Improving Trade Relations of Central Asian Economies

The CAREC study aimed to narrow down the factors associated with regional integration. In particular, it sought to evaluate the trade relations of Central Asian economies with their main external partners— European Union, PRC, and Russia – in terms of five factors: trade openness, FDIs, distance, degree of being landlocked, and exports. It also attempted to explain why trade within the Central Asian region, as well as investment inflow and outflows, has been relatively low despite their steady potential growth in trade and investment from other regions.

Central Asia has maintained strong bilateral relations with the EU. From 2005–2021, Kazakhstan had the highest average trade share with the EU at 31.9%, followed by Uzbekistan at 10.9%, Turkmenistan at 10.2%, Tajikistan at 9.2%, and the Kyrgyz Republic at 5.9%. 

During the same period, the trade share with the PRC for the five Central Asian countries was estimated at 14% to 36%. Turkmenistan had the highest average trade share at 36.4%, followed by Uzbekistan at 21.8%, the Kyrgyz Republic at 18.33%, Tajikistan at 14.3, and Kazakhstan at 14.1%. 

Similarly, there was a significant increase in trade with Russia. Kyrgyz Republic's bilateral trade with Russia rose by 32.5%, with exports from the Central Asian economy improving by 2.4 times. In the past 5 years, Uzbekistan and Russia's bilateral trade grew by 18.5%, with exports to Russia rising by 39%. Tajikistan's trade share with Russia remained at 23.3% percent while that of Turkmenistan stood at 6%. 

Meanwhile, the share of trade within Central Asia ranged from 4.6% to 9.1% from 2005­–2021. The share of exports and imports among the region’s economies did not exceed 10%. The level of trade intensity further decreased from 20.1% in 2005 to 8.1% in 2010 and slightly improved during recent years to reach 17.3%. The low share of trade within the region is due to various factors, such as limited transportation infrastructure, political tensions, and a heavy reliance on natural resources.

Findings suggest that if the Gross Domestic Product of Central Asian economies rises by 1%, the amount of exports will go up from 0.005% to 0.05%. Similarly, a 1%-increase in the GDP of the EU, PRC, and Russia is expected to push exports by 0.007% to 0.09%. 

Further, if the three major trade partners increase their FDIs, Central Asia’s exports will rise by 0.5% to 0.7%. Such growth can be attributed to technology transfer, access to international markets, development of backward linkages, and knowledge spillovers, among others. 

However, challenges impede the development of Central Asian countries through international trade. They suffer from limited industrial diversification that contributes to export uncertainty. This heavy dependence on a narrow range of products, particularly oil, gas, minerals, and agricultural goods as main export commodities makes them vulnerable to fluctuations in global commodity prices and demand. 

Increased regional cooperation is essential to addressing these issues. Better integration of Central Asian economies would allow them to expand their trade; become more involved in global production trade networks and the geography of trade; and become a land bridge for rapidly expanding trade between East and South Asia and Europe.