Moldova Trade Study: IS THE DCFTA GOOD FOR MOLDOVA? Note 2 Valeriu Prohnitchi Adrian Lupusor Chisinau, Moldova February, 29 th 2016

Key aspects of the research 1.Use of a Dynamic Computable General Equilibrium Model of the Moldovan economy 2.The Model shares and elasticity coefficients estimated using the most recent data available 3.Emphasis on trade facilitation and transaction costs 4.Trade data distortions partially removed 5.Effective provisions of the DCFTA used for modelling scenarios and transition periods 6.Comparison of strategic trade options

Very briefly about the CGE models 1.Rigorous quantitative method to evaluate the net and systemic impact of various shocks 2.Reproduce structure and nature of transactions among agents (activities, markets, institutions, production factors, etc.) 3.Especially useful when the expected effects of shocks are complex and spread through many channels

CGE – practical implementation of the college- taught scheme of the economic system

0. Baseline scenario No changes in Moldova trade conditions up to 2024 EU maintains Autonomous Trade Preferences Real GDP growths 4.7 percent on annual average Labor continues to shrink due to migration and natural decline Growth in the stock of productive capital determined by capital investment and depreciation Impact of other scenarios assessed against the baseline

1-2. DCFTA and DCFTA + FDI 1.DCFTA Moldova reduces import tariff for EU according to transition schedule EU reduces import tariff for Moldova Moldova liberalizes trade in services with EU EU liberalizes trade in services with Moldova Implementation of the EU recognized standards (SPS) Trade facilitation measures (reduction in exports and import transaction costs and of customs procedures fee) Implementation of Moldova – Turkey FTA Russian embargo. 2.DCFTA + FDI (10% growth per year)

3. Joining the Customs Union 1.Moldova Raises customs duties for the non-CU countries to the MFN level of the CU Reduces customs duties to zero for the CU members 2.Russia Does not impose a trade embargo Offers Moldova a 30 percent reduction in natural gas prices 3. EU Abolishes the ATP Raises duties on imports from Moldova up to the EU MFN rate 4. Rest of the World Increases tariffs on imports from Moldova by a rate equal to the difference between Moldova’s final bound rate and the CU applied MFN rate

4. Adoption of the MFN rate 1.Moldova Denounces the FTAs Imposes MFN duty rates against all trading partners but respects its WTO bound rate 2.Russia and other CIS countries Impose MFN duty rates against imports from Moldova 3.EU Abolishes the ATP Raises duties on imports from Moldova up to the EU MFN rate 4.Rest of the World Takes no retaliatory actions

Snapshot view: Projected Evolution of GDP Under Simulated Scenarios, 2004=100%

Impact of the DCFTA components on GDP aggregates: annual average percentage points against the baseline MD_ GDS EU_ GDS MD_ SERV EU_ SERV SPS EXP_ FACIL IMP_ FACIL MD_ TRK TRK_ MD EMBDCFTAFDI DCFTA +FDI Private consumption Fixed capital investment Government consumption Exports Imports GDP

Strategic trade policy options: impact on GDP components (annual average p.p. against the baseline) DCFTA +FDI CUMFN Absorption Private consumption Fixed capital investment Government consumption Exports Imports GDP Net taxes on imports and production Value added

Impact on key macroeconomic indicators BaselineDCFTA DCFTA + FDI CUMFN REER Export price index Import price index Terms-of-Trade Investment / GDP, % Private savings / GDP, % Foreign savings GDP, % Trade deficit/ GDP, % Transfers surplus / GDP, % Current account deficit / GDP, % Government deficit / GDP, % Import taxes / GDP, %

Impact on Moldovan trade by regions (annual average p.p. against the baseline) Exports to … Russia Belarus and Kazakhstan Other CIS countries EU27Turkey Rest of the World DCFTA DCFTA + FDI CU MFN Imports from … Russia Belarus and Kazakhstan Other CIS countries EU27Turkey Rest of the World DCFTA DCFTA + FDI CU MFN

Impact on total-factor productivity (annual average p.p. against the baseline) DCFTA+FDICUMFN Corporate agriculture Small agriculture SPS sensitive food industry Non SPS-sensitive food industry Non-food manufacture Energy sector Construction Trade, HORECA, repair services Transport and storage Communications Financial sector Real estate Computer services, R&D Other commercial services to businesses Public services Other private services

Impact on production level (annual average p.p. against the baseline) DCFTA+FDICUMFN Corporate agriculture Small agriculture SPS sensitive food industry Non SPS-sensitive food industry Non-food manufacture Energy sector Construction Trade, HORECA, repair services Transport and storage Communications Financial sector Real estate Computer services, R&D Other commercial services to businesses Public services Other private services

Impact on production factors income (annual average p.p. against the baseline) DCFTADCFTA+FDICUMFN Labor Capital Self-employment in agriculture Self-employment in other sectors

Impact on enterprises and households income (annual average p.p. against the baseline) DCFTADCFTA+FDICUMFN Enterprises Urban Q Urban Q Urban Q Urban Q Urban Q Rural Q Rural Q Rural Q Rural Q Rural Q

Evolution of income inequality Baseline Urban Rural DCFTA Urban Rural DCFTA + FDI Urban Rural CU Urban Rural MFN Urban Rural

Impact on shared prosperity (annual average p.p. against the baseline) DCFTADCFTA + FDICUMFN urban bottom average rural bottom average Urban, bottom 40 / average Rural, bottom 40 / average

Key conclusions DCFTA - part of the most credible development strategy invest its efforts and resources in alleviating the behind-the-border trade barriers Liberalization of the services trade is another important source of economic gains Elimination by the EU of the remaining barriers against trade in goods is also another important source of economic gains for Moldova Adopting the SPS standards should be seen as priority in long-term DCFTA with the EU is fully compatible with the multilateral FTA with the CIS countries DCFTA: “DC” (much) more important than the “FTA” part