Kazakhstan and the WTO: A New Era

On June 22, the World Trade Organization (WTO) announced that Kazakhstan had completed negotiations on its accession, becoming the WTO’s 162nd member. The details of Kazakhstan's membership will remain confidential until the accession package is formally adopted by all 161 other members. Kazakhstan's government will then need to ratify the agreement and will become a full WTO member thirty days after doing so. With most of the details unknown, a critical issue is how Kazakhstan will align its WTO commitments with membership in the Eurasian Economic Union (EEU). The escalation of tensions between Russia and the West, including the imposition of sanctions by both parties, has particularly exacerbated the problem.

With Russian accession to WTO back in 2012, it was agreed that the average weighted tariff of the EEU would go down from 10.9 percent in 2012 to 7.9 percent by the year 2020. Consequently, while Kazakhstan’s common external tariff in the Eurasian Economic Union is estimated at 10.6 percent, as Kazakhstan enters WTO, its tariff will go down even lower than the Russian to some 6.1 percent, returning back to the level it had before joining the EEU. This means that costs to Kazakhstan of trade diversion caused by the EEU – that is a substantial increase in imports from Russia and displacement of imports from Europe - will be reduced. A representative of Kazakhstan’s Business Chamber disclosed that as a result of WTO negotiations, Kazakhstan has liberalized import tariffs on over 3,170 goods . Agriculture tariff will go down most dramatically: from 16.7 percent to 7.6 percent.

This would, therefore, under EEU rules, require adequate downward adjustment to the EEU’s common external tariff (the adjustment to common external tariff is calculated as an average of the tariff rates of the member states on the basis of their share of the total EEU market; Kazakhstan comprises approximately 10 percent). The Russian newspaper Kommersant cited Russian officials who argue that process of harmonizing import duties between Kazakhstan and the EEU may take up to seven years after the country's accession to the WTO. Russian officials are mainly concerned about transshipment of goods from the third countries through Kazakhstan (particularly, sanctioned goods) which would require greater administration and possibly reintroduction of some sort of border control.

Before the conflict in Ukraine, there were optimists in the region who would expect that the EEU would align with WTO requirements, increase cooperation with the European Union (a principal market both for Russia and Kazakhstan, comprising about half of their global trade turnover) and follow the EU model. Today, as the sanctions have been extended from both sides, the prospects of such a scenario seem very unlikely, which means that for Kazakhstan it is now an economic imperative to broaden its trade relations and regain competitiveness which was somewhat lost because of the complications with the EEU.

Kazakhstan seems determined to embrace broader integration in global trade. During the VIII Astana Economic Forum, Kazakhstan’s President Nursultan Nazarbayev suggested the establishment of a common Eurasian economic space and called for greater cooperation between the EEU, China, and the European Union. The institutional reforms announced by President Nazarbayev (100 Steps Program) reveal a truly globalized vision, seeking to establish an independent role for Kazakhstan as an economic center of Eurasia, a financial and transportation hub, an open and modernized country, based primarily on Western standards, sound institutions, and British law in the financial center in Astana. This vision depends on more diversified and open links within the region, in part through investment in infrastructure, along the lines of the Chinese Silk Road Economic Belt, with the goal of increasing domestic connectivity, reducing regional inequality, reforming energy networks, and building new social infrastructure.The fact that Kazakhstan will spend up to 10% of its GDP in domestic investment supports a viability of this vision.

Membership in the WTO is a key component of the new vision. Most of Kazakhstan’s neighbors and important trade partners are WTO members: Kyrgyzstan (a member since 1998), China (2001), Ukraine (2008), Russia (2012), and Tajikistan (2013), while Uzbekistan has also resumed its talks to enter the organization. 90 percent of Kazakhstan's trade is with WTO members. Consequently, as Richard Pomfret, one of the most prominent analysts of Central Asia trade, notes, the bulk of trade in Central Asia falls under the WTO’s writ.

While the economic benefits of WTO accession for Kazakhstan may not be immediate (Kazakhstan’s exports are mostly mineral resources and have their traditional niches), there are many potential gains over the longer term. Imports may become cheaper and more diversified, the size of the shadow economy may be reduced and new production facilities may emerge to play a role in global value chains, which would theoretically lead to inflows of foreign investment and new technologies. In addition, as Pomfret notes, “multilateralism, unanimity, non-discrimination, transparency, and predictability give [WTO] members the protection of international trade law that an outward-oriented economy needs.”

Although it took Kazakhstan nineteen years of negotiations to reach what President Nazarbayev called “a historical milestone,” WTO accession, in fact, is very timely. Kazakhstan has already invested significantly in improving its domestic competitiveness and the capacities of its private sector, with large state spending envisaged until 2020, after which point such support cannot be longer rendered, according to WTO rules. The efforts that the country’s leadership is undertaking in attracting foreign direct investment and creating a good investment climate are a necessary precursor to reap benefits from the WTO. Research by Jensen and Tarr (2008) on Kazakhstan showed that liberalization of barriers to foreign investment in business services, which contributes to the competitiveness and productivity of manufacturing, amounts to 70 percent of gains from WTO accession. In 2008 Jensen and Tarr estimated that the gains to Kazakhstan from WTO accession are 3.7 percent of GDP in the medium run, and could be as high as 9.7 percent of GDP in the longer run.

But more important in the short-term, Kazakhstan’s WTO accession comes at a moment of heightened geopolitical uncertainty. Kazakhstan’s foreign policy, which seemed to have suffered from the Russia-West conflict, has made a timely turnabout and regained its multi-vector orientation, as WTO and China’s Silk Road Economic Belt are real alternatives to consider. WTO membership in this sense is a step towards the development of a rules-based system with positive effects on the investment climate and improved rights. And the fact that Kazakhstan managed to complete it this year, despite geopolitical complications, is a success. The leadership in Kazakhstan has decidedly opted for an open, liberal vision of the country’s future. Kazakhstan’s Eurasia is a common space, not restricted to any forces and open globally.

Aitolkyn Kourmanova is a visiting fellow with the CSIS Russia and Eurasia program at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2015 by the Center for Strategic and International Studies. All rights reserved.

Aitolkyn Kourmanova