Room For Growth: The EU’s Trade and Investment Relationship with Central Asia
Dec 3, 2021
The first European Union-Central Asia Economic Forum convened November 5, taking place within the framework of the EU Strategy on Central Asia that was adopted in 2019. During the forum, Kazakh Prime Minister Askar Mamin proposed creation of a European Union-Central Asia Business Council to facilitate trade and investment. The European Union has been a vital economic partner of Central Asia and the business initiative presents opportunities for new growth and increased trade between the two regions. The partnership could play a vital role in the diversification of Central Asian economies and their integration into the wider global supply chain.
Over the past decade, EU member states have invested more than 105 billion euros (about US$121.3 billion) in Central Asian countries, which exceeds 40 percent of the total amount of foreign direct investment in the region. Overall, the EU accounts for over a third of total foreign trade in Central Asia. The EU has also provided some specific trade benefits. Tajikistan is part of the Generalised Scheme of Preferences (GSP), which gives favorable access to EU markets. Kyrgyzstan and Uzbekistan are part of GSP+, which grants additional preferences, such as 0% tariffs if the partner implements international conventions related to good governance. However, as middle income economies, Kazakhstan and Turkmenistan are not eligible for the scheme.
Despite the trade and investment frameworks established between the regions, there is much room for improvement. The EU has outlined goals for ties with Central Asia through its EU Strategy on Central Asia, which sets out a roadmap for a closer economic and political partnership. Much of that 2019 document focuses on economic reforms and modernization as well as on intensifying and broadening political dialogue. However, it is also important to improve trade with Central Asia and expanding it beyond more traditional commodities. For example, Central Asian exports to the EU are largely restricted to a small number of commodities: crude oil, gas, metals, and cotton. EU exports to Central Asia, on the other hand, are dominated by transport equipment and manufactured goods. If trade and investment between the two regions are to expand, governments in the region will need to promote the export and import of a wider variety of commodities, which could help the diversification of Central Asian economies.
The lack of diversification of Central Asian exports has been a barrier to the significant increase in trade between the two regions. Especially as Europe and the EU moves towards a greener agenda, trade with Central Asia will need to shift into new sectors. Additionally, there is still a significant presence of governments and state-owned enterprises in Central Asian economies, and the private sector is often intertwined with the public one. The rather weak rule of law combined with a somewhat constrained finance sector in Central Asia further increase foreign investers’ wariness of conducting business in the region. These are areas where activities envisioned in the 2019 agreement with the EU can have important benefits.
Still, there have been improvements in some places. Uzbekistan’s government launched ambitious reforms in 2017, designed to open and transform the economy. Prices, the exchange rate, and trade tariffs have been all been progressively liberalized; taxes on businesses and households have been cut; and the role of government is slowly being reduced. Uzbekistan’s progress can present opportunities for the wider region, as do reforms in, for example, Kazakhstan.
Moving forward, economic relations between the EU and Central Asia could benefit from some further steps. Firstly, Central Asian governments should improve public financial instruments by encouraging the banking sector to provide loans and financial instruments for SMEs, implementing financial literacy strategies for businesses, improving export promotion and impact monitoring, supporting key vocational training for key needed skills, and updating transport networks to ensure better connectivity and integration in global value chains. At the same time, the EU should pay more attention to its partners in Central Asia to collaborate on how to best unlock its potential and to facilitate better connections in terms of both exports and imports. The proposed European Union-Central Asia Business Council could be a good initial step to do this, acting as a forum to create a common strategy to incorporate more Central Asian goods and services in EU markets as well as providing an opportunity for the two sides to identify and discuss opportunities for growth.