Customs Union in Kazakahstan

Does Kazakhstan win from Customs Union?

Discurive Essay

First Draft

Instructor: Yelenna Grebennikova-Howe

Student: Dauletiyarova Aigerim

ID20102351

Academic Reading and Writing

KIMEP Fall 2010

Discursive Essay Outline Student’s name: Dauletiyarova

Essay question: Does Kazakhstan win from the customs union?

1. Introduction

Thesis statement: Some government officials in Kazakhstan believe that the Customs Union will be beneficial to Kazakhstan because it will attract foreign investments, help economize on customs duties and give a boost to the economy. On the other hand, analysts claim that Kazakhstan will struggle to see the advantages because of higher prices, losses in customs revenues and loss of competitiveness with Russian and Belarusian manufacturers.

II. Body

1. The first reason in support of customs union is that it will help Kazakhstan economize money on customs duties.

1. Elimination of customs duties on a variety of goods.

2. Decrease in costs of transporting goods.

2. The second reason in favor of Customs Union is that it will give a boost to Kazakhstan's economy.

1. Opportunity for Kazakhstan's manufacturers to compete with Russian and Belarusian producers.

2. 14.7% increase in GDP by 2015.

3. 61 billion tenge increase in annual customs revenues.

3. The third major reason why customs union is beneficial is that harmonization of the tax system will attract more foreign investments to Kazakhstan.

1. Additional revenues to the state budget.

2. Additional investments lead to increase in GDP by 20%.

On the contrary, many analysts assert that Kazakhstan will suffer from customs union and point out the disadvantages.

1. The first and most basic reason against customs union is that the prices on certain products will go up because of higher tariff on goods from third countries.

1. Increase in price on goods from third countries.

2. Increase by 10% on Kazakhstan’s import tariff lines.

3. Increase in average tariff level from 6.2% to 10.6%.

4. Loss of 70 billion tenge from customs revenues.

2. The second reason in opposition to customs union is that Kazakhstan’s manufacturers may totally lose competitiveness with Russian and Belarusian producers.

1. Increase in inflation.

2. Loss of protection by Kazakhstan’s manufacturers from Russian and Belarusian producers.

3. Increase in price on Kazakhstan’s products by 15-20%.

3. Conclusion Does Kazakhstan win from the Customs Union?

Do customs unions really make any difference? Do they improve economies? These are very common question as there are alredy several customs unions all around the world. The creation of the European Customs Union in 1950s which afterwards became European Union was an unexpected step of Belgium, France, Germany, Italy, Luxembourg and the Netherlands. The success of the European Union allowed poor countries like Ireland, Portugal and Spain to converge to higher income levels. Today the European Union consists of 27 countries, more than 700 million people and posseses a GDP of more than $16 trillions which is 28% of the world's total GDP. However, Venables (2003) indicates that the success of the EU may be misleading for other customs union. According to Venables the reason for this is that the winners in a customs union are generally those countries whose economies are closest to the world average. Venables suggests that Customs union among poor countries will lead to divergence rather than convergence. So, in a rich country club the winners are poorer countries that become shielded from the outside competition. In a poor country club, the winners are richer countries whose economies are closer to the world average (as cited in Haas & Plekhanov, 2010, para.7). Nevertheless, on January 1, 2010, customs union between Kazakhstan, Russia and Belarus came into force. This decision has raised doubts among many people all around the CIS. Some government officials in Kazakhstan suggest that the Customs Union will be beneficial to Kazakhstan because it will attract foreign investments, help economize on customs duties and give a boost to the economy. On the other hand, analysts claim that Kazakhstan will struggle to see the advantages because of higher prices, losses in customs revenues and loss of competitiveness with Russian and Belarusian manufacturers.

The first reason in support of customs union is that it will help Kazakhstan economize on customs duties. Prime Minister Vladimir Putin says that due to the crisis trade turnover between Russia and Kazakhstan decreased by $6 billion in comparison with $20 billion in 2008 (personal communication, 2009). However, this sum will surely be increased due to the fact that before entering Customs Union both Russia and Kazakhstan had to pay customs duties to supply each other with their products. In 2009 President Nazarbayev proposed that only one agreement for the equalization of railway tariffs would increase the turnover between Russia and Kazakhstan by 30 percent (as cited in Rahymbekov, 2009, para.9). Firstly, the customs duties on nuclear reactors, cattle, edible fruits, machinery and other categories of products were eliminated (Global Trade Alert Organization [GTAO], 2010, para.9). This will help economize money on customs duties. Secondly, the integration will allow Kazakh business significantly reduce the costs of transporting goods from Kazakhstan to prospective consumers in the European Union, the Atlantic and the Mediterranean region. The Customs Union will give impetus to the strategic plan, "Kazakhstan-2020" and the State Program for accelerated industrial and innovative development for 2010-2014 (FIIR). It is a fact that, only in 2010 144 industrial and commercial facilities will be put into operation (Kusainov, 2010, para.20). Overall, the customs union may allow Kazakhstan save a great deal of money.

The second reason in favor of customs union is that it will give a boost to the Kazakhstan's economy. According to Sharipov (2009) Kazakhstan is dependent on the imports of Russian and Chinese industrial goods (para.5). Domestic producers of Kazakhstan could not compete with Russian and Chinese producers because Russian and Chinese goods have always been better in quality and cheaper. In addition to this, low customs duties made domestic producers vulnerable because other products from abroad could be imported easily. The situation has changed after Kazakhstan has entered the Customs Union. Goods from third countries have become less competitive and have been put at a disadvantage because of a higher common external tariff. Domestic producers of Kazakhstan will have an opportunity to compete with Russian and Belarusian producers as the economic conditions in all three countries are similar. Furthermore, academician Glazyev (2009), a well-known Russian economist and the executive Secretary of the customs commission of the Customs Union of Belarus, Kazakhstan and Russia indicates that creating a single customs area of the three states will allow to provide union members 14-17% of GDP growth by 2015 (as cited in Rahymbekov, 2010, para.9). Besides, the Russian Academy of Sciences (2009) predicts that Russia will receive an additional 16.8 percent from the current level of GDP, Belarus - 16.1, Kazakhstan - 14.7 per cent. A total integration effect in 2015 will be approximately $ 400 billion (as cited in Rahymbekov, 2009, para.9). In 2010 the republican budget of Kazakhstan increased by 7.6 bln tenge due to import duties from third countries. Total annual customs revenues will increase over the previous year by 61 billion tenge (Independent Association of Entrepreneurs of Kazakhstan [IAEK], 2010, para.9). Therefore, Kazakhstan will gain huge economic benefits from the Customs Union.

The third major reason why Customs Union is beneficial is that harmonization of the tax system will attract more foreign investments in Kazakhstan. Professor Balco (2010) claims that nations in the customs union will use tax measures to attract foreign investments in its territories (para.5-6). The country with the most suitable tax environment for foreign investors will develop faster. Balco confirms that an aggressive tax competition between Russia, Kazakhstan and Belarus will harmonize tax systems within the union. This will bring additional revenues to the state budget. Additionally, Shukeev (2010), First Deputy Prime Minister of Kazakhstan, proposed that Customs Union of Kazakhstan, Belarus and Russia will increase GDP of Kazakhstan by 20% by attracting more foreign investments (personal communication). Thus, it seems obvious that harmonization of the tax system among Kazakhstan, Russia and Belarus will bring new investments in Kazakhstan.

On the contrary, many analysts assert that Kazakhstan will suffer from the Customs Union and point out the disadvantages. The first and most basic reason against customs union is that the prices on certain products will go up because of higher tariff on goods from third countries. The most significant tariff changes happened in Kazakhstan. Tariff lines were not changed only on 45% of products. Kazakhstan has increased import tariffs on 10% of its products like wood, refrigerating equipment, pharmaceutical preparations, electro-chemical domestic appliances, footwear and vehicles (Global Trade Alert Organization [GTAO], 2010, para.18). Karagusova (2010), chairman of the department of Finance and Budget of Majilis of the Republic of Kazakhstan, claims that with the entry into the customs union Kazakhstan is expected to lose 70 billion tenge or from customs revenues (para.4). According to deputies the reason for such a catastrophic fall in income is the difference in duties on goods imported to Kazakhstan from Russia and Belarus (as cited in Kozybaeva, 2010, para.4). Moreover, Leonidova (2010), Chairman of the trade union market of Kazakhstan, declared that imported goods from countries outside the union increased in price by 50% in 2010 (as cited in Duisenbek & Asanova, 2010, para.9). Asset Issekeshev, the Minister of Industry and Trade of Kazakhstan, maintains that with the adoption of a unified customs tariff, average tariff level has increased from 6,2% to 10,6% (as cited in Duisenbek & Asanova, 2010, para.8). Goods from third countries have become more expensive and less competitive. For example, in Kazakhstan the import duty on the new common tariff for imported cars is 25 per cent compared top 10 per cent until last year (Haas & Plekhanov, 2010, para.13). Many medicines imported from outside the former Soviet countries are also more expensive now. Tinibai (2010) proclaims that “Customs duties rose by 5 percent on imported insulin, hemoglobin, antibiotics, and vitamins. The duty on leather goods went from 5 percent of the cost of the goods to 20 percent,”( para.7). Kondakova (2009), general manager of distribution services of the "Candy Karaganda" company suggests that the customs union will force them to buy Russian raw materials instead of the imported confectionery fat as the customs duties for confectionary fat will increase from 5 per cent to 15 per cent. This increase is significant for confectioners. (as cited in Ulyankina, 2009, para.10). Accordingly, prices in Kazakhstan will go upwards because of higher tarrifs on goods from outside the Customs Union.

The last reason in opposition to customs union is that Kazakhstan’s manufacturers may totally lose competitiveness with Russian and Belarusian producers. Kanagtuly (2010) assumes that Kazakhstan will suffer from a flood of imports (para.7). Moreover, Kanagatuly predicts that domestic producers will be undermined and the inflation will go upwards. Sharipov (2009) asserts that “Lifting trade restrictions, having an underdeveloped domestic industry, the lack of competitive goods, the elimination of customs restrictions and unification of tariff policies is likely to spur inflation” (para.5). In addition to this, Haas and Plekhanov (2010) suggest that “Kazakh manufacturers and farmers have lost protection from Russia and Belarus by eliminating customs restrictions and will feel competitive pressure against relatively high quality and cheap Russian and Belarusian products” (para.12). They also state that local producers of Kazakhstan will compete harder with Russian manufacturers that are already working in Kazakhstan. Nazhanov (2009), Vice-President of the Independent Association of Kazakhstan, claims that the final product will become more expensive by 15-20 percent which will make Kazakhstan's products not competitive on the global market (as cited in Ulyankina, 2009, para.10). The reason for this is that prices on components for assembling will increase because of higher external tariffs. Consequently, it is seems most likely that Kazakhstan will lose competitiveness with its neighbours, Russia and Belarus.

In conclusion, the creation of the customs union between Kazakhstan, Russia and Belarus has raised many concerns. There are opinions that more foreign investments, better opportunity for competitiveness and increase in GDP may be beneficial for Kazakhstan. However, it should be accepted that Customs Union will cause increase in prices. Moreover, the Customs Union may result in loss of competitiveness with Russian and Belarusian producers and may undermine domestic producers of Kazakhstan. Hence, it seems obvious for me that Kazakhstan will struggle to see the advantages of the Customs Union and will have to consider quitting the Customs Union in the nearest future.

References

Balco, T. (2010), The conference on the development of tax and customs legislation within the formation of a single economic space of the Republic of Kazakhstan, the Republic of Belarus, and the Russian Federation; Transfer pricing – the pluses and minuses. Almaty, retrieved from http://www.kimep.kz/about/news/aug2010/balco

Duisenbek, D. & Asanova, A. (2010), Customs Union of Kazakhstan, Belarus and Russia is bursting at the seams, retrieved from: http://centralasiaonline.com/cocoon/caii/xhtml/ru/features/caii/features/main/2010/03/19/feature-01

Global Trade Alert Organization [GTAO], (2010), The Custom Union of Russia, Belarus and Kazakhstan, retrieved from: http://www.globaltradealert.org/measure/custom-union-russia-belarus-and-kazakhstan

Haas, R. & Plekhanov, A. (2010), Let's stick together: Pros and Cons of the Tripatriate Customs Union in CIS, retrieved from http://www.ebrdblog.com/wordpress/2010/02/let’s-stick-together-pros-and-cons-of-the-tripartite-customs-union-in-the-cis/

Independent Association of Entrepreneurs of Kazakhstan, [IAEK] (2010), Customs Union: Advantages and disadvantages of trading, retrieved from: http://www.nap.kz/ru/mneniya-obrashheniya/tamozhnya/tamcoyuz

Kanagatuly,D. (2010), Kazakhs weigh gains from customs pact, retrieved from http://www.atimes.com/atimes/Central_Asia/LA20Ag01.html

Kozybaeva, Z. (2010), The Customs Union raises worries among politicians in Kazakhstan, retrieved from http://www.dw-world.de/dw/article/0,,5315170,00.html

Kusainov, D. (2010), Russia and Kazakhstan will join to form a customs union, retrieved from: http://www.zakon.kz/173885-rossija-i-kazakhstan-budut-vmeste.html

Rahymbekov, A. (2009), The Customs Union is in the interests of Kazakhstan, retrieved from: http://www.inform.kz/rus/article/2214384

Sharipov, R. (2009), Customs Union with Russia and Belarus Raises Doubts in Kazakhstan, Eurasia Daily Monitor, 6, retrieved from: http://www.jamestown.org/single/?no_cache=1&tx_ttnews%5Btt_news%5D=35810&tx_ttnews%5BbackPid%5D=7&cHash=e7ae6a3b12

Tinibai, K. (2010), A Semi-Soviet Union is Born, retrieved from: http://web.ebscohost.com/ehost/detail?vid=19&hid=9&sid=707b0863-fe55-427c-8df5-c4b695ba9a2c%40sessionmgr112&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=a3h&AN=48995012

Ulyankina, Y. (2009), What brings us the customs union?, retrieved from http://www.kn.kz/articles.php?id=4249

11