Monday, May 23, 2005
Common Economic Misconceptions and the Politics of Trade
05-23-2005 Pavel Erochkine - Russia Profile - The latest opinion polls show that a new fear is emerging among the Russian population that, more than 15 years after the fall of the Iron Curtain, a new wall is appearing between Russia and Europe.
Policymakers in the European Union accept that EU-Russia relations are close to a post-Soviet low. A package of four common spaces â economy; external security; freedom, security and justice; and education, research and culture â was designed to develop the relationship, which is based on the Partnership and Cooperation Agreement of 1997, and set an ambitious agenda for partnership for the next several years. Both sides hope that the package will be adopted at the EU-Russia summit on May 10.
At a recent conference in Luxembourg on EU-Russia relations, which was organized by the Luxembourg Institute for European and International Studies and by the New Eurasia Foundation, almost all experts and policymakers agreed that most of the current problems result from lack of strategic vision and mutual understanding.
There are significant misconceptions about, for example, the proposed Common Economic Space, and one of the surprises at the EU-Russia summit will likely be the realization that this economic space is not about economics at all.
The EU is Russiaâs single largest trading partner, and its share in Russiaâs trade turnover has become dominant. It has increased from 37 percent in the mid-1990s to more than 50 percent today. Although much less significant, Russiaâs share in EU trade will soon double from 4 percent to 8 percent. The economic links between Russia and the EU have been strengthening. Yet this increased economic integration has been driven by the expansion of the EU, economic growth and higher commodity prices, and not by reductions in trade barriers. Political ups and downs in EU-Russia relations have had very little effect on trade and financial flows.
Russian policymakers see the main benefit of the Common Economic Space in facilitating trade and investment, which are dominated by energy and are dangerously dependent on world oil prices. They are interested in diversifying Russiaâs trade with the EU by getting the best deals for Russian companies in, for example, agriculture. They are fighting wholeheartedly over health and sanitation standards that could hurt Russian producers. Russiaâs World Trade Organization accession negotiations have been driven by a similar pragmatism.
In contrast, for the EU, the Common Economic Space is a political issue. An official EU paper on the Common Economic Space states that the EUâs main interests are to foster political and economic stability in Russia, to contribute to the strengthening of the rule of law through the development of institutions and of legislative and judicial systems. The EU also hopes to support measures for a better investment climate in Russia, and to cooperate in combating âsoft security threats.â These are the EUâs official objectives, and the paper does not mention anything related to the topics important to Russia, such as trade or economic integration.
The historical truth is that common economic spaces are rarely driven by economics. One of the first such spaces was COMECON, which from 1949 to 1991 linked the Soviet Union to Bulgaria, Czechoslovakia, Hungary, Poland, Romania and East Germany. Although more than 70 percent of an average memberâs trade was within COMECON, it was an ideological system, and not a market system based on the comparative advantages of different members. Russia kept the system going by supplying other members with subsidized energy, and the system rapidly collapsed when this stopped. Russia and the East European members of the former COMECON have switched most trade from the CIS to the EU. Russiaâs interest in COMECON was political and ideological, not economic. Todayâs EU-Russia relations are the reverse.
The EU wants to have a market-oriented, democratic and well-governed neighbor, and not a bigger trading partner. The road maps and plans for legislative harmonization are designed accordingly. The Common Economic Space is not really intended to foster further economic integration, which is occurring anyway, but to make Russia accept certain rules and to force it into a certain framework. Many in the EU genuinely believe that they are creating this new framework for the benefit of both Russia and the EU.
Russia has huge mineral wealth, well-educated people and unexploited industrial potential. What it lacks is good governance, and it is rightly argued that introduction of European norms could help Russia turn the corner in this crucial area.
When one side talks about the rules of behavior and the other thinks they are taking about trade, it is inevitable that misunderstandings and clashes will occur. There are very similar problems in other areas.
Mutual understanding is the most powerful driver in international relations, and it is absent in the relations between Russia and the EU. The EU should make clear what it wants from Russia and what it thinks the benefits for Russia and the EU will be. Russia should do the same. They have to agree on common interests and have to form a common vision about their partnership, and only then can they create common spaces to accommodate them.
Policymakers in the European Union accept that EU-Russia relations are close to a post-Soviet low. A package of four common spaces â economy; external security; freedom, security and justice; and education, research and culture â was designed to develop the relationship, which is based on the Partnership and Cooperation Agreement of 1997, and set an ambitious agenda for partnership for the next several years. Both sides hope that the package will be adopted at the EU-Russia summit on May 10.
At a recent conference in Luxembourg on EU-Russia relations, which was organized by the Luxembourg Institute for European and International Studies and by the New Eurasia Foundation, almost all experts and policymakers agreed that most of the current problems result from lack of strategic vision and mutual understanding.
There are significant misconceptions about, for example, the proposed Common Economic Space, and one of the surprises at the EU-Russia summit will likely be the realization that this economic space is not about economics at all.
The EU is Russiaâs single largest trading partner, and its share in Russiaâs trade turnover has become dominant. It has increased from 37 percent in the mid-1990s to more than 50 percent today. Although much less significant, Russiaâs share in EU trade will soon double from 4 percent to 8 percent. The economic links between Russia and the EU have been strengthening. Yet this increased economic integration has been driven by the expansion of the EU, economic growth and higher commodity prices, and not by reductions in trade barriers. Political ups and downs in EU-Russia relations have had very little effect on trade and financial flows.
Russian policymakers see the main benefit of the Common Economic Space in facilitating trade and investment, which are dominated by energy and are dangerously dependent on world oil prices. They are interested in diversifying Russiaâs trade with the EU by getting the best deals for Russian companies in, for example, agriculture. They are fighting wholeheartedly over health and sanitation standards that could hurt Russian producers. Russiaâs World Trade Organization accession negotiations have been driven by a similar pragmatism.
In contrast, for the EU, the Common Economic Space is a political issue. An official EU paper on the Common Economic Space states that the EUâs main interests are to foster political and economic stability in Russia, to contribute to the strengthening of the rule of law through the development of institutions and of legislative and judicial systems. The EU also hopes to support measures for a better investment climate in Russia, and to cooperate in combating âsoft security threats.â These are the EUâs official objectives, and the paper does not mention anything related to the topics important to Russia, such as trade or economic integration.
The historical truth is that common economic spaces are rarely driven by economics. One of the first such spaces was COMECON, which from 1949 to 1991 linked the Soviet Union to Bulgaria, Czechoslovakia, Hungary, Poland, Romania and East Germany. Although more than 70 percent of an average memberâs trade was within COMECON, it was an ideological system, and not a market system based on the comparative advantages of different members. Russia kept the system going by supplying other members with subsidized energy, and the system rapidly collapsed when this stopped. Russia and the East European members of the former COMECON have switched most trade from the CIS to the EU. Russiaâs interest in COMECON was political and ideological, not economic. Todayâs EU-Russia relations are the reverse.
The EU wants to have a market-oriented, democratic and well-governed neighbor, and not a bigger trading partner. The road maps and plans for legislative harmonization are designed accordingly. The Common Economic Space is not really intended to foster further economic integration, which is occurring anyway, but to make Russia accept certain rules and to force it into a certain framework. Many in the EU genuinely believe that they are creating this new framework for the benefit of both Russia and the EU.
Russia has huge mineral wealth, well-educated people and unexploited industrial potential. What it lacks is good governance, and it is rightly argued that introduction of European norms could help Russia turn the corner in this crucial area.
When one side talks about the rules of behavior and the other thinks they are taking about trade, it is inevitable that misunderstandings and clashes will occur. There are very similar problems in other areas.
Mutual understanding is the most powerful driver in international relations, and it is absent in the relations between Russia and the EU. The EU should make clear what it wants from Russia and what it thinks the benefits for Russia and the EU will be. Russia should do the same. They have to agree on common interests and have to form a common vision about their partnership, and only then can they create common spaces to accommodate them.
# posted by Deval : 6:45 AM
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