The Cost of Borders : Evidence from the Eurasian Customs Union

How strongly can trade facilitation benefit trade? We study the most comprehensive trade facilitation measure possible – complete elimination of customs points – within the Eurasian Customs Union EACU). The EACU abolished internal customs controls between its members in two stages, which makes it possible to identify the effect of border elimination. We find that most of the trade impact is driven by the non-tariff costs rather than changes in MFN tariffs. Removal of the internal customs controls increased the intra-CU by 65% and hurt trade with the MFN partners to a similar extent. While the trade gain for the members is largely driven by the final goods trade and at the expense of the MFN partners, the intermediates trade is affected much less. This finding suggests that international fragmentation of production limits the scope for trade diversion from regional trade agreements