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Figure 1. Evolution of external trade between Moldova and the European Union

Source: elaborated by the author based on data taken from: http://www.statistica.md/

Since 2006, in theEU trade Moldova became the beneficiary of trade preferences regime - GSP + (General System of Trade Preferences - General System of Preferences). This system of tariff trade preferences aims to promote sustainable development of countries that have a vulnerable position in foreign trade. Since 2008, trade between Moldova and the European Union takes place in the Autonomous Trade Preferences - ATP (Autonomous Trade Preferences). This asymmetric bilateral regime, extended tariff exemptions and quantitative exports to the EU originating from Moldova, except for a limited number of agricultural products.

In trade relationswith EU, Moldova is a net importer. In general, until crisis, increase of imports from the EU overtook the increase of exports to this region. A decrease commercial balance deficit with the EU occurred in 2009 - under the crisis, exports to EU have decreased only by 18.5%, while imports fell by 36.4%. In 2010 it returned to old patterns with the EU, though the import and export was below the values ​​recorded in 2008.

Figure 2. Commercial relations between Republic of Moldova and European Union.

Export and import evolution.

Source: elaborated by the author based on data taken from: http://www.statistica.md/

Approximately half of Moldova's exports are directed to the EU, the remaining export is directed in particular to the CIS. In 2010 there was a slight reduction in the share of exports to the EU. Slow economic recovery, which occurs in the EU (economic growth of 1.76% in 2010), caused an increase in exports to the region of only 9.1%, while exports to the CIS region had a good economic promotion in 2010 (growth of 4.55%) increased by 27.2%. In the case of EU imports, also, is the main commercial partner. The share of EU imports in total imports registers a relatively constant evolution, which during the years 2006-2010 ranged in a corridor from 43 to 45.6 %.

Figure 3. Geographic structure of Republic of Moldova export and import, %

Source: elaborated by the author based on data taken from: http://www.statistica.md/

Export to the EU has a limited geographical diversification. Geographical diversification calculated based on Herfendahl-Hirschman[1] index, indicatesa high degree of concentration in the period 2006-2010, this indicator ranged in a corridor from 0.24 to 0.34. Export to the EU in a proportion exceeding 75% is directed to four countries: Romania, Italy, Germany and the United Kingdom of Great Britain and Northern Ireland (until 2008 inthe first four states entered Poland, in 2009 Britain beat it). Import from the EU, is also concentrated, but less than export and shows a continuous decrease of this parameter. The main countries of the EU from which Moldova is importing: Romania, Germany, Italy and Poland. The share of these four major EU countries has continuously decreased from 68% in 2006 to 62% in 2010. This decrease is caused by the reduction of imports from Romania, which decreased from 28.4% in 2006 to 23.4% in 2010. On the other hand, one shows a constant evolution in the share of imports from Germany, Italy and Poland.

Figure 4. Geographic structure of commercial relations with European Union countries

Source: elaborated by the author based on data taken from:http://www.statistica.md/

Export to the EU has overcome some structural changes: on one hand the share of machinery and transport equipment and inedible crude materials has increased and on the other side share various manufactured articles and beverages and tobacco has decreased. Overall, these changes led to a diversification of products exported to the EU. HHI index which was calculated based on product diversification has declined from 0.27 in2006 to 0.25 in 2010.

Table 1. Structure of Republic of Moldova export to European Union, %

Source: elaborated by the author based on data taken from: http://www.statistica.md/

The share of exports to EU of agricultural food products is much smaller than Moldova's total exports share (in 2010 they had a share of over 25% of total exports, compared with 16.8% in exports to the EU.). This is caused by noncompliance of given category of products to the technical EU standards. Moldova started the process of complying with EU technical standards; however this process is very costly in terms of limited national resources and is going rather slowly.

Since the introduction of ATP regime for the majority of Moldovan products subjected to quantitative limits, export quotas have not been reached. Exceptions are spelt and wine exports, and in 2010 export quotas for maize and barley were exceeded. This is due to the fact that:

-         Quantitative restrictions apply to Moldovan products of vegetable or animal origin, which do not meet the EU technical requirements;

-         Developmentsin agriculture are poor, namely its ability to provide export is reduced. During the years 2006-2010, agricultural production fell annually by 0.4% on average terms.

Table 2. Annual tariff quotas for Moldovan exports within ATP

Source: elaborated by the author based on”Proposal for a  REGULATION OF THE EUROPEAN PARLIAMENT AND OF  THE COUNCIL  amending Council Regulation (EC) No 55/2008 introducing autonomous trade  preferences for the Republic of Moldova”, available on: http://www.europarl.europa.eu/and data taken from: http://exporthelp.europa.eu/

Regarding import therehave not occurred essential structural changes. Import from the EU is dominated by industrial products: chemicals, manufactured goods and machinery and transport equipment. However, import of products is relatively diversified, the 2010 HHI index has a value of 0,12.

 Table 3. Structure of the Republic of Moldova import to European Union, %

Source: elaborated by the author based on data taken from: http://www.statistica.md/

Note:CSCI – Standard International TradeClassification

Regarding foreign investment, EUhas as well the leading role. Investors from EU countries bear a major share of 51% of FDI in capital stock[2]and approximatelythree quarters of FDI inflows[3]. However,at attracting foreign investment chapter Moldova has modest success. After the stock of FDI per capita we are in the last position in Europe, with $723.4[4].

Table 4. Structure of attracted foreign investments, by country of origin, %

Source: taken from “Analysis on foreign direct investments, attracted in the Republic of Moldova during 9 months of2010”, p. 8, available on:www.mec.gov.md/files/FINAL.pdf

Moldovan migration is directed mainly towards two regions: the EU (mainly Italy and Portugal) and CIS (especially in the Russian Federation and Ukraine)[5]. Accordinglythe EU is a major donor of remittances to Moldova. Higher rates of growth recorded in Russia, compared to the European Union have determined EU losing its leadership in donating remittances to Moldova. In 2010 the share of remittances received from Russia was 55%[6].

The EU will continue to remain the main economic partner of the Republic of Moldova. However, there are factors that could diminish the intensity of economic relations and, on the one hand, modest economic developments related to the EU, and on the other hand, in particular the promotion of slow reforms in Moldova. The national economy is strongly dependent on the dynamic of EU economy. Baleful economic evolutions in the EU, especially in Romania, Italy, Germany and Portugal may have adverse effects on flows oriented to Moldova: remittances, payments for the import of Moldovan products and foreign investments. On the other hand, intensification of structural reforms in Moldova would add quality to the EU economic relations:

-         Implementation of measures necessary for adjustment to European standards of quality, which target: infrastructure, institutions, processes that will boost exports to the EU;

-         Improving business environment will lead to increasing interest in new investment projects in Moldova by businesses in the EU

On a medium term, in the context of initiating negotiations on signing the Free Trade Thorough Comprehensive Agreement(FTTCA), relations with the EU will continue to improve. Processes prior to signing the agreement should contribute to Moldova’s compliance to European standards. Besides bilateral reduction of customs tariffs to ensure the free movement of goods between Moldova and the EU, Moldova will be required to adjust to European national standards in several segments, such as plant protection requirements for goods, services and investment, issues of competition, public procurement, etc.. However, on a short term, FTTCA represents a risk for certain sectors of the economy, for example, agricultural-food sector. However, long-term effects that could be obtained if Moldova will conscientiously carry out "its homework" and promote reforms will be much higher than negative repercussions. Currently, Moldova, practically is not ready to sign such an agreement, many areas comply with European norms. In this regard, Moldova, within negotiations should insist on a gradual transition to a liberalized trade regime, which allows mitigation of possible negative effects. Simultaneously Moldova must focus its efforts to achieve rapid and serious structural economic changes. Moreover, neither the European Union will support signing up the agreement if there will be no secure progress achieved.       

This publication was produced by IDIS “Viitorul” with the financial support of Soros Foundation Moldova and the National Endowment for Democracy. You can download its orginal version here