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Sequencing in Customs Union
Formation: Theory and Application
to Eurasian Economic Union
Gerald Pech
based on joint work with Aidos
Alimbekov and Eldar Madumarov
Sequencing as a Problem
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Why do economic unions not form in one go?
Historical coincidence? – Eastern Europe
Evolving nature of union?
Increasing attractiveness over time
– could bring in a “strategic” motive behind the
sequencing
A “Strategic” Explanation of
Sequencing
• Aghion-Antras-Helpman, J Internat Econ (2007):
“equilibrium sequencing”
• An “agenda setter/formateur” can form union at
once or start with a core union
• Assume that forming the core union has a
“negative externality” on an accession candidate
• It should be willing to join under conditions more
favourable to the formateur
• Prediction: The country which is most negatively
affected joins last
Kyrgyzstan’s delayed entry
• Signatory of the 1995 agreement
– but not of the Dushanbe agreement 2007
• WTO member since 1998
• April 2010: Bakiyev steps down
• Atambaev wins election on promise of close
ties with Russia
• Kyrgyzstan joins in 2015
Effect of Customs Union on Kyrgyzstan
• Re-import business and textile industry
historically benefitted from low tariff regime
• Kyrgyzstan expected to be a net-loser from
joining customs union
• But Kyrgyzstan also suffers negative external
effects from core customs union
• Main industries equally hit by exclusion from
integrating market
How to Explain Sequencing in Eurasian
Customs Union
• So by joining Kyrgyzstan loses compared to
status quo ante
• But once core customs union has formed
joining is the least bad option
• So is the strategic sequencing model the best
explanation of what happened with
Kyrgyzstan’s entry?
A Historical Precedent: The Zollverein
• The German Customs Union (Zollverein) was
founded in 1833 between independent
German states
• Development that started at Prussia’s
initiative in 1816
• And finally resulted in German nationhood
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The Zollverein: Hesse-Cassel
• In 1828, Hesse-Darmstadt joined Zollverein
• Negative externalities on Hesse-Cassel
– through higher border-tariffs of neighbouring
Darmstadt
– resulting in civil unrest
– and fear of further loss of transit traffic
• Recalcitrant duke resigned in 1831, successor
signed ratification documents
The Zollverein
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An Aside: Why Was Prussia Interested
in Integration?
• Prussia did not benefit that much from trading
with the smaller states
• But it a gained better bargaining position
when negotiating over trade with big players
such as England and France
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What is missing from the story
• As Alimbekov/Madumarov/Pech (2015) show, the
AAH story either needs
– myopic accession candidates
– an exogenous constraint on bargaining institutions
which the agenda setter can choose from
– bargaining frictions: it takes time to bargain
• Kyrgyzstan’s WTO membership makes
negotiations more complicated
• Problems in negotiating with Bakiyev gvt’
– better modelled as “political uncertainty?”
Richer Explanations
Some more facts
• Kyrgyzstan receives Russian infrastructure
support
… some more facts
• New border facilities at Kazakh-Kyrgyz border
– Making core customs union more credible and
costly?
• Russia promises Kyrgyzstan help in securing its
outer border
– suggests that desire to “incentivize” Kyrgyzstan to
invest into border controls could have played a
role
An Imperfect Commitment Model of
Accession
• Assume accession is irreversible
• and accession candidate cannot credibly
promise to implement policies which are
necessary to make union successful
• Like investing in border security
• Sequencing solves the incentive problem:
Make accession conditional on investment
Supporting Materials
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Winners and Losers
• Economic welfare of a country is sum of
– Consumer surplus
– Tariff revenue
– Profits of home producers
– We assume that foreign firms have market power!
• As a proxy for impact of CU we use
– change in current account balance
– change consumer surplus of non numeraire good
• Political benefits and costs!
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Eurasian Customs Union
• 1995: First agreement signed between Belarus,
Russia, Kazakhstan, Kyrgyzstan, Tajikistan and
Uzbekistan.
– Uzbekistan not interested at the moment
– Tajikistan only has land border with Kyrgyzstan
• 2007: Dushanbe agreement on customs union
signed between BY, KZ and RU
• 2010: Official launch of CU with external tariff at
(high) Russian rates
– for some goods July 2010, for others July 2011
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Tariff Protection
Kazakhstan
simple
average 2009
6.78%
weighted
average 2009
5.52%
Belarus
8.00%
2.3%
Russia
8.09%
5.9%
EU
10.6%
7.37%
from: Jandasov/Sabyrova 2009
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Standard and non standard channels
Source: Vashakmadze, E., Kaminski, B., Mironova, Y., (2011).
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Standard and non standard channels
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EXPit  0  1CU   s 2,..,6 sCDi  7CU  Ii
•
• where is the average value of the export index for
country i in the pre- and the post customs union period
(t=1,2), CU is a dummy variable for customs union
which takes the value 1 for the subsample starting in
2010, CDi is the country fixed effect and Ii is a dummy
which is 1 if the country is a latecomer in the customs
union (i.e. Tajikistan (TAD), Kyrgyzstan (KY) or
Armenia(ARM)) and 0 if the country as of now is not
expected to join the customs union (i.e. Ukraine,
Azerbaijan, Moldova).
Dependent Variable: EXPit
Method: Least Squares
Date: 05/03/15 Time: 17:39
Sample: 1 12
Included observations: 12
EXPit =b0+ b1*CU+ b2*TAD+ b3*KY+ b4*ARM+ b5*MOL+ b6*AZ
+ b7*(KY+TAD+ARM)*CU
b0
b1
b2
b3
b4
b5
b6
b7
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
Coefficient
Std. Error
t-Statistic
Prob.
238.1018
289.1980
-166.0115
0.672807
49.87698
-179.2669
383.8645
-235.6465
96.99498
96.99498
137.1716
137.1716
137.1716
118.7941
118.7941
137.1716
2.454785
2.981577
-1.210246
0.004905
0.363610
-1.509056
3.231343
-1.717896
0.0701
0.0407
0.2928
0.9963
0.7346
0.2058
0.0319
0.1609
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
338.6452
255.7868
12.62738
12.95065
12.50770
2.690579
0.921567
0.784308
118.7941
56448.15
-67.76429
6.714100
0.042389