The Economics of Customs Unions in the Commonwealth of Independent States

Abstract

The Customs Union proposed for four members of the Commonwealth of Independent States (CIS)- the Free Trade Area established among the 12 members of the CIS- likely to lock those countries into the old technology of the former Soviet Union. The effects of such organizations will be especially negative for the countries that have already established relatively liberal trade regimes. In the aftermath of the breakup of the Soviet Union, trade among the new independent states collapsed. To help reestablish interstate trade, the 12 members of the Commonwealth of Independent States (CIS) established a Free Trade Area. More recently, four members of the CIS- Kazakstan, the Kyrgyz Republic, and Russia- in principle to establish a Customs Union. Michalopoulos and Tarr analyze the economic implications for potential members of establishing such a Customs Union. They conclude that the dynamic effects of the Union (and the Free Trade Area) are likely to be negative, because they would tend to lock the countries into the old technology of the former Soviet Union. The static effects would tend to be mixed but would be more harmful to countries that have already established relatively liberal trade regimes with lower average and less-differentiated tariffs than the common external tariff contemplated by the proposed Customs Union. This paper-a joint product of the International Trade Division, International Economics Department, and the Russia and Central Asia Department-is part of a larger effort in the Bank to analyze the effects of different trade regimes in countries in transition.