We assess deep integration in the Eurasian Economic Union (EAEU) through the reduction of time in trade costs, the reduction of non-tariff barriers in goods and the liberalization of barriers against foreign suppliers of services. We develop an innovative multi-region model of trade and FDI for preferential trade analysis where we incorporate Dixit-Stiglitz endogenous productivity effects from trade and FDI liberalization. This model produces important differences compared with a perfect competition model. We build on numerous surveys and econometric estimates of the trade and FDI barriers in our focus countries that we helped develop.We show that if the EAEU effectively implements its objectives for trade cost reduction, it would lead to significant welfare gains of between 0.8 to 4.8 percent of consumption, depending on the country. If these deep integration measures are extended to third countries, either by a wider liberalization effort or by spillovers, then the estimated welfare gains increase between 2.5 and 4.5 times for Belarus, Kazakhstan and the Russian Federation. Using the neoclassical model of labor migration, we estimate that the right to legally work in the Russian Federation is approximately of equal value to Armenia as the combined aspects of the reduction of trade costs, including FDI liberalization. Our estimates show that all the spillovers are beneficial to all the EAEU countries. Among the various reforms under consideration, we identify which reform is most important for each EAEU member country; and we identify whether the European Union, China or the United States is the most important external region for each member country if the reforms are extended to third countries.assumption. We are the first to provide estimates of these trade costs impacts for the EAEU countries with and without spillovers to third countries. We also contribute to the literature by providing an estimate of the free movement of labor, where we employ the well-known neoclassical model of labor migration. Key ResultsOur results for our central (basic) scenario of EAEU integration shows significant gains ranging from 0.8 percent of consumption for the Russian Federation to 4.8 percent of consumption for Armenia. If the measures to reduce trade costs and liberalize barriers against FDI in services are extended to third countries, either by a wider liberalization effort or by unavoidable extension of benefits (called "spillovers"), then the estimated gains increase to between 3.6 and 7.2 percent of consumption, depending on the country. The importance of spillovers is especially true for FDI liberalization. The significantly larger gains from wider liberalization or spillovers reflects the fact that the five EAEU countries collectively have only 2.2 percent of world GDP in 2017. The estimated gains are significantly smaller with our perfect competition model, which shows the importance of incorporating the endogenous productivity gains from trade and FDI liberalization in services.Since remittance income is very impor...

What are the potential gains to the members of the Eurasian Economic Union (EAEU) of successful deep integration through the reduction of time in trade costs, the reduction of non-tariff barriers in goods and the liberalization of barriers against foreign suppliers of services? We estimate that if the EAEU were to effectively implement its objectives for trade cost reduction, it would lead to welfare gains as a percent of consumption of 0.8% for Russia, 1.7% for Kazakhstan, 3.1% for Armenia and 4.8% for Belarus. If these deep integration measures were partially extended to third countries, the welfare gains would increase to 3.6% for Russia, 4.5% for Armenia, 6.3% for Kazakhstan and 7.2% for Belarus. We estimate that the right to legally work in the Russian Federation for Armenians is approximately of equal value to Armenia as the combined aspects of the reduction of trade costs, including spillovers. We identify the external region and reforms that are most important for each member country regarding reforms and spillovers; this may inform lobbying positions of the member governments. Our innovative model, that includes imperfect competition and foreign direct investment, produces important differences compared with a perfect competition model.