The BFTA created a free trade zone to extend trade and promote harmonious development of economic relations among Baltic countries. The BFTA abolished import and export tariffs on all industrial goods. However, this agreement excluded sensitive goods i.e. agricultural goods, fisheries, processed food goods and textile. The agreement provided also that new qualitative export or import restrictions would not be imposed (Pautola –Mol, 2003).
The further step towards closer market integration was made in 1996 when Baltic States agreed to cancel trade restrictions on agricultural goods, the agreement came into force in 1997. The agreement covered products only of the Baltic origin. All quantitative export and import restrictions and similar measures also were cancelled under the agreement, with the proviso that protective measures can be reintroduced if local production is under threat. A third and last phase of the BFTA was aimed at removing non-tariff barriers. This phase was completed in 1998 (Sumilo, 2006)
Finally, unlike the customs union the free trade area are not obliged to use common external tariff. The absence of harmonized boarder policy let to occur the ‘cheat’ trade. As some firms were wishing to avoid paying import tariffs to more protective countries i.e. Lithuania or Latvia and might attempted to import their products through less protective member i.e. Estonia. To minimize such activity the BFTA stipulated that freely trade goods must comply with the EU rules of origin. However, rules of origin measurement are very difficult to implement (Kazlauskiene & Meyers, 1997).
Assessment of Shallow integration
This term is used to describe integration based on national treatment. Shallow or negative integration entails removal and limitation on policies, as distinguished from deep effort to coordinate them. Usually RIA generally have only shallow policy integration aims, their objective is not economic union but an increase in competition through elimination of policy interventions and reduction of market segmentations (Schiff and Winters, 2003).
Firstly, by signing the trilateral BFTA agreement all Baltic States increased their market size to around 7.5 million people. The BFTA created a bigger market for freer movement of goods, but the size of the market compare to the market of the EU was very small. Small economies like the Baltics are price takers in the world market because of the lack of bargaining power (Pautola-Mol, 2003). Beside that, the economic power of these young countries was also small, although the GDP indicator was growing constantly. By the end of the 1990s Baltic were considered as mid-class economies. Furthermore, the RTAs with many union members are more likely to be trade creating (Jackson, 2007). Thus, the BFTA was signed just by three states and from table 1a and table 1.b it’s obvious that the share of total import and exports among Baltic States was fairly small around 12 % although, study of Laser and Schrader (2004) and Hacker, S. and Einarsson, H (2002) suggest that the trade among the BFTA exceeded it potential.
In shallow integration assessment the tariff data could demonstrate welfare enhancement if they follow the rule that the higher the tariffs before creation of the RIA and the lower after establishing the RTA (Jackson, 2007). However, the Baltic tariff data is scarce especially for the period of early 1990s but according to article of Vilpisauskas (2003) the Baltics protected their market by implementing tariffs. Obviously, by signing the BFTA the countries promoted freer trade among themselves. It suggests that BFTA was welfare enhancing although the scope of welfare enhancement was fairly small because of the small volume of trade carried among the Baltics (see table 1 & 2).
Furthermore, the relative costs in BFTA countries were similar. The Sussex Framework suggest that welfare in more likely to be enhanced in countries with wide difference in relative costs between the RTA members with a comparative advantage close to world average (Jackson, 2007). Therefore it is hard to define comparative advantage in the Baltic States but against the EU the main comparative advantages of the Baltic region, which determine their specialization in the world market after regaining their independence and during the whole transition period, have been related to their geographical location, highly qualified labor and relatively low wages (Sumilo, 2006). According to the study which was done by Kaitila and Widgren (2003) using the export from the Baltic region to the EU regression tend to suggest that Baltic countries are competing more with each other in the EU market than with any of the EU 15 countries. And revealed comparative advantages are more similar to each other in the aggregate EU market. Although these regressions were devoted to assess the Baltic state integration to the EU but it also suggests that BFTA was unlikely to be welfare enhancing.
Also the rule of thumb suggests that RTAs between the North-North and North- South are more likely to be welfare enhancing than between the South-South (Jackson, 2007; Schiff and Winters, 2003). Geographically Baltic are located in the north but according to their economic power in the early 1990s these three countries were more similar to the south economies. Due to it we can assume that the BFTA fitted more the South- South model and the BFTA had small influence on welfare enhancement.
Finally, the table 5.a and 5.b indicate the share of imports and exports of GDP in each of the BFTA members. Jackson claims that if trade is initially a small share of GDP the RIAs is more likely to be welfare improving. However, trade had reasonable share in the GDP of Latvia around 50% in Lithuania around 60% and in Estonia around 80%. But probably the influence of the BFTA in these numbers is fairly small because the overall trade among the Baltic States was around 10 % of their total trade. Here the biggest influence is played by the many bilateral trade agreements signed by Latvia, Lithuania and Estonia separately.
2008 Source: Balance of Payments Statistics (Yearbook 2008) IMF
2008 Source: Balance of Payments Statistics (Yearbook 2008) IMF
Assessment of deep integration
Jackson suggests that FDI is more likely to increase in the North –North RIAs, less likely in North-South and least likely in South –South. However, looking at the chart 4 FDI in the Baltic was fairly small in the early 1990s. It did not reach 0.5 billion $ until late 1990s. Estonia attracted more FDI per capita than the other two countries, overall Lithuania was attracting more FDI but its population more than twice as big as Estonian. A more visible increase in FDI occurs after 1998 and accelerated after the accession to the EU (see chart 4). The increase in the FDI could be explained as foreign investors treated Baltic market uniformly and it was indirect pressure on the governments to proceed with removing non tariff barriers and harmonising market regulation, using the EU rules as a guide (Vilpisauskas 2003; Pautola –Mol, 2003). However, the chart 3 seems to suggest that majority of FDI in the Baltic were not the Baltic origin as investment abroad from the Baltics was merely reaching 0.1 billion $ and sometimes even indicated as negative FDI.
Source: Balance of Payments Statistics (Yearbook 2008) IMF
Source: Balance of Payments Statistics (Yearbook 2008) IMF
Baltic industries underwent a far-reaching process of privatization and structural change. Table 2 represents the size of private sector in the Baltic States as percentage of GDP. The data indicates significant growth of private sector in the Baltics since the 1991. The size of private sector could indicate the better quality production and most importantly higher productivity to drive better profits. Not surprisingly in the early 1990s soviet-type capital- and skill-intensive industries shrank significantly and mainly low-value-added industries, such as wood, furniture and paper dominated Baltic production. Only in Estonia —due to large-scale Finnish FDI —new productions in the fields of radio and communication equipments were established besides the reinforcement of traditional industries (Lasser and Schrader, 2004).
According to Kazlauskiene and Meyers (1997) the BFTA had problems with differing standards and certification requirement, but it was resolved in 1998 when individually Baltic countries signed European Association Agreement with the EU and adopted the EU standard system. Finally Baltic countries established several trilateral intergovernmental institutions such as Baltic Assembly, Baltic Council of Ministers and Baltic Council and signed a range trilateral agreements ranging from economic to security matters
Conclusions
In terms of shallow integration the BFTA removed trade barrier among the members, although it was done gradually, increased their market size and made it more attractive for the FDI. It promoted trade but the trade in inner BFTA did not change significantly. But the influence of the EU is visible in assessment of the scope of integration in the BFTA. However, elements of deep integration are hard to assess because of lack of data and most importantly strong gravitational force of the EU, as majority of FDI flow came from the EU. But the private sector in the BFTA increased significantly and production had diversified. Finally, the agreement lost it importance as the integration towards the EU membership accelerated and the BFTA was ceased when Latvia, Lithuania and Estonia were granted a full membership in the EU.
References:
Books
Kaitila, V. and Widgren, M. (2003) ‘Revealed comparative advantage in trade between the EU and the Baltic States’;in Pettai, V. and Zielonka, J. (ed.) The road to the European Union Volume 2 Estonia, Latvia and Lithuania; Manchester: Manchester University Press
Vilpisauskas, R. (2003) ‘Regional integration in Europe: analysing intra-Baltic economic cooperation in the context of European integration’; in Pettai, V. and Zielonka, J. (ed.) The road to the European Union Volume 2 Estonia, Latvia and Lithuania; Manchester: Manchester University Press
Pautola-Mol, N. (2003) ‘Preferential trade agreements: specific aspect of EU-Baltic trade integration’; in Pettai, V. and Zielonka, J. (ed.) The road to the European Union Volume 2 Estonia, Latvia and Lithuania; Manchester: Manchester University Press
Hiden, J. & Lane, T. (1994) ‘Facing both ways: Baltic economies after independence’, in Buckley, P. & Ghauri, P (ed.) The Economics of Change in East and Central Europe: Its impact on International Business, London: Academic Press Limited
Schiff, M. and Winters, A. (2003) Regional Integration and Development, Washington, DC: World Bank and Oxford University Press.
Internet
Evans, D., Holmes, P., Gasiorek, M., Rollo, J. and Robinson, S. (2007) ‘Assessing Preferential Trading Agreements Using the Sussex Framework’ CARIS Working Papers no. 01
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Jackson, K. (2007) ‘Assessing the Turkey-EU Customs Union: Consideration of Shallow and Deep Integration’, BCID Research Paper, no. 19
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Hacker, S. and Einarsson, H. (2002) ‘The Pattern, Pull, and Potential of Baltic Sea Trade’ The Annals of Regional Science, Vol.37, no.1
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Laaser, C.F. and Schrader, K. (2004) ’The Baltic States’ Integration into the European Division of Labour’ Kiel Working Paper No. 1234
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Kapustans, J. (1997) ‘Cooperation among the Baltic States: Reality and Prospects’ NATO Fellowship Final Report, pp. 1-38.
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Kazlauskiene, N. & Meyers, W. (1997) ‘The Baltic Free Trade Agreement in Agriculture: Issues and Potential impacts’ Center for Agricultural and Rural Development Iowa State University
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Sumilo,E (2006) ‘Trade and Trade Policy Developments in the Baltic States after Regaining Independence before Joining the EU’ XIV International Economic History Congress, session 87, Helsinki , Finland
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Data
Bems,R. and Jönsson, K. (2005)‘Trade Deficits in the Baltic States: How Long Will the Party Last?’, Sveriges Riksbank Working Paper Series, no. 186
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Hacker, S. and Einarsson, H. (2002) ‘The Pattern, Pull, and Potential of Baltic Sea Trade’ The Annals of Regional Science, Vol.37, no.1: pp.6-7.
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[Accessed on 7 November 2008]
Bems,R. and Jönsson, K. (2005)‘Trade Deficits in the Baltic States: How Long Will the Party Last?’, Sveriges Riksbank Working Paper Series, no. 186 pp. 28
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IMF Yearbook 2008
Appendix 1
Source: Jackson (2007)