Trade Effects of Eurasian Economic Union and Global Production Sharing: A Gravity Analysis

Abstract

This study examines the effects of the Eurasian Economic Union (EAEU) on global production sharing and trade in parts and components. With a panel dataset of disaggregated bilateral exports of EAEU members and 28 partners, we estimate an augmented gravity model for 2010–2017. To mitigate endogeneity issues, we employ the Hausman and Taylor Estimator. The study has two important findings. First, there are significant trade diversion effects on the exports of parts and components. Second, the formation of EAEU has resulted in a reduction in intra-bloc exports. In addition to these, we find that market size, inter-country differentials of income, business-friendly climate, and cultural similarities are the other significant determinants of bilateral trade. Based on the empirical analysis, we propose that the EAEU normalise the Common External Tariff below the current level to minimise trade diversion.