1. Ukraine Conflict and Czech Exports: Consequences and New Opportunities (China) Michal Paulus IES FSV UK Vilém Semerák CERGE-EI UK

2. Our Objectives Estimate the economic effects of the conflict in Ukraine on Czech exports to Russia and possible structure of foreign trade of the afflicted countries – The change in exports caused by expected worse economic development of Russia Analysis based on gravity model – Trade potentials to China, opportunities for replacing Czech exports to Russia by Czech exports to China Analysis based on gravity model – Direct and indirect export-related change in the demand for domestic output related to direct redistribution of trade flows due to the sanctions Multi-regional IO model

3. Methodology Sectors Machinery, motor vehicles, food products (43, 26 and 2 % of CZ export to Russia) 1 st Problem (worse economic development of Russia and CZ exports) Estimation and comparison of theoretical exports using the gravity model in two scenarios: 1) Before crisis (Russian GDP growth 2 % in 2014 and 2.5 % in 2015, January prediction of WOE, IMF) 2) After sanctions (GDP growth 0.2 % in 2014, 0.5 % in 2015) 2 nd Problem (Trade potentials) Ratio or abs. difference between estimated and real exports – TP= Theoret.X – Real X or TP= Theoret.X/Real X

4. Results I Food ProductsMachineryMotor Vehicles Loss in exports 2014 Russia (mil. EUR) 1.960.340.6 Russia (% of total CZ exports) 0.03%0.14%0.19% Most relevant partners (mil. EUR) 13.5403.8174.9 2015 Russia (mil. EUR) 4.1130.488.0 Russia (% of total CZ exports) 0.07%0.30%0.41% Most relevant partners (mil. EUR) 28.9593.9245.0 Loss most relevant for machinery industry followed by motor vehicles The loss in food products sector is negligible in 2014 Low growth of Russian GDP prevails also in 2015. Hence we can expect similar losses as in 2014 (the table shows cumulative loss in 2015 including losses in 2014) Total losses for the sectors: 102 mil. EUR (0.1 % of CZ total exports and 2 % of CZ exports to Russia)

5. Results II Food ProductsMotor VehiclesMachinery No. Country Trade Potentials (%) Trade Potentials (mil. EUR) No. Country Trade Potentials (%) Trade Potentials (mil. EUR) No. Country Trade Potentials (%) Trade Potentials (mil. EUR) 1 GERMANY 132%307.51 GERMANY 117%1028.01 GERMANY 112%1947.1 2 SLOVAKIA 118%244.72 SLOVAKIA 152%587.02 AUSTRIA 150%701.5 3 RUSSIA 130%22.53 POLAND 150%473.83 SLOVAKIA 128%575.0 4 NETHERL. 125%18.74 SPAIN 125%166.14 UTD KINGDOM 116%406.7 5 SLOVENIA 171%16.85 HUNGARY 130%107.15 BELGIUM 127%261.1 6 SAUDI ARAB. 302%12.46 ROMANIA 136%79.96 ITALY 115%226.7 7 JAPAN 184%12.27 INDIA 155%76.47 US 118%168.2 8 LITHUANIA 153%12.18 GREECE 181%60.58 SINGAPORE 291%163.4 9 THAILAND 198%11.39 CROATIA 210%57.09 IRELAND 221%159.6 10 LEBANON 163%10.910 AUSTRIA 108%49.810 NETHERL. 107%152.6 148 CHINA PR 47%-7.412 CHINA PR 159%44.9149 CHINA PR 92%-57.0 China: Unutilized trade especially in motor vehicles sector Machinery and food products around potential China also does not belong to the states with the highest trade potentials (12 th highest) Our main trading partner (Germany) offers the highest trade potential Our neighbours also of highest importance (Slovakia, Poland, Austria)

6. Summary Losses in exports towards Russia in machinery, motor vehicles and food products are 2 % of total CZ exports to Russia and 0.1 % of total CZ exports. However losses in other markets much more relevant – 5 times higher (0.5 % of total CZ exports). Trade potential – China not the state number one. Germany and our neighbours much more relevant.

7. Analysis based on Multi-Regional IO Model Vilém Semerák

8. Methodology We derived a simplified world input-output table – Based on the WIOT for 2011 – 6 + 1 countries/regions CR, Germany, EU25, USA, Russia, China (P.R.C.), Rest of the world – 35 economic sectors for every country/region Estimates type I effects of: a) change in final demand vectors, b) change in intermediate input requirements – Type II effects (with induced effects) not considered at the moment (paper) Advantages of the design: ability to analyze indirect flows and to check consistency of the forecasts for all the analyzed countries Disadvantages: – Lower level of detail Food, beverages and tobacco as one sector (15+16) Transport equipment as one sector (34+35) – Slightly older data (2011)

9. Scenarios Shocks in final demand only: – Russian final demand for Czech (+ German and EU) food, beverages, and tobacco replaced by the same demand for products imported From the “rest of the world” From China Other types of shocks can be analyzed easily (on demand!) Omitted issues – Direct reexports motivated just by the embargo (“smuggling” via Belarus) – Induced effects not considered in the presented version – Elastic substitution related to changes in relative prices – Time dimension of the adjustment – how fast is China or another country able to replace the EU supply?

10. Overall Comparison: Food (15+16) Type of ShockNot Compensated Compensated by China Compensated by the ROW Only Czech exports-0.03%xxx All EU exports-0.04%xxx All EU and US exports -0.04% Overall Comparison: Complete Exports Type of ShockNot Compensated If Compensated by China If Compensated by the ROW Only Czech exports-0.91%xxx All EU exports-1.14%xxx All EU and US exports -1.14%-1.12%-1.09% Source: own simulations

11. Results: Overall Effects of the Shock on China Type of EU & US exports China does not take over EU & US exports (ROW) China takes over EU & US exports Food exports only0.000%0.08% All exports to Russia0.01%1.09% Source: own simulations Note: induced demand effects (type II multipliers) not considered!

12. Conclusions The export related shocks related to embargo are small from the Czech perspective Effects of the embargo will be a little mitigated by the effect that other exporters to Russia also need inputs – And some of these inputs come from the EU Obviously, the effects are China are positive but not extremely large They are positive even if Chinese suppliers do not directly replace EU and US ones directly, but they tend to be very small

13. Thank you for your attention!

14. Appendix MachineryMotor VehicleFood Products Country Exports, bill. EUR % of total exports Country Exports, bill. EUR % of total exports Country Exports, bill. EUR % of total exports GERMANY 14.75134% GERMANY 6.71231% SLOVAKIA 1.52326% FRANCE 2.5486% UTD KINGDOM 1.6257% GERMANY 1.21821% UTD KINGDOM 2.5416% SLOVAKIA 1.5117% POLAND 0.67012% RUSSIA 1.9334% FRANCE 1.4417% AUSTRIA 0.3586% SLOVAKIA 1.9134% RUSSIA 1.1545% HUNGARY 0.2544% NETHERL. 1.7304% POLAND 0.9584% ITALY 0.2304% POLAND 1.5984% BELGIUM 0.9004% UTD KINGDOM 0.1773% AUSTRIA 1.3883% SPAIN 0.7944% FRANCE 0.1473% ITALY 1.3393% ITALY 0.6503% NETHERL. 0.1282% US 1.1383% AUSTRIA 0.6333% ROMANIA 0.1072% Most important trading partners

15. Sectors Sector Total CZ exports (bill. EUR) Exports to Russia (bill. EUR) % share of ex. to Russia on total ex. to Russia % share of ex. to Russia on CZ total ex. Machinery43.77 1.9343%4% Motor Vehicles21.73 1.1526%5% Food 5.77 0.092% Total CZ exports to Russia (bill. EUR) 4.48 Topic broad and complex, hence we restrict our analysis only on specific sectors: Machinery (electrical machinery, nuclear reactors, mechanical appliances, televisions, sound recorders etc.) – HS codes 84-85 Motor vehicles (cars, trucks, bicycles, etc.) – HS codes 87 Food (animal products, vegetable products, foodstuffs) – HS codes 1-23

16. Methodology Consequences of worse economic development of Russia on CZ exports Estimate theoretical exports using the gravity model in two scenarios: 1) Russian GDP grows according to the January prediction of WOE: “before crisis” scenario, 2 % in 2014, 2.5 % in 2015 2) Russian GDP grows according to the October prediction of WOE: “after 3 rd round sanctions” scenario, 0.2 % in 2014, 0.5 % in 2015 Comparison of the results → loss of exports caused by lower Russian GDP growth caused by sanctions and Ukraine crisis Comparison of the losses also with the losses regarding the most relevant export destination countries