THE GUUAM JULY 2002 FREE TRADE AGREEMENT
A PRELIMINARY ASSESSMENT

Daniel LINOTTE
Leif-Erik AUNE


Daniel Linotte,Senior Economic Adviser, OSCE (Vienna, Austria)

Laif-Erik Aune, Research Assistant, OSCE (Vienna, Austria)


Introduction

In July 2002, four GUUAM countries (Georgia, Ukraine, Azerbaijan and Moldova) signed a Free Trade Agreement (FTA) that now has to be ratified by the parties. That document must be transposed into concrete measures such as, for instance, the adoption of rules of origin and common formalities and procedures for customs matters. Thus, as it stands today, the Free Trade Agreement requires addenda to become fully effective. Moreover, its relevance and prospects should be assessed, taking into account the peculiarities of the countries, including geography and levels of economic development. The implementation of the GUUAM FTA requires external expertise and technical assistance from countries and organizations that have experience with free trade areas.

In Part 1, we present selected concise and analytical information about regional free trade agreements in order to facilitate the assessment of the GUUAM FTA. In Part 2, we review the GUUAM FTA and put it in a broader perspective, taking into account inter alia WTO rules and policy on regional integration arrangements and free trade area experiences, particularly EFTA and CEFTA. In the final section, we evaluate the GUUAM FTA and provide recommendations for further action to implement the GUUAM FTA.

1. Essential Aspects of Regional Trade Agreements

1.1. History, Definitions and Classification of Regional Trade Agreements

Historical perspective. Customs unions have existed since the seventeenth century, but until the establishment of the GATT system in 1947, customs unions tended to cluster around one hegemonic state.1 By mid-2002, over 200 regional trade agreements had been notified to GATT or WTO, of which 150 are in force. According to Bhagwati and Panagariya, these agreements came in two waves, the first one dates from 1958 to 1970 and was initiated by the Rome Treaty that established the European Community; the second wave began in the mid-1980s (and accelerated in the 1990s), principally with the Single European Act.2

Categorizing trade blocs. As indicated in Table 1, which proposes a particular classification of trade blocs, regional economic integration is a complex phenomenon that can relate to different situations. Broadly speaking, it corresponds to growing trade and economic relations within a group of countries, faster than with the rest of world. Such a process might be the result of a formal agreement between partners.3 Proximity also makes countries natural partners. Thus, the sharing of a common border should normally be an incentive for exchanging goods and services, and traveling between countries, even in the absence of a formal agreement. Distance is often seen as an impediment for trade. Moreover, the existence of a formal agreement does not imply that it is effectively enforced.

Table 1

Categorizing Trade Blocs

Informal

Large and/or growing trade

Absence of agreement

Formal

Agreement between partners

  • Effective
  • Ineffective

Natural

Proximity, neighbors

Unnatural

Distant partners

Level/intensity of regional integration. Considering formal regionalism, different levels of integration can be distinguished. A tentative list is provided in Table 2. The lowest level is a preferential trade agreement between at least two countries. In that case, mutual import tariffs are made lower than those against the so-called rest of the world. The next stage is the complete elimination of tariffs between partner countriesthat corresponds to a free trade area, in which member countries retain national tariff levels on imports from outside the area. In a customs union, member countries adopt common external tariffs, which requires negotiating and agreeing on their levels, for each tariff line, and not contradicting WTO rules. The highest stage of integration is the creation of a common political entity. It requires monetary, economic and commercial institutions, within a federal, confederation-type or centralized political system.

Table 2

Level of Economic and Commercial Integration between Countries

Preferential trade agreement

Lowering of tariff barriers between contracting parties

Free Trade Area (FTA)

Elimination of tariff barriers (and non-tariff-barriers )

Customs Union (CU)

FTA + Adoption of a common external tariff

Common Market (CM)

CU + free movement of labor and capital

Monetary Union (MU)

CM + adoption of a common currency

Economic and Monetary

Union (EMU) MU + Centralized public finances

Political Union (PU)

Single political entity with corresponding economic and commercial institutions

1.2. Economic Analysis of Regional Trade Agreements

Trade creation and trade diversion. Following the seminal work of Viner, the economic analysis of regional integration agreements (RIAs) first concentrated on their gains and losses from a comparative static analysis, particularly from the perspective of the countries that are in.4 There is trade creation when cheap imports replace high-cost ones. In other words, following a regional trade agreement (a free trade agreement or a customs union), efficient foreign suppliers belonging to a regional bloc push out inefficient suppliers from the rest of the world. In the case of trade diversion, as a result of a regional trade agreement, a cheap source of imports is replaced by a less efficient one.

Overall, a country benefits from a RIA when trade creation effects are larger than trade diversion effects. In welfare terms, this implies that trade liberalization within a RIA framework could lead to welfare losses and, subsequently, might not be a so-called first-best optionwhich is not the case for full unilateral liberalization, which always leads to net welfare gains, for small countries at least.5

Public finance aspects. The elimination of tariff barriers has immediate negative impacts on tax collection, which may alter the financial base of the state and, subsequently, lead to downward adjustments of public expenditures or additional borrowings and debts. That is true of countries that have limited direct and indirect (turnover or value-added) taxes, which is particularly the case for transition countries characterized by a large shadow economy and limited institutional capacity for tax collection.6

Competition and economies of scale effects. Two key-dynamic effects of RIAs are competition and economies of scale. By eliminating their mutual tariff and non-tariff barriers, the members of a RIA completely merge their markets. As a result, competition may increase. Moreover, bigger markets may allow for economies of scale when long-term average costs of production decline as a result of enlarging the production capacity, etc.

Cost-benefit analysis approach. A CBA of regional trade agreements should consider most tradable goods markets, with explicit demand and supply functions to be fully conclusive about its welfare implicationa complex task indeed. Computable General Equilibrium Models (CGEMs) are used for simulation and studying the impacts of different trade policy regimes on welfare. They generally assume that economic agents have identical preferences that can be aggregated in a single social welfare function. De facto, there are winners and losers and transfer (income redistribution) schemes could be envisaged to compensate losers.

Terms of trade implications. The creation of a regional trade bloc can also impact the terms of trade of the region vis-à-vis the rest of the world. As the trade bloc may represent a big entity on international markets, one may assume that it can, in some cases, modify world prices and improve its terms of trade. For small countries, by definition, the terms-of-trade argument does not apply.

Building blocs versus Stumbling blocs. Following the work of Bhagwati on RIAs, a distinction is made between building blocs and stumbling blocs.7 These concepts should help to answer the question: does a trade bloc enhance the welfare of all countries and not only of those belonging to the bloc? A building bloc increases the welfare of all countries, in and out. A stumbling bloc has positive effects only for countries that are in and is detrimental to others.

Regional trade integration and levels of development. The evidence seems to indicate that developing countries may benefit more from a north-south than from a south-south free trade agreement. Moreover, integration between low-income countries often leads to divergence between countries within the regional bloc, which does not seem to be the case for trade blocs between rich counties.8

Domino effects. Another aspect of RIAs is the so-called domino effect, which implies that when a trade bloc exists there is a tendency for outsiders to try to join the club because of the benefits of membership and the costs of staying out, especially when confronted with a large trade bloc.9

Compensation schemes. In a previous paragraph, we indicated that losers could be compensated when modifying the trade policy regime. De facto different compensation criteria were suggested, reflecting different perspectives, giving importance either to losers or winners, or combining both. The names of Kaldor, Hicks and Scitovsky are often referred to when discussing social welfare and collective choices. Compensation criteria are based on potential actions that could eventually be implemented, depending on many factors, including the will of politicians/policy makers and the strength of potential losers and winners.10

1.3. Regional Trade Agreements and the WTO

Regionalism. Most countries in the world belong to RIAspreferential arrangements, free trade areas or customs unions. Very often, countries are members of several agreements, which may complicate trade rules and not support transparency and good governance. At the end of 2000, 60 percent of the regional trade agreements in force have been concluded among European countries.

WTO rules on regionalism. Regional trade arrangements among WTO members have to be notified to the organization. In all, during the period from 1948-1994, 124 notifications were made. Some of these agreements are no longer in force, or they have been amended or superseded by redesigned agreements. Since 1995, over 100 new agreements were notified although not all of them are fully enforced.

For WTO members, regional trade agreements are permitted under specific conditions spelled in three sets of rules:

  1. paragraphs 4 to 10 of the General Agreement on Tariffs and Trade (GATT) article XXIV, as clarified in the Understanding on the Interpretation of Article XXIV of the GATT 1994, provide for the formation of free trade areas and customs unions for trade in goods,
  2. the so-called Enabling Clause for developing countries and
  3. Article V of General Agreement on Trade in Services (GATS) that governs regional arrangements on trade in services.

FTAs and GATT. Paragraph 4 of GATT underlines the desirability of increasing freedom of trade by the development, through voluntary agreements, of closer integration between the economies of the countries parties to such agreement. Moreover, the purpose of a customs union or of a free trade agreement should be to facilitate trade between the constituent territories and not raise trade barriers of other contracting parties with such territories.

Paragraph 5 states that the provision of this Agreement shall not prevent the formation of a free-trade area; provided that: (a) duties applied by the area shall not be higher or more restrictive; and (b) the formation of the free trade area shall be done within a reasonable length of time. 10 years is seen as a limit, unless exceptional cases for which a full explanation has to be provided. The parties of a free trade area have to notify WTO contracting parties about their mutual arrangement and provide them with adequate information. Compensations are also envisaged.

The 1994 Understanding of the Interpretation of article XXIV of GATT reaffirms that the purpose of such [free trade] agreements should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other [WTO] Members with such territories; and that in their formation or enlargement the parties to them should to the greatest possible extent avoid creating adverse effects on the trade of other members.

FTAs and GATS. Following the terms of GATS Article V, this Agreement shall not prevent any of its Members from being a party to or entering into an agreement liberalizing trade in services between or among the parties to such an agreement, provided that such an agreement: (a) has substantial coverage [in terms of number of sectors, volume of trade affected and modes of supply] and (b) provides for the absence or elimination of substantially all discrimination between or among the parties

1.4. Examples of Free Trade Agreements

The European Free Trade Association (EFTA) and the Central European Free Trade Agreement (CEFTA) might be relevant references for GUUAM because of the limited number of countries (4 and 7, respectively), the limited size of these economies and the fact that, in the case of CEFTA, the parties are transition countries. To some extent the North American Free Trade Agreement (NAFTA) could also be an interesting reference.

EFTA. The legal basis of EFTA was the so-called Stockholm Convention that entered into force on 3 May, 1960; it was updated on 21 June, 2001 and the new version, referred as the Vaduz Convention, entered into force on 1 June, 2002.

The EFTA Convention proposes a framework with a set of rules on trade relations amongst member countries, namely Iceland, Liechtenstein, Norway and Switzerland in 2002. The provisions arrange for free trade of industrial goods. Most of the provisions relate to the abolition and prohibition of import duties and quantitative restrictions, and equivalent measures for both exports and imports.

EFTA has supporting institutions, including a Secretariat that is based in Geneva, Switzerland, and is staffed by experts from member countries. The updating of the Convention was the result of a Swiss initiative to extend to all member countries the framework established in the bilateral Swiss-EU Agreements, areas that were already partly covered through the European Economic Area.

CEFTA. Former Czechoslovakia, Hungary and Poland signed the Central European Free Trade Agreement on 21 December, 1991. It became effective on 1 March, 1993. Slovenia joined in 1996 and was followed by Romania and Bulgaria in 1997 and 1999, respectively. By 1 January, 1997, duties on industrial products were abolished.

Considering trade in goods, products were divided into four categories: List A consists principally of raw material and semi-processed goods for which tariff barriers are completely eliminated at the inception of the agreement. List B refers to processed products and manufactures. Corresponding tariffs are reduced linearly in three phases, over a 3-year period, starting 2 years after the inception. List C is composed of so-called sensitive products that are phased out over an 8-year period. Specific rules apply to agricultural products and processed food.

NAFTA. On 1 January, 1994, NAFTA entered into force. A key-objective is the elimination of tariffs on imports of goods between the three member countries: Canada, Mexico and the U.S. The removal of tariffs takes into account countries peculiarities, i.e. levels of development. Mexico has until 2008; the U.S. and Canada had to remove import duties by the late 1990s. NAFTA also promotes fair competition, investments and the enforcement of intellectual property rights.

The NAFTA documents are quite substantial. The Agreement has eight parts, covering 22 chapters. Chapter Four on rules of origin contains 15 articles (including formulas for the calculation of the regional value content) and 3 annexes.

2. The GUUAM Free Trade Agreement

2.1. A Brief Historical Review of GUUAM Economic and Trade-Related Statements

From GUAM to GUUAM. The leaders of four countries (Georgia, Ukraine, Azerbaijan and Moldova) decided to create GUAM in 1997. They were first met with skepticism and even opposition. That did not deter the leaders of these countries, who gained recognition and support over the years. In April 1999, GUAM was joined by Uzbekistan (and became GUUAM), which subsequently suspended its participation in the organization in June 2002.

The GUUAM economic dimension. From the beginning, GUUAM was seen as a political, economic and strategic alliance to strengthen the independence and full sovereignty (re-gained with the termination of the former Soviet Union in 1991). Economic matters were already stressed in the joint 1997 communiqué with a focus on the so-called Trans-Caucasus transportation corridor and the full utilization of existing economic possibilities. In a 1999 joint statement made in Washington, the Presidents of the five GUUAM countries referred explicitly to the Restoration of the Historical Silk Route. In the 2000 New York Memorandum, the heads of GUUAM states underlined the urgent need to establish effective inter-statefirst and foremost economic and inter-sectoralrelations with a view to improve the well-being of the people of their countries. At the September 2000 Millennium Summit of the United Nations, the GUUAM leaders also expressed their support for the development of their co-operation within the framework of economic and trade blocs.

2.2. The GUUAM FTA: A Concrete Step Forward11

The July 2002 decision. At their Summit of June 2001, the Heads of State adopted the Yalta GUUAM Charter, which reiterated a set of objectives, including promoting social and economic development, strengthening and expanding trade and economic links; [and] the development and effective use of the transport and communication arteries. They also stressed the importance of completing a Free Trade Agreement that was concluded at the Yalta Summit of July 2002 with the creation of a Free Trade Area (FTA) involving the four countries of Georgia, Ukraine, Azerbaijan and Moldova. The future participation of Uzbekistan remains unclear. It seems that Uzbekistan became dissatisfied with GUUAM. If that is the case, the Free Trade Agreement might offer a new perspective for cooperation, with a concrete field of action.

The Agreement. The GUUAM FTA has a preamble and 27 articles, covering trade, economic-related and institutional matters, with specific references to taxes, technical barriers to trade, formalities, harmonization of customs procedures, commodity classification, subsidies, services, competition, public procurement, dispute settlement, accession, etc. The agreement shall enter into force on the date of the deposit of the second notification.

2.3. The GUUAM Countries and the WTO

The GUUAM FTA preamble. The GUUAM FTA parties are reaffirming their commitments to the principles of the General Agreement on Tariffs and Trade (GATT/WTO). The GUUAM FTA has still to be notified to the WTO, which will then study it and provide comments if necessary.

WTO membership. Two GUUAM countries have already joined the WTO: Georgia and Moldova, in 2000 and 2001, respectively. In the Georgian case at least, the trade policy stance is extremely liberal. That could reflect the fact that Georgia is a small country, in which case low tariffs are expected to have positive welfare effects and concessions made to be part of the international community by joining the WTO. Moldova and Georgia also have too little domestic natural resources and capital base to envisage protectionist trade policies.

Joining the WTO. Ukraine and Azerbaijan are negotiating to join the WTO. These two countries still retain direct controls over international trade flows, possibly reflecting the complexity of their economies, related business lobbying or, in the Azeri case, a favorable resources endowment in terms of energy resources. Nevertheless, when joining the WTO, Ukraine and Azerbaijan will have to make their respective trade regimes fully transparent and be in line with WTO rules and policy.

2.4. Implementing the GUUAM Free Trade Agreement

Consolidating bilateral free trade agreements. GUUAM countries have contracted several bilateral free trade agreements. In fact, any pair of GUUAM countries has signed a free trade agreement. In all, there are 6 free trade agreements existing between the parties to the GUUAM FTA. It seems that all of them but one are enforced. That implies that the GUUAM FTA offers a unique opportunity to consolidate and supersede all these bilateral agreements and, as a result, make the trade regime of GUUAM countries more transparent within a multilateral framework.

The GUUAM FTA in a comparative perspective. The GUUAM FTA is much simpler than other free trade agreements. Its full and effective implementation may require additional information. For instance, common rules of origin should be adopted. An adequate institutional framework should be considered. Priorities must also be defined.

Setting up priorities. According to trade experts, a line should perhaps be drawn between so-called 1st and 2nd generation measures. 1st generation measures relate to trade in goods. Services belong to 2nd generation measures partly because of their inherent complexity. Trade in goods should then be dealt with first. However, given the importance placed on the Trans-Caucasus transportation corridor, transit and transportation services should receive special attention.

TBs versus NTBs. Considering trade in goods, a line is drawn between tariff and non-tariff barriers, TBs and NTBs. Import tariffs correspond to taxes that are levied on imported goods. Such instruments are rather transparent. NTBs are more complex. They correspond to technical, bureaucratic and legal matters that can make the trade regime extremely opaque and, as a result, impede and distort trade. The bilateral FTAs concluded among GUUAM countries have in most cases led to the elimination of TBs.

Addressing NTBs. The elimination of NTBs may require much time and expertise. In that respect, the adoption of common rules of originthat are often seen as NTBs beside technical regulation and standards, import licensing and customs valuationis essential for imposing duties at the border between GUUAM countries. There are already CIS rules of origin and they could serve as reference for implementing the GUUAM FTA.

Institution building. So far, there is a GUUAM Information Office based in Kiev and national Coordinators in the member States. Assuming that the GUUAM countries are willing to deepen their relations, the EFTA example could be followed, with the creation of a Secretariat that would concentrate on implementing the FTA. However, one must be fully aware of the limited financial capabilities of the GUUAM States. That implies that any Secretariat should remain small in size and rely on human resources and expertise from the capital cities of the GUUAM countries.

Arbitration procedures. Dispute settlement procedures should also be adopted, possibly referring to models provided by other organizations such as CEFTA or EFTA. In any case, arbitration should be kept simple and before formalizing disputes, priority must be given to full transparency, mutual understanding, cooperation, and the search for consensus.

2.5. The Prospects of Economic Integration within GUUAM

The determinants of international trade. The determinants of international trade are manifold: GDP per capita, population, trade policies/regimes, resource and factor endowment, economies of scale, exchange rate volatility, convertibility, number of currencies, distance, transportation and communication infrastructure, the quality of governance and corruption, political factors, history, time, culture, languages, etc.

Referring to different sets of variables and factors, various models have been proposed to explain trade. So-called gravity models of international trade are very popular. They generally favor three variables: real GDP levels (or per capita), population, and distance.

Gravity models of international trade. Even if the distance between countries is a somehow abstract concept, gravity models of international trade were successful in fitting sets of data and predicting the volume of trade between countries. Thus, the closer (the more distant) two countries are to each other, the more (the less) these countries will trade; moreover, the heavier a country, the heavier its trade. What about GUUAM?

The state of the GUUAM economies. One must remain realistic about the immediate impacts of the agreement on trade between the actual GUUAM states. Free trade agreements are already enforced. Economic reforms have still to progress. Despite WTO membership, Georgia and Moldova are confronted with widespread corruption. Border controls and the full application of legal norms are also made extremely difficult by separatism, particularly in Azerbaijan, Moldova and Georgia. In separatist regions, the rule of law does not prevail and there is plenty of room for illegal and criminal activities.

Partly as a result of a non-conducive business environment, the incomes per capita of the GUUAM FTA countries are very low (maximum in 2001, in purchasing power parity dollars: Ukraine, with USD 4,150; minimum: 2,420 for Moldova; see Table 3).

Table 3

GUUAM CountriesBasic Indicators, 2001

Countries

Population

(millions)

GNI per capita

(PPP, $)

GDP growth (%)

CPI

change

(%)

 

 

 

1990-1995

1995-2001

2001

 

Azerbaijan

8.1

3,020

--

7.8

9.9

1.6

Georgia

5.0

2,860

24.5

5.1

4.5

4.6

Moldova

4.3

2,420

17.6

-1.5

6.1

9.8

Ukraine

49.1

4,150

14.2

-0,2

9.1

12.0

Uzbekistan

25.1

2,470

4.6

3.6

4.5

27.2

Source: World Bank, The Economist, EU TACIS.

Note: GNI = gross national income;

PPP = purchasing power parity;

CPI = consumer price index.

Georgia and Moldova also have high external debt burdens, which should have a negative impact on future economic development (see Table 4). In that respect, it should be mentioned that, in the Georgian case at least, there were already confusions between a short-term recovery and long-term sustainable growth.12

Table 4

GUUAM CountriesExternal Indicators (% GDP) 1999/2000/2001

Countries

Current account

Debt

Debt

service ratio

Azerbaijan

0.5 (01)

22.5 (00)

3.4 (00)

Georgia

6.7 (01)

54.2 (00)

21.8 (00)

Moldova

7.6 (01)

95.7 (00)

10.5 (00)

Ukraine

3.6 (01)

38.3 (00)

11.5 (00)

Uzbekistan

1.4 (00)

26.8 (99)

17.5 (99)

Source: World Bank, The Economist, EU TACIS.

International and mutual trade. Considering data reported in Table 5, trade among GUUAM countries is limited. Russia is often the major trading partner for both imports and exports. Nevertheless, as they share a common border, Moldova and Ukraine can be seen as natural partners. Georgia and Azerbaijan are natural partners too. From a geopolitical perspective, Georgia is also a key-transit country for at least Azeri oil.

Table 5

The Main Trade Partners of GUUAM Countries in 2000/2001

GUUAM Country

Main partners

For exports

For imports

Azerbaijan 2001

Italy (57.2)

Israel (7.1)

Georgia (4.5)

US (16.1)

Russia (10.7)

Turkey (10.4)

Georgia 2001

Russia (23)

Turkey (21.5)

Azerbaijan (3.3)

Russia (23.1)

Turkey (12.6)

Azerbaijan (9.0)

Moldova

Q I-III

2001

Russia (43.8)

Ukraine (10.2)

Italy (35.7)

Ukraine (17.0)

Russia (15.1)

Romania (11.6)

Ukraine 2001

Russia (21.7)

Turkey (5.9)

Italy (4.9)

Russia (34.4)

Turkmenistan (9.8)

Germany (9.2)

Uzbekistan 2000

Russia (16.7)

Switzerland (8.3)

Ukraine (4.7)

Russia (15.8)

South Korea (9.8)

U.S. (8.7)

Sources: EU TACIS, The Economist.

Note: In brackets, as a percentage of total exports

or imports.

But, again, when referring to gravity models of foreign trade, the scope for further economic integration among GUUAM countries is (still) rather limited. As already mentioned, income levels are modest. With the exception of Ukraine, with about 49 million inhabitants, population figures are low. Furthermore, the Black Sea separates Ukraine and Moldova from their Southern Caucasus partners, namely Georgia and Azerbaijan.

2.6. Relations with Third Parties

The GUUAM FTA cannot discriminate. Following the GUUAM FTA, concerns were apparently raised in third countries. Beside theoretical trade diversion effects, the GUUAM FTA could eventually have a negative impact on third countries and neighbors in particular. Such views are not justified for at least the following reasons:

(1) According to WTO rules, free trade agreements must not result in higher protection against countries that are left outside. That is particularly true of Georgia and Moldova, which are already members of the WTO. Moreover, Ukraine and Azerbaijan are negotiating for accession to the WTO. The preamble of the GUUAM FTA explicitly refers to WTO rules.

(2) the GUUAM FTA can help to simplify trade regimes between its members as there are already bilateral trade agreements between GUUAM countries. Thus, the FTA could stimulate the consolidation of these bilateral agreements and, as a result, make the trading environment simpler, which should ultimately be of benefit to third countries.

(3) For countries that have Free Trade Agreements with Georgia, Ukraine, Azerbaijan and Moldova, the GUUAM FTA does not make them less effective.

(4) Assuming that the GUUAM FTA is fully implemented, it will contribute to the economic growth of the GUUAM countries, which should have a positive incidence on close neighbors and other countries.

(5) Per se, a trade agreement is limited to commercial and related business matters and does not have any security or military implications, and is definitely not intended to hurt third countries, etc.

The GUUAM FTA as an open system. As indicated in its Article 26 on accession, the GUUAM FTA is, upon consent of GUUAM Participating States, opened for accession by any state. Uzbekistan might be interested in joining the agreement. That could also be the case of third parties. Turkmenistan is a key-supplier of gas to Ukraine. Considering its geographical location and common borders with GUUAM countries (i.e. Georgia and Azerbaijan), another possible interesting country is Armenia. In that case, trade would even be seen as a confidence-building device.

Furthermore, as Russia, along with Belarus and three Central Asian States, is moving ahead with the creation of the Eurasian Economic Community (EEC), one could eventually envisage institutional linkages between GUUAM and EEC, fostering mutual recognition and equal partnership.

2.7. Perception of GUUAM

U.S. support. Presently, the U.S. is interested in promoting stronger relationships between GUUAM states. Much importance is provided to effective border controls and projects that would help multiply transportation routes between the West and the oil and gas rich Caspian Sea basin. U.S. interests largely reflect the geopolitical location and the resource endowments of these countries.

EU mitigated perception. Regarding the GUUAM FTA, the EU (or at least the European Commission) does not seem to show an extreme interest. TACIS projects in GUUAM countries place much importance on WTO-related matters and trade within the framework of the Partnership and Cooperation Agreements (PCAs) concluded between these countries and the EU.

The EU interest in GUUAM should grow over time. In fact, the implementation of the GUUAM FTA may prepare for a constructive future exchange of views, and negotiations between the EU and the GUUAM countries, fostering the implementation of the PCAs.

Russias multiple views. On the Russian side, there is apparently no single view about GUUAM.13 There were certainly worries and attempts to undermine the organization. However, some Russians circles would eventually see GUUAM as a mean to create a zone of stability around Russia, which would be a significant contribution to security and peace at the age of global terrorism.

Converging interests. De facto, Western, Russian and GUUAM interests do not necessarily contradict, especially when international relations can be based on common values, the rule of law, mutually beneficial trade, investment and financial flows, and strong economic ties.

2.8. External Assistance

Legal and policy advice. Technical assistance on trade policy matters is already provided to GUUAM countries by various organizations, including the EU, USAID and CIDA. For instance, the EU is supporting so-called Policy and Legal Advice Centers (PLACs) in Ukraine and Georgia. These centers are working on WTO-related matters. In the Georgian case, the Georgian European PLAC supported the process of WTO accession by providing advice on a wide range of issues such as tariffs, public procurements, standardization and certification, etc. IRIS Georgia is the office of the Center for Institutional Reforms and the Informal Economy, managed at the University of Maryland and undertaking projects that are funded by USAID. IRIS has been involved in several WTO related activities. In Ukraine, the Ukrainian European PLAC is working on trade legal issues. Ukraine also benefits from Canadian support, with the CIDA-funded project Trade Policy Capacity Building in Ukraine that is being implemented by the Center for Trade Policy and Law of Carleton University.

Training. Expertise capacities are built up by the above-mentioned institutions that provide unique opportunities for on-the-job training and hiring of local qualified experts in GUUAM countries. Moreover, training opportunities abroad are provided by assistance programs. For instance, Georgian economists were involved in trade courses offered by the George Mason University in the U.S.

Overall Assessment of the GUUAM Free Trade Agreement and Conclusions

  • The GUUAM FTA corresponds to the mainstream policy, namely the creation of free trade areas in the new global economy. It should definitely not contradict WTO rules, particularly because two GUUAM FTA parties are members of the WTO and the two others are negotiating to join the organization. Again, it should be stated that the GUUAM FTA does not render null existing free trade agreements concluded between GUUAM countries and third parties.

  • Considering the economic analysis of regional trade agreements, the GUUAM FTA should have little impact, at least in the short run. There were already bilateral free trade agreements between GUUAM countries prior to the GUUAM FTA. We may assume that trade diversion, trade creation, economies of scale and budgetary effects have been realized in most cases.

  • One may still wonder if a domino effect could be observed with:

  • 1) Uzbekistan reconsidering its participation in GUUAM initiatives and

    2) neighboring countries weighing carefully the benefits of joining the Free Trade Agreement.

  • As indicated by the EFTA case, where member countries are distant from each other, the absence of common borders between the Caucasian GUUAM countries (Azerbaijan and Georgia) and Western GUUAM (Ukraine and Moldova) should not deter the implementation of the GUUAM FTA. On the contrary, the June 2001 Agreement offers possibilities to develop further existing transportation links and facilitate the crossing of borders and exchanges.

  • Despite some shortcomings, the GUUAM FTA offers unique opportunities that deserve strong support from the West. Taking into account the experience of other free trade areas, such as EFTA and CEFTA, the GUUAM FTA will certainly be extended with more information on specific issues. It should be mentioned that additional provisions might eventually lead to discussions that will require expertise, express political sensitivities and possibly pressure from business lobbies, as that is the case in richer market economies.

  • Assistance on trade policy is provided to the GUUAM countries by various organizations. The GUUAM FTA may certainly benefit from existing programs and new ones that should be developed to address very specific problems and promote institutional building.

  • The June 2001 Declaration by the EFTA States and Ukraine could eventually be referred to as a base for technical assistance, assuming that it will support Ukraine to strengthen the environment conducive to, and supportive of, private entrepreneurship, free competition and economic activity based on market forces. In other words, the realization of the GUUAM free trade area and the provision of technical assistance require significant progress with market-oriented reforms and liberalization for creating a business-conducive environment.

  • Considering Table 2, the GUUAM FTA is a modest step to integrate further the economies of the parties. More ambitious integration and cooperation schemes could be considered.

  • GUUAM leaders have already expressed their will or hope to move closer to the enlarging European Union. The implementation of the GUUAM FTA may help and should perhaps be seen from the perspective of strengthening future EU-GUUAM relations. That could lead to immediate concrete actions such as, for instance, the adoption of common rules of origin in line with EU principles.

All in all, the GUUAM FTA must be strongly backed by the West and (why not?) even by other CIS countries. It should ultimately contribute to growth and development of member countries and their partners. As a result of better economic and living conditions, regional and global security shall also be enhanced.


The views are those of the authors only and do not necessarily reflect any OSCE official position.
1 E. Mahant, Regional Economic IntegrationBringing Values Back In, in: Globalization and the Political Economy of Trade Policy, ed. by C. Parakevopoulos et al., The APF Press, Toronto, 2000, p. 42.
2 J. Bhagwati and A. Panagariya, Preferential Trading Areas and Multilateralism, in: The Economics of Preferential Trade Agreements, ed. by J. Bhagwati and A. Panagariya, The AEI Press, Washington, 1996, pp. 1-78.
3 For the distinction between formal and informal trade blocs, see: Trade Blocs? The Future of Regional Integration, ed by V. Cable and D. Henderson, Royal Institute of International Affairs, London, 1994.
4 See: J. Viner, The Customs Union Issue, Carnegie Endowment for International Peace, New York, 1950.
5 The welfare analysis of free trade areas and customs unions was one of the first examples of the so-called second-best welfare economics. For more detail, see: M. Corden, Trade Policy and Economic Welfare, Oxford University Press, Oxford, 1997.
6 See: Y. Eilat and C. Zinnes, The Shadow Economy in Transition Countries: Friend or Foe?, mimeo., Harvard University, 18 December, 2000.
7 See: J. Bhagwati, The World Trading System at Risk, Princeton University Press, Princeton, 1991.
8 A.J. Venables, Winners and Losers from Regional Integration Agreements, Discussion Paper 2528, Center for Economic Policy Research, London, August 2000.
9 See: R. Baldwin, A Domino Effect of Regionalism, NBER Working Paper No. 4465, Cambridge, Mass., 1993.
10 See: M. Olson, The Logic of Collective Action: Public Goods and the Theory of Groups, Harvard University Press, Cambridge, Mass., 1971.
11 D. Linotte and L. Aune, The GUUAM July 2002 Free Trade Agreement: A Concrete Step Forward, The Analyst Central Asia Caucasus, SAIS/Johns Hopkins University, Washington, D.C., September 2002.
12 See: D. Linotte, D. Kemoklidze and G. Kereselidze, Georgian Foreign Trade Relations: From Soviet Disintegration to WTO Membership, New Regional Agreements and Partnership with the European Union, Georgian Economic Trends, No. 1, Tbilisi, 2000.
13 See: P. Goble, GUUAM: What Is the Future? Paper presented at the Center for Strategic and International Studies Conference, Washington, D.C., 11 July, 2001.


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