How Russian Manufacturers Can Access China, India and The EU Markets Via The EAEU Free Trade Agreements

Op/Ed by Chris Devonshire-Ellis

Skilled Factory Worker Salary Averages Across The Eurasian Economic Union

The Eurasian Economic Union is a huge Free Trade bloc, comprising Armenia, Belarus, Kazakhstan, Krygyzstan and Russia. Effectively sited between China and the European Union, it is home to 183 million people, and has an annual GDP (PPP) of about US$5 trillion. Because of its geographical position, China has been keen to involve the countries concerned into its Belt & Road Initiative, and each of the member states of the EAEU has Belt & Road MoU with China. This has helped facilitate trade and investment from China into the EAEU, with numerous infrastructure projects being put into place; most notably in road, rail and energy.

China has also signed off a Free Trade Agreement with the EAEU, however at this moment it is non-preferential and does not include any product or service categories. That is currently being negotiated. It does however have Double Tax Treaty agreements with each of the EAEU member states, which effectively deal with cross-border treatment of labor and services and can be used to minimize applicable tax rates. This however is of great interest for China and the EAEU countries concerned when involved with projects along the Belt & Road.

The EAEU has also signed off Free Trade Agreements with Iran, Serbia and Vietnam, while negotiations with Cambodia, Egypt, India, Singapore and Thailand are all underway. This will provide the member states of the EAEU – and the countries concerned – with trade and manufacturing options. Often these can be structured and positioned to service both the huge EAEU market but also more expensive labour jurisdictions such as China and Singapore. For example, in labor terms, it is more cost effective to manufacture in Kazakhstan and sell to China – and especially so when the upcoming China-EAEU FTA products includes relevant categories.

EAEU Skilled Factory Worker Labour Costs
In this section we take a look at the existing labor costs among EAEU member states and takes a look into the future when negotiations over FTA with the EAEU are completed. It this serves as a road map for businesses considering export manufacturing in the EAEU. It should be noted that additional costs may need to be factored into employee costs, including mandatory welfare payments, and these can add a further 50% on total expense. Contact us for assistance on this issue.

These figures show both the increasing spread of the EAEU in terms of current and upcoming Free Trade Agreements. They also show the diversity of salary levels. Cambodia, for example, has half the salary costs of Thailand, despite the two countries being neighbors. However, the infrastructure is less developed, and obtaining skilled and semi-skilled workers can be hard – training is often required. These issues affect the manufacturing productivity levels attainable. Having said this, Cambodia has been receiving increasing amounts of FDI from China as a result of this, and the productivity and infrastructure situation will improve over time.

Using EAEU Free Trade Agreements To Access China, India, & The European Union
There are other, regionally inter-related issues. The main manufacturing ASEAN nations featured here – Cambodia, Thailand & Vietnam – all have FTA with both China and India. This means they could be good bases to manufacture and export to both these markets. Singapore, also an ASEAN member, has far higher salary (and other costs of business expenses) than anywhere else in ASEAN yet is the regional services and support hub. With its FTA with the EAEU expected shortly, Russian and EAEU businesses will over time find it practical to establish a small regional support HQ there, as the management of multiple investments in ASEAN can more effectively be positioned from Singapore than any of the other ASEAN nations.

The intelligence listed here provides numerous permutations about how best to position a manufacturing company in order to either sell back to Russia and the EAEU, or set up a subsidiary company to supply this as well as the major markets of China, India and beyond. Numerous other factors also come into play in terms of productivity; utilities infrastructure and so on among them. Our practice, Dezan Shira & Associates has considerable experience is assisting foreign investors throughout this region, and can provide analysis and operational costings for such projects. Factors to be looked at to trigger investment into these regions are as follows:

Market Access To ASEAN 
The ASEAN trade bloc includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand & Vietnam.  Establishing a manufacturing operation in any of these nations permits free trade between each of these countries, providing local rules of origin are in place. These are complex – however do allow for a proportion of Russia or EAEU component parts to be added to the final product mix. (Being sited in a Free Trade Zone would be advantageous here). As Vietnam already has a FTA with the EAEU that would be an obvious choice to base an export manufacturing operation, with Cambodia and Thailand additional choices once their FTA with the EAEU is agreed.

Market Access To China & India 
Vietnam already has an FTA with the EAEU, and also offers Free Trade access to other ASEAN member countries. ASEAN also has a collective FTA with both China and India. Simply being based in ASEAN as a capitalized foreign investor is enough to qualify for this.

At present, Vietnam is the primary location for Russian and EAEU businesses looking to manufacture and sell to these markets. Cambodia & Thailand will also offer this once their FTA with the EAEU is finalized.

Market Access To The EU & The Balkans 
Serbia, which has just signed off an FTA with the EAEU, also has a preferential trade agreement with the EU.  Goods originating from Serbia and exported to the EU customs area are subject to preferential customs regimes.  In 2000, the European Commission introduced Autonomous Trade Measures for Serbia.  These measures permitted exports to the European Union without customs duties and quantitative restrictions for almost all products originating from Serbia. In 2008, Serbia and the EU signed a Stabilization and Association Agreement (SAA) and Interim Agreement on Trade and Trade-Related Issues.  The SAA and its subsequent trade agreement with the European Union opened the door for Serbia to begin systemic reforms and harmonize its legislation with EU standards.  Under this agreement, Serbia phased out and abolished tariffs on most goods imported from the EU.  Import duties on all industrial products were scrapped fully, while duties on some agriculture products remain.

Serbia has also been a member of the Central European Free Trade Agreement (CEFTA) since December 2006.  CEFTA is a multilateral free-trade agreement among southeastern European countries, and includes Albania, Bosnia-Herzegovina, Kosovo, Macedonia & Moldova.

As can be seen, the continuing development and expansion of Free Trade Agreements with the Eurasian Economic Union is and will certainly start to influence supply chains impacting the Russian and EAEU markets, as well as offer solutions to Russian and EAEU export manfacturers wanting to access markets in China, India and Asia. This will continue as other FTA between countries around the world and the EAEU start to commence and finalize negotiations.