Customs Union
A week ago, I received an invitation to the regular monthly Open Meeting of the International Business Council, (IBC).
Now, I get a lot of correspondence from IBC – after all, I serve on the Management Board, and have done so, (with two short interludes), ever since it’s inception in 2000. That might change this month, because I am up for re-election and who knows what might happen.
Indeed, the inaugural meeting was held in the conference room at the Silk Road Lodge, but it soon became apparent that the conference room was too small to accommodate the numbers involved. There aren’t that many of us left in Bishkek who attended that opening meeting, but despite the constant turnover of personnel, the organization has gone from strength to strength and is recognized as one of, if not the, leading voice of business in the Republic.
The regular monthly Open Meeting is just one of the activities it runs. Normally it is a quiet affair … a couple of hours in which two or three speakers make a presentation introducing a topic followed by questions and answers and a general discussion.
Over the years, however, some of them have been notable … it was one of the first public meetings at which members of the government(s) appeared after both the 2005 and 2010 revolutions; the Hyatt Hotel, the venue), was almost sealed off when the IBC meeting was the subject of a mass picket when it discussed the question of whether Kyrgyzstan should join the HIPC (Highly Indebted Poor Countries) programme; in 2004, the then Prime Minister chose a meeting of the IBC to announce a review of the Tax Code – which took some four years and numerous (I was tempted to say countless) drafts before it was completed … to nobody’s satisfaction.
When I first saw this notice I almost uttered two groans. One because I saw that the number of speakers listed on the Agenda, (twelve, including two Ministers), and the other when I saw the topic … “Kyrgyzstan and the Customs Union”. If there is one aspect of doing business in the Kyrgyz Republic about which I know very little, then “Customs” is probably it.
For the record: Kyrgyzstan joined the World Trade Organization, (WTO), in 1998 – the first of the former Soviet Republics to do so. As a result it has adopted as fairly liberal trading regime - and, indeed, much of the country’s economy is based on trade. There was an attempt to set up a Customs Union within the Commonwealth of Independent States that emerged after the collapse of the Soviet Union, which resulted in the formation of the Eurasian Economic Community, (EurAsEC), of states – including Kyrgyzstan – but this was not a formal Customs Union. Uzbekistan also joined – but later suspended their membership. There are three other “observer” states.
Eventually three of those countries, (Russia, Kazakhstan and Byelorussia), decided to establish a formal Customs Union which would harmonize a “common market” across all three states with common customs tariffs and procedures. It came into effect on January 1st, 2010, when all tariffs between the three members were abolished. The member countries thus opened their markets to each other, exposing domestic producers to more competition. Those countries with low customs duties, (like Kazakhstan), had to raise them, which led to price hikes on goods coming from outside of the union and created a tariff wall which impacted . On the other hand, the producers in each country gained access to new markets in the other countries. In theory, the union also fosters investments between its members in sectors which involve moving raw materials across borders.
For other countries, like Kyrgyzstan, nothing in the system changed – except they faced higher tariffs when trading with Kazakhstan and Byelorussia, which meant their goods become more expensive and less attractive to consumers in those countries. As a lot of Kyrgyz exports to these countries involve the re-export of goods made in China, or Chinese goods assembled in Kyrgyzstan, the higher tariffs have have had a dramatic effect on Kyrgyzstan’s role as a transit country – and thus hit the country’s economy hard … compounded by the fact that it coincided with a period when Kyrgyzstan faced a lot of other problems.
As a result there has been a debate in Kyrgyzstan about whether Kyrgyzstan should apply to join the Customs Union. That’s what this meeting was all about.
Up until now, I had more or less overlooked the question, having decided that, as we weren’t really involved in import and export, it would have little impact on our business. I wasn’t alone in taking this view. One of my friends, another ex-pat, had asked his local staff what effect the Customs Union would have on their business – and they said the same. I felt that I was in good company.
When Britain joined the “Common Market”, the European Economic Community, (EEC), back in the 1970′s, I was all in favour of it. One of the major newspapers ran a cartoon which displayed a newspaper billboard declaring “Britain says “Yes” to Europe“, and a bystander is saying … “I don’t remember being asked.” However, we did get asked and have a chance to have our say, and in the referendum of 1975, I voted “Yes”. On the whole, even though there is more bureaucracy and lots of other problems – I still think it was the right decision. My gut feeling about Kyrgyzstan’s membership of the Customs Union, therefore, was that unless there was some overriding obstacle, then perhaps it would be wise to join. After all, Kazakhstan and Russia, account for a lot of our foreign trade.
Despite the fact that the subject didn’t exactly enthrall me, I trotted along to the meeting at the appointed time, and took my place. We were a little late starting, which is not that unusual for Kyrgyzstan – but not not very late. The Chairman called the meeting to order after giving five minutes for the latecomers and announced that the two ministers, unfortunately couldn’t come and had sent representatives in their stead. There were lots of things going on in the country at that particular time, so although it was disappointing, it was understandable.
The opening speeches were short(ish) and to the point – with a surprising amount of detail. The main speakers were well prepared – too well prepared for they had far too much material to present in the time available and the chairman had to interrupt two of the speakers and ask them to cut their presentations short. As we had printouts of the presentations, it didn’t detract too much from the flow of information.
The range of speakers was quite interesting, and they spoke with passion about their particular positions – “Yes” or “No”. Those opposed seemed to stress that the existence of the Customs Union had not brought the expected benefits but, on the contrary, created new bureaucracy and problems. There were also several “contradictions” and questions yet to be resolved between the members within the Customs Union. (That sounded like the European Debate that we had back in Britain in the 1970′s all over again.) Several speakers pointed out that there was no question of principal about whether to join or not – the overriding issue was whether the terms and conditions were appropriate and at least two of the speakers adopted the position of “Not now but later”.
Part of their logic of adopting a position of “wait and see” is that the situation could change if and when Russia and/or Kazakhstan join the WTO.
The one issue that seems to me to be a problem is that Kyrgyzstan’s tariffs at the present are set at about 5.1%, but if we entered the Customs Union, then they would have to rise to double that. This would have an effect on prices for imported goods in the domestic market – which is a considerable portion of the existing trade. Even if the Customs Union would have little direct effect on our business as we are not involved in import and export, it would have a significant indirect, “knock on” effect.
Even if we decided that this was acceptable because membership would bring other advantages, the fact that the new unified tariff was higher than Kyrgyzstan is allowed to impose under the WTO rules, meant that Kyrgyzstan would have to compensate its partners in WTO countries and the bill for this, it was said, would be in the region of USD1billion a year. That seems a lot, and I wonder if Kyrgyzstan could afford this.
The most surprising fact, however, was the discrepancy between the official Chinese and Kyrgyz statistics about trade between the two countries. I was aware that there are discrepancies, but had put this down to my usual skepticism about statistics. It was reported, however, that according to Kyrgyz statistics, in 2008 Kyrgyzstan exported goods worth USD44.4million to China, but the Chinese figures claim they were worth USD121.3 … just under three times as much. According to Kyrgyz statistics, Kyrgyzstan imported goods from China worth USD728.2million, but according to the Chinese they were worth USD9213.4million … or over twelve and a half times more. What’s more, discrepancies exist in the figures with other countries as well … but these were the most striking. I can think of lots of legitimate reasons why there might be some differences between the two sets of figures, but it is hard to see how to explain the huge discrepancy that seems to exist.
If the Chinese figures are anyway near accurate then China must be Kyrgyzstan’s biggest trading partner … and although China is a member of the WTO, it is not in the Customs Union.
That doesn’t mean to say that joining the Customs Union would be a bad thing in itself – but it does mean that there would need to be some considerable readjustment within the Kyrgyz economy if it did … just as they would need to be if Kyrgyzstan stays out.
So, it turned out that there was lots of information, well presented in a lively meeting which provided a lot of food for thought.
I don’t think it helped me, however. I may have gone into the meeting knowing just a little about the topic, (and, to be honest, not very interested), but a gut feeling that given there were no overriding objections, then it would probably be a good thing for Kyrgyzstan to join. I came out with a lot more information – but also a lot more questions – and possibly more confused than ever. All in all, I felt glad that I was foreigner … and it’s not my decision.
I also came out of the meeting thinking that it was, probably, one of the best Open Meetings that IBC has staged for a long time.
For the record:
One of IBC’s other activities is the publication of a bilingual, (English-Russian), newsletter, “Trade & WTO news”, which is financed by the USAID Regional Trade Liberalization and Customs Project (RTLC), and aims to inform entrepreneurs of the Kyrgyz Republic on trade policy news, the impact on trade of Kyrgyzstan as WTO member and import rules of the WTO countries through analytical articles, interviews and latest WTO notifications.
The latest issue includes articles on the problems and prospects of trade with China, a summary of news items about international trade and trade with the European Community as well information about official notifications from different WTO countries.
If you are interested, you can download a copy in pdf format from the IBC website: www.ibc.kg
Bishkek