E. Prospects for deepening trade relations

Similarly, the base of LAC exports to the Russian Federation appears to have been established and is represented by bananas and meat (mostly frozen bovine boneless meat). Brazil and Ecuador are the primary exporters of those products to the Russian Federation. These two products and trade partners have played an important role in Russian Federation imports from LAC throughout the 20 years considered. Another important trade item that has expanded its import share since 2014 is soya beans (other than seed) supplied from Brazil and Paraguay in virtually equal proportions. Prior to 2002-2011, the list of top import items of LAC origin included cane sugar supplied from Brazil and Guatemala. But such exports to the Russian Federation were more than halved in 2012-2019, replaced by rising domestic (beet) sugar production. As previously indicated, trade between EAEU member States and LAC suggests that not all such States have established the sort of long-term business relations necessary for ensuring steady deliveries. EAEU member States that have achieved steady trade volume levels in cooperation with their LAC partners show a clear specialization in supplying low value-added items. It appears that more prolonged trade is stifled by certain trade barriers. Other barriers to trade can include domestic impediments (i.e. low competitiveness, such as price or quality related issues) and external ones, such as expensive logistics, administrative costs, regulatory requirements, etc. In addition to the aforementioned obstacles, attention should be paid to the absence of trade facilitation agreements between the two regions. The first step to deepen trade and economic relations between the two regions was taken in 2018 when the Eurasian Economic Commission and MERCOSUR signed a memorandum on trade and economic cooperation. Currently, the EEC and SIECA are on their way to concluding a Memorandum of Understanding.

A suitable starting point for analysing the prospects for deepening cooperation is to identify the spheres in which the two regions are actively trading with other developing countries, while alternative supply sources exist in a partnering region. In other words, if an EAEU member State’s imports can be supplied by LAC countries, it could allow a LAC supplier to occupy that niche. Below follows a general overview of the categories of goods for which import demand exists. In order to be able to classify identified niches with a real potential for deepening trade relations, further work would be needed to ensure that the observed lack of trade is not due to insurmountable hurdles, such as expensive logistics and transport costs, a lack of necessary infrastructure, poor competitiveness, administrative burdens, or technical barriers. It is in the sphere of competence of national trade promotion agencies to improve business awareness overseas and shed light on existing opportunities; overcome technical and other non-tariff barriers and promote efficient lines of infrastructural development. In this vein, the prospects to follow might guide policy makers in determining the path of trade policy. Table II.4 lists top-10 products for which LAC countries could provide exports to the EAEU, according to the above-mentioned considerations.16 This list is marked by a trend towards the

16 The shortlisting procedure comprises three filters. The first identifies the products (six-digit level of the Harmonized

System 2017) for which EAEU imports either exceed a determined critical value (α1) or are characterized by a yearly rate of growth exceeding a reference point (α2). The second filters the items for which LAC’s share of supply to the EAEU has been inferior to a reference point (α3). The third selects the ones that could indeed be supplied from LAC, i.e. those for which exports from the region have exceeded an established threshold (α4). The reference point for identifying actively growing imports (α2) has been defined as 25% yearly. The critical value for declaring low LAC share to the EAEU (α3) has been established at 5%. As the EAEU member States’ import volumes differ considerably and, thus, the strictness of absolute values of thresholds α1 and α4 would be uneven, it is recommended to identify the reference values for defining imports to the EAEU and exports from LAC as significant based on the share of the corresponding country’s (region’s) overall imports (exports). The shares have been established so as to filter out top-10 priority products for each of the

EAEU member States, which has led to thresholds at nearly 0.01-0.02% of total trade flow depending on the state.

The analogic methodology is applied to identify the prospects for deepening EAEU supply to LAC.

prevalence of high-value added products, such as electronic and mechanical appliances, as well as vehicles. These products are actively imported from non-LAC developing countries. Among other selected items, there is the category of agricultural products and processed food, including the prospective supply of soya beans to all EAEU member States except the Russian Federation, as well as coffee or maize to Armenia. LAC countries have long experience in exporting some of these items including some to EAEU, so elsewhere. However, trade prospects with EAEU from geographically distant LAC countries are associated with logistical and cost challenges, and both regions will have to work on these matters to overcome transportation cost issues. Finally, the short list comprises certain items produced in the oil extraction and processing industry. These products require very specific transport infrastructure and have little to no import substitution opportunity. The results of applying the same procedure for exploring EAEU opportunities to expand exports to LAC are presented in the table II.5. It comes naturally that this list comprises petroleum oils and preparations thereof, as well as electric energy, as these products constitute the basis of EAEU exports and are not being supplied to the LAC region due to cost of logistics and absence of infrastructure. The one-off supply of petroleum oil to Belarus from the Bolivarian Republic of Venezuela that was discussed above illustrates this issue: the deliveries could not have translated into full-scale long-term supply due to the transportation costs involved. By analogy, it could have been expected that being an important producer of copper and waste thereof, EAEU would not supply these to LAC, which in turn is among the world’s major exporters of both products. The resources on the list include unwrought palladium supply for which the Russian Federation is both one of the world’s few producers and its leading source. This item has wide applications in oil cracking and, thus, might be of interest to LAC petroleum exporters. The agricultural products present on the list are mainly those in which EAEU specializes, above all wheat and meslin (Russian Federation, Kazakhstan) and wines (Armenia). The impediments to trade in primary products with a long-distance partner persist as far as EAEU export opportunities are concerned. Some higher value-added products on the list could be re-exported rather than exported from EAEU, which could be the case of motor cars from Armenia, or electronic appliances from Belarus and plastics from Kyrgyzstan. On the other hand, the supply of precious metals and jewellery thereof may be a niche with export potential that has yet to be fully explored due to a lack of business awareness, which still requires further investigation. Further efforts to identify the two regions’ prospects for deepening trade appear worthwhile, beginning with an exploration of the reasons for weakness in mutual trade of products shortlisted as encompassing considerable trade potential. An insufficient intensity of mutual trade may correspond to barriers engendered by trade policy regulations (tariff and non-tariff barriers), internal barriers (poor logistics within the country of destination, insufficient government support relative to that of competitors, burdensome administrative regulations for exporters etc.), as well as difficulties in establishing a rapport with distant partners (complexity of searching for a partner, lack of awareness of foreign markets regulations or of products produced overseas). The work of eliminating these hurdles could involve trade facilitation negotiations, transportation projects, customs and logistics infrastructure development, the organization of business fairs and ensuring tools for sharing information on doing business overseas with the stakeholders. However, many firms need to

improve their competitiveness abroad in order to increase their presence in foreign markets. Unsatisfactory quality, low productivity and high prices are the challenges firms face for competing abroad. Provided the long distances between both regions and the higher trade costs they entail it is especially important to take into account the opinions of entrepreneurs when determining the strategy for expanding trade between EAEU and LAC countries. Given the preliminary nature of the above analysis of prospective niches for deepening trade cooperation, additional research is necessary. Nevertheless, certain conclusions may already be proposed: • Provided the detrimental effects distance between both regions might have on costs and, hence, the price and competitiveness of prospective exports, opportunities for expanding mutual trade should be discovered where either price elasticity to logistic costs, or demand elasticity to price is low. • The first condition might highlight the importance of trade in services unaffected by long distances and will be discussed later in this document. • There are opportunities for producers of goods that have no substitutes in nearby regions or for which higher quality offsets transportation costs. Examples of such products include (1) endemic primary products, such as LAC coffee and Russian Federation palladium; (2) products with peculiar characteristics that would require marketing campaigns to highlight their peculiarities, such as Armenian wines; (3) high value added products in which countries in the region specialize, such as precious-metal jewellery produced in EAEU.