Improving Trade Relations of Central Asian Economies

Trade outside the CAREC region

In the decades following independence, Central Asian economies have developed policies that promote trade relations with external partners, of which the European Union, People’s Republic of China (PRC), and Russia are the major ones.

PRC is a significant partner as its economic engagement with Central Asia—largely driven by foreign direct investments (FDIs) in the region—has grown substantially over the past decades. Central Asian countries are also geographically and historically connected to Russia, which has contributed to their economic development. 

Meanwhile, economies in Central Asia have become increasingly dependent on the European Union (EU) for a variety of reasons, including political, economic, and cultural cooperation. Throughout the years, the EU has developed a partnership with Central Asian nations to foster regional stability, promote sustainable development, and enhance connectivity.  

Trade inside the CAREC region

Regional economic integration and cooperation have significant benefits for Central Asia. The removal of trade barriers, increase in investments, improvements in infrastructure, and an increase in economic activities as a result of regional integration can facilitate the growth of trade. 

However, market integration in Central Asia does not promote regional cooperation because of low levels of regional economic interdependence. There is a similarity in the export of Central Asian countries and they are closely related to each other; the regions compete rather than complement one another.^[1] Other factors that have hindered trade and investment within the region include infrastructure challenges and different economic and political systems. 

Several initiatives have been undertaken in recent years to address these issues and promote trade among Central Asian countries. These include the establishment of the Eurasian Economic Union (EAEU) and the CAREC program that aim to enhance regional connectivity, improve trade facilitation measures, and foster economic cooperation among Central Asian countries.

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. 

Policies recommended to boost Central Asia’s regional integration and improve trade relations include

^[1] W. Wang. 2014. The Effects of Regional Integration in Central Asia. Emerging Markets Finance and Trade. 50: 2. pp. 219–232.

M. Abduvaliev. 2024. An Overview of Central Asian Trade Growth and Economic Integration. Visiting Fellow Program. Xinjiang: CAREC Institute.