EU-Armenia Trade Liberalization: A Poverty and Social Impact Analysis

Abstract

This study set out to analyze the socioeconomic impact of increased trade liberalization between Armenia and the EU within the framework of Eastern Partnership initiative. In addition to a quantitative assessment of the potential impact of trade liberalization on the economic situation and poverty in Armenia, the study involves evaluations of existing foreign trade regimes and regulatory systems. Results of the analysis reveal that a simple free trade agreement or tariff liberalization will not result in significant socioeconomic benefits for Armenia. This is mainly caused by the already liberal trade regimes between Armenia and the EU. Armenia is already included in the Generalized System of Preferences in trade with the EU, yet the potential of this facility is not yet fully utilized. Armenia has relatively small and concentrated foreign exports which are limited by existent production capabilities and the current level of industrial development. Therefore, verification of a deep and comprehensive Free Trade Agreement (DCFTA) which implies harmonization of the partner countries’ trade- and production-related legislation with EU standards is not feasible in the medium term. Enforcement of such standards on the domestic market – i.e. on production and imports – could paralyze the Armenian economy and most likely result in negative social consequences. If initial institutional and legislative harmonization is the matter, no direct economic and social benefits are to be expected for Armenia, as no structural changes will occur in the ability of Armenian producers to enter the EU market and the Armenian private sector will continue to be in non-compliant with EU standards. To this end, regional economic integration of Armenia with the EU is of great importance to long-term development of the country. However, it will only be economically justifiable and generate a positive social impact if the process that leads to such integration is based on development and harmonization of the capacities of domestic producers and enterprises. Therefore, the policy priority should move away from trade liberalization towards industrial development.