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Austria’s trade activities from a value-added perspective

Austria’s exports depend to a large extent on foreign inputs, which amounted to 40% of the value of gross exports in 2021 (though many industries had an even larger share). If we include intermediate imports in the picture, exports accounted for about 30% of Austrian GDP; services also contributed significantly via inter-industry linkages.

How much do Austrian exports contribute to Austria’s GDP? This question is important, since for small open economies like Austria’s, foreign markets are important for products ‘Made in Austria’. To answer it, one must consider the fact that many of the goods produced in Austria directly and indirectly embody intermediate products imported from abroad, like raw materials and energy, semi-finished products, or high-tech components like computer chips. So-called Multi-Country Input-Output Tables (MC IOTs) allow us to calculate such indicators and the contribution of exports to Austria’s GDP. In this note we highlight some selected patterns and trends, taking a ‘value-added perspective’ of trade. In the first place, this allows inter-country and inter-industry linkages to be taken into account. Secondly, using such data also enables us to simultaneously consider the role of services and their contribution to the production of exports.

The import content of exports

The first question is the extent to which the production of exports relies on intermediate imports, expressed in value-added terms. This is presented in Figure 1, which shows the so-called ‘import content of exports’, based on the FIGARO data released by Eurostat/JRC (for further technical detail and an overview of the indicators, see Stehrer, 2022) from 2010 to 2021 (the latest year available). Whereas in 2010, the share of foreign value added in Austrian total gross exports (including all industries) was about 36%, by 2021 that figure had increased to over 40%. The numbers conceal a large variation across industries, however. Figure 2 therefore shows the foreign import content of each industry’s gross exports for 2010C and 2021. This direct and indirect reliance on imports is highest in manufacturing industries, with almost 73% in C19 (Manufacture of coke and refined petroleum products) and 65% in C29 (Manufacture of motor vehicles, trailers and semi-trailers). In eight industries, the share is over 50%.

Austria’s value-added exports

Given this (in part) heavy reliance on imports to produce exports, the second question is the extent to which exports contribute to a country’s GDP. Put differently: how much value added produced in Austria is absorbed in other countries due to final consumption abroad? The answer – as presented in Figure 3 – is that Austria’s value-added exports amount to about 30% of total value added. This is lower than the usual measure of a country’s openness, defined as a country’s gross exports as a percentage of total value added, which amounts to over 50%. The difference is due to the imported intermediate inputs to produce a country’s exports.[1]

This value-added perspective of trade also leads to an alternative view concerning the relative importance of industries for Austria’s exports. Specifically, due to strong inter-industry linkages, some service industries contribute significantly to Austria’s value-added exports. Figure 4 compares the share of each industry in Austria’s gross exports with its share in Austria’s value-added exports in 2021. For example, the industry G46 (Wholesale trade, except of motor vehicles and motorcycles) contributes more than 10% to Austria’s value-added exports, whereas the share in terms of gross exports is much less, at about 7%. One finds similar patterns (with the contribution to value-added exports being larger than the contribution to gross exports) for industries like M69_70 (Legal and accounting activities), K64 (Financial service activities, except insurance and pension funding) and H49 and H52 (Transport activities), to name but a few. Such business services are thus very relevant for the production of other industries’ exports which rely on their inputs.

Conversely, whereas C28 (Manufacture of machinery and equipment n.e.c.) contributes more than 10% of Austria’s gross exports, its share in terms of value-added exports is 6.3%, as it also relies on value added created in other industries (and foreign inputs, as discussed above). This also applies to other (mostly manufacturing) industries like C10T12 (Manufacture of food products), C24 (Manufacture of basic metals), C29 (Manufacture of motor vehicles, trailers and semi-trailers) or C20 (Manufacture of chemicals and chemical products).

Concluding remarks

In this note, we have highlighted some important aspects when considering Austria’s trade patterns from a value-added perspective. This, first, allows us to account for the importance of imported intermediate inputs in producing gross exports. Second, it indicates that when taking these intermediate imports into account the share of value-added exports in GDP is about 30% – lower than the usual measure of openness, defined as gross exports over GDP. Finally, third, this perspective allows us to consider the important role of (business) services and the way in which these contribute to other industries’ production of exports.

[1] We disregard some subtle differences between these two measures (e.g. taking re-imports of value added into account, etc.). Further, the openness measure can vary due to differences in the respective data sources.


Robert Stehrer is Scientific Director at wiiw. His expertise covers a broad area of economic research, ranging from issues of international integration, trade and technological development to labour markets and applied econometrics. His most recent work focuses on the analysis and effects of the internationalisation of production and value-added trade. Other contributions relate to the connection between digitalisation, demographics, productivity and labour markets. He studied economics at the Johannes Kepler University Linz, Austria, and sociology at the Institute for Advanced Studies (IHS) in Vienna and is lecturer of economics at the University of Vienna.

The interactive graphics were created by Alireza Sabouniha. He is research assistant at wiiw and recently completed his master’s degree in Economics at the WU (Vienna University of Economics and Business).

BRICS Plus: A new world order and the end of the US dollar as the global reserve currency?

The political and economic interests of the heterogeneous group of countries under China’s leadership are too diverse to seriously challenge Western supremacy. However, as a bloc, the BRICS Plus members would be in a position to pressure the West in terms of global reserves of raw materials.

Not everyone is happy with the current balance of power in the world. The BRICS states of Brazil, Russia, India, China and South Africa want to change the geopolitical and geoeconomic order and form a collective counterweight to the United States and the West. At the beginning of 2024, the alliance was expanded by five countries and is now called BRICS Plus, although Argentina rejected its invitation at the last minute at the instigation of its new president, Javier Milei.

At this point, let’s have a brief digression on the history of its creation. The post-Cold War era has been dominated by the so-called Pax Americana, which – until recently – has provided a relatively stable order in which the US and its allies have largely set the geopolitical and geoeconomic tone. The vast majority of world trade is conducted in US dollars, and in international bodies and organisations such as the International Monetary Fund and the World Bank the US is the dominant heavyweight alongside the other G7 states. In 2009, Brazil, Russia, India and China founded the BRIC group of states in the hopes of changing this. When South Africa joined in 2010, BRIC became BRICS. At the beginning of 2024, Saudi Arabia, Iran, the United Arab Emirates (UAE), Egypt and Ethiopia joined on the initiative of Beijing, turning BRICS into BRICS Plus. Chinese President Xi Jinping particularly hopes that this will open up new opportunities in his efforts to end America’s global dominance.

End of American dominance and protection against sanctions

While three of the new BRICS Plus members – Saudi Arabia, Iran and the UAE – are important oil and gas producers, Egypt and Ethiopia are key players in Africa with large populations. With its economy suffering massively under US economic sanctions, Iran is urgently looking for new trading partners. All these middle powers have a common interest, which the well-known political scientist Ivan Krastev formulated as follows: they want to be at the table and not on the menu. In other words, they want to trade as little as possible via the US-dominated international financial system, they want to be less dependent on the West and, above all, they want to take the bite out of any Western economic sanctions. These aims are precisely why bringing some major fossil fuel producers into the bloc has a particular appeal to China, the leading BRICS power. Beijing could be preparing for war against Taiwan – at least as an option. In the various war scenarios that China’s leadership is probably playing through, possible sanctions by the West are likely to play a prominent role, especially given the harsh punitive measures taken against Russia following its full-scale invasion of Ukraine. Having Saudi Arabia, Iran and the UAE on its side in the event of a conflict would be economically vital for the supply of oil and natural gas as well as politically helpful.

Heterogeneous alliance

But how realistic is the prospect of establishing a new world order and dislodging the US dollar as the global reserve currency? Apart from their scepticism towards the US-dominated international economic and financial system, the BRICS Plus members do not share much in common. On the contrary, India and China have been engaged in a bloody border conflict in the Himalayas for decades. New Delhi has clearly taken Washington’s side in the geopolitical struggle between the US and China while also being politically and militarily supported by the latter. Moreover, while India’s economy is still relatively closed and primarily focused on the domestic market, China’s is closely intertwined with those of the US and the EU, even if there are tendencies towards decoupling. On the other hand, Saudi Arabia and Iran are arch-enemies who only resumed diplomatic relations in May 2023 under Chinese mediation and remain hostile to each other in the Middle East. While Saudi Arabia maintains a strategic security and energy partnership with the US, Iran is repeatedly on the brink of war with Washington and its ally Israel.

Apart from wanting to play a bigger role on the global stage, the five founding members of BRICS have never really been like-minded. While Russia and China have increasingly positioned themselves as antipoles to the US, India has gradually drawn closer to the US to counter a more aggressive China. Although they occasionally toy with the anti-American option, South Africa and Brazil continue to foster close ties with the US in both economic and political terms. It is no coincidence that India, Brazil and South Africa are democracies, while Russia and China are autocracies – and ones that get along very well with the authoritarian rulers of Iran and Saudi Arabia.

In addition to having diverging political and economic interests, the BRICS Plus countries also differ strongly in terms of their respective economic and demographic weight. Collectively, the five BRICS countries account for around 41 per cent of the world’s population, approximately 32 per cent of global economic output (adjusted for purchasing power), and roughly 20 per cent of all goods exported worldwide. If we add the five countries that make up the “Plus” part, the combined bloc only accounts for slightly more – around 45 per cent of the world’s population, 36 per cent of global GDP, and 25 per cent of global goods exports. Thus, the expansion is likely to fundamentally alter the character of the previously exclusive club of leading regional economies. It will be replaced by a curious mixture of very large, large, medium-sized and small countries, some of which are pursuing very different interests. What’s more, the BRICS Plus group is already clearly dominated by China, which accounts for almost two-thirds of the bloc’s economic output and 39 per cent of its population. As understandable as Beijing’s claim to leadership may be against this backdrop, these imbalances are problematic for ensuring joint action on an equal footing. The balance between the interests of the junior partners and dominant China is therefore likely to remain delicate. And it is unlikely that forming an internationally relevant bloc capable of cohesive action out of such a heterogeneous group of countries will represent a genuine success for Beijing.

BRICS Plus as a potential raw-materials superpower

As the figure above shows, even if their political interests were more aligned, the combined economic weight of the BRICS Plus countries would not be enough – at least in the short to medium term – to turn the US-dominated world order on its head. However, there is one exception, as the BRICS Plus countries would collectively be in a dominant position when it comes to raw material deposits. With the inclusion of Saudi Arabia, Iran and the UAE, the bloc would account for 43 per cent of global oil production and a very large share of global oil reserves. Almost 40 per cent of the rare earth deposits required to manufacture batteries for electric vehicles, power storage systems and microelectronics are in the hands of China, which also has a near monopoly on their processing. Thus, when it comes to the supply of raw materials, the BRICS Plus bloc could potentially put the West under considerable pressure – in a scenario with echoes of the OPEC oil embargo of 1973.

G7 and US dollar still dominant

From an overall economic perspective, however, a reorganisation of the world and an end to the US dollar as the reserve currency is a pipe dream of Beijing, Moscow and Tehran, which will not come true in the foreseeable future. As the most important industrialised countries of the West, the G7 nations still jointly account for around 30 per cent of global GDP, just under 10 per cent of the world’s population, and roughly 27 per cent of all exported goods. As still the largest economy and the only military superpower, the US continues to dominate not only the G7 but also the world. Around 62 per cent of global currency reserves are invested in US dollars, compared to just 2 per cent in Chinese yuan. The BRICS group’s track record to date also speaks against a rapid end to the Pax Americana. The bloc’s greatest success so far has been founding the New Development Bank in 2014, which is modelled on the World Bank. To date, the bank has issued loans with a total value of just over 30 billion US dollars. Tellingly, most of the loans have been granted in US dollars.

From China’s point of view, however, the meagre balance sheet of the previous BRICS format and the uncertain prospects for BRICS Plus are acceptable. The old BRICS format did not really advance the interests of the rulers in Beijing. So, their thinking goes, why not try a new start that could at least irritate the US and its partners while possibly strengthening some bilateral relations, especially in the Middle East, where China is keen to gain more influence? At the same time, the BRICS Plus initiative allows some smaller powers to position themselves as players in the geopolitical competition of the incipient Cold War 2.0 between China and the US so that they can avoid becoming mere pawns or a theatre of war in this conflict.


Mario Holzner is Director of the Vienna Institute for International Economic Studies (wiiw) and was a Fellow of the European Commission’s Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs (DG GROW) in 2023.

The interactive graphics were created by Alireza Sabouniha. He is research assistant at wiiw and recently completed his master’s degree in Economics at the WU (Vienna University of Economics and Business).

Importance and characteristics of Austrian companies active in foreign trade

The value added generated by export activities in Austria amounts to around 30% of GDP. On average, slightly more than two thirds of firms in the manufacturing industry are internationally active. These export activities are designed for the long term. Larger companies are significantly more active internationally and contribute the largest share of exports. Exporting companies are larger on average, generate more surpluses and invest more compared to companies that do not export. They also pay higher wages, but rather than being driven by the export activities as such, they result from the higher firm-level productivity. Finally, there is a close and reciprocal link between exports, R&D activities and productivity.

Austria’s prosperity depends to a large extent on exports, which account for more than half of the country’s economic output. If the imports necessary for the production of exports are deducted, around a third of domestic value added still comes from exports (see Figure 1).

Despite the export industry’s great importance to Austria, little was previously known about the characteristics of exporting companies. How large is the proportion of Austrian companies that export? Are they primarily large or small companies? Are exporters more productive and more successful?

Access to microdata via Statistics Austria’s Austria Micro Data Center (AMDC) makes it possible to provide detailed answers to these questions for the first time (Stehrer et al. 2022; Stehrer, 2023).

How many companies export? And how much?

Not all companies export. On average, in the 2013-2020 period, the share of Austrian manufacturing companies active in foreign trade was around 70%. Just over 55% were both exporters and importers. Around 6% were pure exporters, and just under 10% were only internationally active as pure importers. The remaining 28% were neither exporters nor importers (see Figure 2). [1]

The export activities of Austrian companies are designed for the long term. Around 90-95% of exporting companies in a given year also export in the following year, and only 1-2% of all companies cease their export activities each year. A further 5% of companies in any given year leave the market due to insolvency or closure.

Conversely, only a few non-exporting companies (around 5% per year) start exporting. As a result, the proportion of exporters among all companies is slowly but steadily increasing (see Figure 2). While 33% of companies were still not internationally active in 2013, this proportion had fallen to around 26% by 2020. Even the economic crisis and the disruption to supply chains triggered by COVID-19 were unable to halt this trend.

Non-exporters also have a higher probability (roughly 5-10%) of exiting the market. On average, around 5% of companies (as a percentage of existing companies) enter the market each year. Of these, the proportion of companies that export immediately accounts for around two thirds of all market entrants.

Smaller companies export significantly less often than large companies. While exporters are in the minority among companies with fewer than 10 employees, around half of companies with 10 to 49 employees export. In addition, more than 80% of companies with more than 49 employees are exporters, and it is very rare for large companies (meaning those with 250 or more employees) to not be exporters (see Figure 3).

Although Germany is the most important export market for Austrian companies, this does not mean that Austrian exporters limit themselves to this market. The proportion of ‘marginal exporters’ (i.e. companies that only export to one country) is only 15% of exporting companies. If marginal exporters are defined somewhat more strictly as companies that only export one product to a specific country, their share drops to only around 7%. The shares of marginal importers are only half as high according to these two definitions, at 7% and 3.5%, respectively. Unsurprisingly, these shares are significantly higher among smaller companies.

Overall, a small number of companies account for a large proportion of export sales. Around two thirds of exports are accounted for by 5% of exporting companies, 75% by around 10% of exporting companies, and 90% by a quarter of exporting companies. The situation is similar for imports, as only 25% of importing companies are responsible for 90% of all imports. If a distinction is made according to the different sizes (i.e. employee numbers) of companies, this concentration is somewhat lower, but still very pronounced.

From an economic policy perspective, this concentration is a clear sign of the success of some Austrian companies on international markets. However, it also means that there is a group of companies in the Austrian economy that may be significantly more susceptible to international demand shocks or disruptions to international supply networks.

The strengths of exporting companies

Exporting companies are larger, generate more surpluses, and invest more compared to companies that do not export. In absolute terms, this ‘export premium’ is a factor of around two to three. Per hour worked, turnover, wages and operating surpluses are a factor of 1.2 to 1.6 higher for exporters. However, taking into account both the size and productivity of the exporting companies and the socioeconomic characteristics (e.g. education, age and gender) of their employees, it is clear that export activity only has a very small positive effect on employees’ wages and salaries, which means that the productivity and performance of the companies are more important factors.

These correlations are also evident in relation to their import activity. Companies belonging to an international group of companies are also very often larger and more productive than companies that are only domestically active. This pattern is consistent with both the empirical results for other countries and the current theoretical literature on the performance of heterogeneous companies. Companies that only export to one country or only export one product (i.e. are ‘marginal exporters’) also tend to be larger and more productive than companies without export activities, albeit to a lesser extent than companies with a diversified export portfolio.

One explanation for the positive export premium is the reciprocal, close link between exports and productivity, as exporters are more productive than non-exporters, and higher productivity in the past goes hand in hand with significantly higher export intensity. Exporters also conduct R&D more frequently and invest in digitalization more often than non-exporters. In fact, there are hardly any companies active in R&D that do not export, and the more they invest in R&D, the higher the export share of turnover. In addition, the causality between exports and R&D runs in both directions. In other words, exports create incentives to develop new products, just as R&D creates the basis for products that can be marketed internationally.


Exports are of crucial importance to Austria’s prosperity. New data shows that export activities are very widespread in Austrian manufacturing, as half of companies with 10 or more employees export. However, only 5% of exporting companies account for two thirds of export sales.

Exporting companies are larger and economically more successful; sales, wages and operating surpluses per hour worked are significantly higher for exporters than for companies that do not export. The decisive factor here is the higher productivity of exporting companies: the more productive a company is, the better it can hold its own on export markets. Conversely, international competition forces exporting companies to continuously boost their productivity.

In terms of economic policy, this means that measures to promote the productivity of companies lead to better export performance and, conversely, that measures to promote export activities may lead to better company performance. In particular, the close relationship between R&D and exports is very important in terms of economic policy, as it shows a way to increase export intensity by promoting R&D and innovation.

If, as in the past, it is possible to increase the number of companies conducting R&D in Austria, the proportion of exporters will also continue to rise. The same applies to the correlation between productivity and exports: measures that increase productivity, such as research funding, should also increase the export activities of Austrian companies in the long term. In the best-case scenario, exports and productivity will reinforce each other over time.

[1] These figures relate to the primary survey of the structural business statistics (SBS).


Dr. Bernhard Dachs and Univ.-Doz. Dr. Robert Stehrer (wiiw)

Bernhard Dachs is Senior Scientist at the Innovation Systems Department of AIT Austrian Institute of Technology, Vienna. He graduated in Economics from the University of Business Administration and Economics, Vienna, and holds a doctorate in Economics from the University of Bremen. Over the past years, his research focus has been the economics of innovation and technological change, in particular the internationalisation of R&D, innovation in services, and the analysis of national and international technology policy. His work has been mostly empirical and applied. Papers based on this research has been published a number of international peer-reviewed journals.

Robert Stehrer is Scientific Director at wiiw. His expertise covers a broad area of economic research, ranging from issues of international integration, trade and technological development to labour markets and applied econometrics. His most recent work focuses on the analysis and effects of the internationalisation of production and value-added trade. Other contributions relate to the connection between digitalisation, demographics, productivity and labour markets. He studied economics at the Johannes Kepler University Linz, Austria, and sociology at the Institute for Advanced Studies (IHS) in Vienna and is lecturer of economics at the University of Vienna.

The interactive graphics were created by Alireza Sabouniha. He is research assistant at wiiw and recently completed his master’s degree in Economics at the WU (Vienna University of Economics and Business).

The African Continental Free Trade Area: Progress, Opportunities and Challenges of Africa’s Mega-Regional Initiative

The African Continental Free Trade Area (AfCFTA) is an ambitious initiative, full of promise for Africa and beyond. It comes at a time when the continent faces many development challenges. Africa hosts the largest group of developing countries in the world, of which 33 are least developed countries, and 16 are landlocked developing countries.


With the adoption of the Agreement Establishing the African Continental Free Trade Area (AfCFTA) in May 2018, a new impetus has been given to Africa’s regional integration. The AfCFTA promises to connect 1.4 billion people across 54 of the 55 African countries (Eritrea is not participating), spanning of a market with a combined GPD of 3.4 trillion USD. It envisages the free movement of goods, services and people, and provides for continental rules on competition, investment, intellectual property, digital trade, and women and youth.

When looking at Africa’s recent trade performance, there was a positive post-pandemic rebound. Trade grew from $589 billion in 2021 to $689 billion in 2022. This 2-digit growth was above what was witnessed globally and in other regions. Nonetheless, the narrative of the continent’s poor participation in global trade has not changed. Africa’s share of world trade has hovered around 3% over the last decade, as shown in Figure 1. Though stable, this trade is overshadowed by the shares of other regions, for example Asia trading as much as 40% and Europe 37% of the global total.

Africa’s share in global trade hardly does justice to the continent. Africa hosts 25 per cent of global population, representing a consumer market which had an estimated worth of $1.4 trillion in 2015, and is projected to grow to $2.5 trillion by 2030. In this context, the AfCFTA forms part of the African Union’s Agenda 2063, which is the blueprint of Africa’s future vision. The AfCFTA is therefore seen as an opportunity for Africa to overcome major development challenges and integrate better through trade, both regionally and globally.

State of Play of the AfCFTA Negotiations

Since the historic entry into force of the Agreement which brought the AfCFTA to live in 2019, there has been important progress. A total of 47 of the 54 States Parties have ratified the agreement so far.

For trade in goods, an ambitious target has been set to achieve tariff liberalization for 97% of trade. State Parties, either in their individual capacity or as part of a Regional Economic Community (REC), have submitted tariff offers detailing goods subject to duty free trade, and also listing goods that are sensitive or excluded, representing the remaining 3% of trade.

For trade in services, negotiations have advanced in 5 priority sectors, namely business, communication, financial, tourism and transport services. Services schedules detailing the level of national treatment and market access afforded in these sectors have been submitted. In future liberalization rounds, other sectors will be negotiated, though some countries have already made offers in non-priority sectors such as health, education and recreational services.

Both for goods and services, the submitted schedules of commitments have and are undergoing technical verification processes to ensure they are compliant with what was agreed. To facilitate commercially meaningful trade in goods and services under the AfCFTA, there are also Guided Trade Initiatives in place for countries in need of support.

For the so-called AfCFTA phase II of negotiations, 3 protocols providing common rules on intellectual property, investment and competition, respectively, were adopted in February 2023. State Parties are now negotiating two additional protocols, on women and youth, and on digital trade, respectively. These are considered critical to unlock the full benefits of the AfCFTA, since women and youth are the backbone of the private sector and digital trade is a very dynamic sector, growing at a rate of 40% annually, and expected to exceed US$ 300 billion by 2025.

Accompanying the AfCFTA, the African Union members have also signed protocols supporting the free movement of persons and a single African air transport market, which are deemed to facilitate the mobility of people on the continent and free the commercial air transport market from various impediments, once they enter into force.

Expected Gains and Impacts of the AfCFTA

Historically, the composition of African trade has been characterized by trade of primary commodities with little value added. Though there has been some diversification in the destination of trade, increasingly with Asia and also with the continent itself, trade with Africa’s traditional partner Europe is still very dominant. As shown in Figure 2, on average, between 2016 and 2022, the EU led as Africa’s first trade destination, representing more than a quarter of the continent’s trade with the world (28.6% of its exports and 26.9% of its import shares, respectively). Of this trade, African exports and imports to and from Austria registered a 0.3% share of the global total on average.

The second place for Africa’s trade destination was tightly wrung between the continent itself and China. Intra-African exports represented 15.5% of Africa’s global trade share, closely followed by China (14.9%) and India (6.8%). African imports from China represented 17.8% of its global total, compared to 14%, 9.1% and 5% from Africa, the Americas and India, respectively. Trade with the rest of the world on average comprised almost a third of total African exports at 31.6%, and just over a fourth of total African imports at 26% for 2016-2022.

When taking a closer look at trade with Africa’s main trading partner, there are notable differences in the composition of the continent’ import and export patterns. As shown in Figure 3 below, African exports to the EU are primarily be characterized as a trade in extractive commodities, namely fuels (46%), followed by manufactures (28%) and food (14%), where there is generally little value addition from the continent. In comparison, when considering African imports from the EU, over two thirds are manufactures (67%), dwarfing processed food and fuels, each of the latter registering a 13% share. In contrast, intra-African trade paints a different picture. Within the continent, there appears to be more trade sophistication, with manufactures (45%) leading, followed by fuel (21%) and food items (20%).

With the AfCFTA, these trade patterns are expected to change. It is estimated that by 2045, intra-African trade will be 34% higher than without the AfCFTA. Trade in sectors such as agri-food, services and industries will increase by 49.1%, 37.9% and 35.7%, respectively. The expected increase in energy and mining will be lower, at 19.4%. With the AfCFTA, the value of intra-African trade is expected to increase with 577% by 2045 (as compared to a 405% increased in a scenario without the AfCFTA). This would translate into a net gain of intra-African trade creation estimated at USD 195 billion and the share of intra-African trade would expand from 15% today to over 26% by 2045.

Currently, the demand for trucks to transport bulk cargo in 2019 was registered at 698,000. Without the AfCFTA and infrastructure development as initially planned, this demand would only grow to 1.3 million, as compared to a full AfCFTA and infrastructure development scenario in 2045 where the demand for trucks for bulk cargo would increase to 1,9 million by 2030. Intra-African trade in transport services has the potential to increase by nearly 50%, whilst in absolute terms, over 25% of intra-African trade gains in services would go to transport alone; and nearly 40% of the increase in Africa’s services production will be in transport. This is encouraging when considering transport costs in Africa, which range from 15 to 20% of import costs, representing double and even threefold of the costs developed countries bare.

Trade and Investment Opportunities in Africa

Given the estimated gains and dynamic impacts of the AfCFTA, there are sizeable opportunities through Africa’s trade integration. The expected increase in market size will spur market efficiency, making Africa a more attractive destination of foreign investment and trade.

There is scope for deeper and services-based industrialization from within the AfCFTA as shown by the estimates for 2045. This trade is also expected to increasingly include intermediary goods for further processing within the continent, bolstering regional value chains.

Unlike world FDI which targets the natural resources sector, intra-African investment gravitates more towards services, particularly insurance, retail banking and telecommunications. The AfCFTA is thus an important vehicle to promote intra-African trade and investment, especially in the more dynamic sectors. For example, because of the new trade demand from the AfCFTA the increased need for trucks, rolling stock, aircrafts and ships translates into an investment opportunity of USD 411 billion. In sum, the AfCFTA opens opportunities for (both domestic and foreign) companies already operating on the continent, or for those thinking to establish a production base to source the African market.

Existing Challenges and Concerns of the AfCFTA

Though the AfCFTA is at its early stages, there are some important challenges and concerns. These range from multiple and overlapping REC memberships (see Table 1), to trade adjustment costs, the coexistence with other trade agreements and previous commitments and the capacity of the countries to domesticate the various protocols into national laws, policies and legislation in a timely fashion.

Among these, a major question is how the AfCFTA is going to coexist with other agreements and obligations which are already in place or being negotiated with other regions, such as the EU and China. With the EU, some countries have economic partnership agreements in place (see Table 1). The AfCFTA agreement will require countries to revisit such agreements considering the newly acquired obligations.

The AfCFTA is anticipated to contribute to reducing the current trade dependency on primary commodities of Africa on its external partners, including the EU and China, particularly in terms of industrial imports which could ultimately contribute to closing trade deficits of African countries with external partners. This is an opportunity for a shift towards more value added and intermediary trade patterns, from which Africa and its trade partners from beyond the continent stand to gain.

The Way Forward

The AfCFTA brings unprecedented opportunities for Africa’s transformation, competitiveness, and development. Though aspects of the AfCFTA negotiations are still evolving, it is important to monitor and support the implementation process of the agreement.

Effective implementation of the AfCFTA, will require the joining of efforts and various partnerships across global and regional spheres, which could help Africa and its business partners capitalize on the expected benefits and opportunities this megaregional has to offer.


Laura Páez is currently guest researcher at the Vienna Institute for International Economic Studies (wiiw). She is an international development practitioner with more than twenty years of professional experience. She is currently appointed to the United Nations Economic Commission for Africa (ECA), where she heads the Market Institutions Section. Previously she headed the Investment Policy Section at ECA. Her current work focuses on generating knowledge on the regulatory and policy dimensions across investment, competition, intellectual property, services and digitalization in Africa, geared to support regional integration processes such as the African Continental Free Trade Area.

Prior to her current appointment at ECA, Laura Páez worked at the United Nations Conference for Trade and Development in Geneva on issues pertaining to Africa’s economic development in the context of the continental’s trade and development agenda.

The interactive graphics were created by Alireza Sabouniha. He is a research assistant at wiiw and recently completed his master’s degree in Economics at the WU (Vienna University of Economics and Business).

FIW-Spotlight: Forecast for foreign trade in goods 2023 and 2024

The huge rise in prices and sudden shock in energy costs from the previous year, along with a significant decrease in precautionary stocks, will negatively impact global industrial production and world trade in 2023. Additionally, Austria’s inflation gap with vital trading partners and the euro’s increase in value worsen its competitive pricing position. Nonetheless, Austrian exports of goods experienced a robust 3.9% growth (in real terms)) during the first half of 2023, thereby increasing market share in crucial markets. Export growth will slow down considerably in the latter half of this year. In 2023, goods exports are expected to grow by approximately 1.5% (in real terms) overall. There is a likelihood that exports will increase by 2.5% (in real terms) in 2024. By 2023, the trade deficit in goods for foreign trade will be reduced to half the amount of the previous year, at € -10.3 billion. This improvement is partly due to a decrease in energy prices, which has positively affected the terms of trade. Figure 1 presents a summary of the primary outcomes of the foreign trade forecast.

Global economic output loses momentum and dampens growth in Austrian export markets

Global economic development has recently lost considerable momentum (see Figure 1.1). It is accompanied by a weakness in global industrial production, which is also having an impact on global trade in goods. Germany is particularly affected by this. Austria’s most important trading partner is expected to experience a recession in 2023 (-0.6%), while Germany’s economic output will recover slightly next year (+1.2%). The economy in Europe will also be burdened by high inflation and rising interest rates as a result of restrictive monetary policy. At the same time, demand in China declined significantly following the end of the lockdown in spring 2023. However, global industrial production and trade in goods are also falling, primarily because of the reduction in precautionary stocks that were built up in previous years due to the threat of supply shortages and energy supply shortfalls. However, the shift in the global consumption structure from increased consumption of goods to increased consumption of services – due to the coronavirus – is also having a dampening effect. The growth prospects will only improve again next year with the advanced reduction of increased inventories. In addition, most of the forecasts currently available indicate a further decline in inflation for 2024. The continuing restrictive monetary policy and weak economic development in China are likely to have a negative impact on the global economy in 2024. In the US, the economy has remained stable so far and has been supported primarily by private consumption. However, economic growth is also forecast to weaken in the US in 2024, primarily because the impetus from private consumption is fading.

Inflation differential to other countries and appreciation of the euro worsen the competitive price position

Under these international conditions, the Austrian export markets (the “Austrian market growth”) will shrink by 0.4% this year, mainly due to weak import demand from Germany and the Central and Eastern European countries and are expected to recover by +3.2% in 2024 (Figure 1.3). In addition, Austria’s inflation gap with important trading partners and the appreciation of the euro will lead to a deterioration in its competitive price position in the forecast period (Figure 1.3). In 2023, the price increase measured by the consumer price index is significantly higher than in comparable countries in the eurozone (Figure 2.1). This inflation differential is likely to shrink in 2024 but will continue to persist. In line with this picture, domestic industrial companies once again rate their competitive position as significantly worse compared to competitors in the EU, but especially compared to competitors outside the EU (Figure 2.4). Assessments of the competitive position have reached historic lows, particularly in the intermediate goods and consumer goods sectors, while the decline in the capital goods sector has been delayed and less severe. However, an effect on Austria’s exports and market shares cannot yet be seen in the data for the first half of 2023.

Robust development of goods exports and market share gains in the first half of 2023 despite adverse circumstances

The Austrian export industry proved to be robust in the first half of 2023 despite the negative influences and was even able to gain market share in important markets. It is less affected by the slump in demand for primary products in the wake of destocking and was able to maintain its competitiveness in specific niches. The development of Austrian producer prices abroad also suggests a moderate pass-through of domestic cost increases to Austrian export prices relative to trading partners, presumably at the expense of corporate profits. According to preliminary data from foreign trade statistics, growth in exports of goods reached 6.1% at current prices (nominal) and 3.9% at constant prices (real) in the first half of 2023 (Figure 3). Exports of capital goods (machinery and vehicles) proved to be the most important growth drivers. The (nominal) market share development in the first half of 2023 shows gains of 10.2% compared to the same period of the previous year, mainly thanks to strong exports of machinery to Germany and the USA. Measured in terms of exports in the eurozone, Austria’s market share rose by 3.4%1).

Pessimistic outlook for the second half of 2023, but moderate recovery in the coming year

However, company assessments in the WIFO Business Survey convey a pessimistic outlook for the second half of 2023 (Figures 4.1, 4.2). The assessment of export orders has deteriorated since the May survey. Export expectations were also downgraded significantly in the summer months and barely recovered in the last survey in October. The mood in the capital goods sectors has deteriorated, and thus in the very areas of the export industry that have driven export growth to date. This should slow down export momentum in the second half of 2023 and significantly diminish the export successes from the first half of the year. Growth in goods exports of around 1.5% (in real terms) is expected for 2023 as a whole (Figure 5.1). Given the assumption that the international economy will improve in 2024, a recovery can be expected over the course of the coming year. Exports of goods are likely to increase by 2.5% (in real terms) in 2024. However, the now delayed decline in demand for capital goods will extend into 2024 and leave Austrian export companies specializing in capital goods little room for further market share gains.

Imports of goods reflect the weakness of domestic industrial production and the reduction in precautionary stocks of energy and industrial raw materials that were built up in the previous year. In addition, the slump in the consumption of so-called consumer durables in particular is also noticeable2). This is also partly due to the normalization of the consumption structure following the COVID-19 crisis. Imports are expected to fall by almost 2% (in real terms) in 2023, while imports are likely to recover in 2024 with growth of 2.3% (in real terms) (Figure 5.1). The trade deficit in foreign trade in goods will improve significantly due to the weak import trend and, at € 10.3 billion, will be half of the previous year’s figure in 2023 (Figure 5.2). However, the improvement in the terms of trade, the ratio of export to import prices, is also essential for foreign trade. These had deteriorated drastically in 2022 as a result of commodity and energy taxes – particularly due to the higher proportion of energy in imports – and weighed heavily on Austria’s trade balance. However, the fall in energy prices (especially for natural gas) this year triggered a countermovement. he natural gas and crude oil became more expensive. According to the current forecast, the major price pressure from abroad via commodity prices will continue to ease, and the increase in producer prices for goods sold abroad by Austria and important trading partners in the EU has also continued to weaken. The terms of trade will therefore improve again in 2023 and 2024 (by +1.5% in 2023 and +0.5% in 2024), but less significantly than they deteriorated in 2022 (-5.0%) (Figure 5.3). Key imported commodities such as natural gas and crude oil will also remain more expensive in the medium term.

The forecast is based on the assumption that there will be no further escalation in Russia’s war of aggression against Ukraine, that sufficient natural gas stocks have been built up over the winter and that a complete halt in natural gas supplies from Russia to Europe can still be ruled out. Nonetheless, potential dangers persist, and deficits might lead to more expensive prices and fuel inflation. The recent Middle East conflict between Israel and Hamas also harbours additional uncertainty and geopolitical risk if the conflict spreads and further tensions in the Middle East jeopardise the production and transport of oil. However, if none of this happens, inflation may drop faster than predicted in the forecast, resulting in the possibility of raising the key interest rate, which would give a positive boost to the global economy.


Dr. Yvonne Wolfmayr is Senior Economist at WIFO and has been working in the Research Group “Industrial, Innovation and International Economics” since 1992. From 2013 to 2016 she was Deputy Director of WIFO. She studied Economics at the University of Vienna and the University of Innsbruck with a major in International Economics. Since then, she has spent time abroad at renowned universities in the USA (University of California, Los Angeles, and Stanford University). Her research focusses on the empirical analysis of international trade issues, including foreign direct investment The foreign trade forecast is one of her regular activities at WIFO.

  1. The development of nominal market shares also reflects price and exchange rate changes. If the market share is calculated in comparison to countries in the same currency area, the exchange rate effect is eliminated in this comparison. ↩︎
  2. Consumer durables include furniture, sports equipment, bicycles, refrigerators and washing machines, for example ↩︎

Macroeconomic Costs of Russia Sanctions

This FIW Spotlight focuses on the impact of sanctions on trade by the European Union (EU) and Austria with Russia. The imposition of sanctions has led to a significant drop in trade, with a 40% drop in EU exports to Russia and a 19% drop in Austrian exports. Remarkably, Russia bears the economic cost of these sanctions, as illustrated by a significant GDP loss of 7.9% on a permanent basis. This analysis shows the profound impact of sanctions on international trade relations as well as the economic losses of the sanctioned country, in this case Russia.

The invasion of Ukraine by Russia in February 2022 has led to a wave of outrage around the world and triggered a complex response of sanctions and counter-sanctions. These policies not only have a direct impact on the nations involved, but also send shockwaves through the global economy that reach far beyond the countries directly affected. At a time when the global economy is still struggling with the aftermath of the COVID-19 pandemic, understanding the economic costs of these sanctions is crucial.

At the beginning of the conflict, studies were published promptly that analysed the economic costs of possible sanctions and trade stops (Bachmann et al., 2022; Balma et al., 2022). At that time, however, it was not yet possible to measure the exact impact of these measures on trade. The authors could only make assumptions and create models. Seventeen months later, it is now possible to measure the changes in trade volumes and thus provide a precise analysis of the costs of these measures. First, the author takes a look at the impact of the sanctions on trade before examining the macroeconomic consequences in more detail in a hypothetical scenario.

Trade collapses

The sanctions taken have had a significant impact on trade with Russia. EU exports to Russia plummeted by over 60% when the first set of sanctions came into force in May 2022. Subsequently, exports have recovered somewhat. However, they were still 40% below the multi-year average in January 2023. These aggregate figures at the EU level do not give an indication of the differences in trade depression between member countries (see chart 1). Among the largest member countries, France’s and Germany’s exports to Russia fell the most. German exports in January were 59% below the long-term average, French exports 48% below. Austria’s trade with Russia was less affected. Austrian exports initially fell by 41% in May 2022. They then recovered and even reached a plus of 2% in July 2022. Nevertheless, the sanctions also have a negative impact on trade for Austria. In January 2023, exports were still 19% below the multi-year average. The different trade effects between the member states show that the countries trade very different goods with Russia. Each “basket of goods” contains different shares of sanctioned goods and services. For example, the Austrian export mix contains an above-average number of non-sanctioned goods groups, such as food and pharmaceutical products, which explains the small decline.

In order to calculate the economic impact of the sanctions, the different “baskets of goods” of the countries in trade with Russia must be taken into account. To do this, the author first calculates the sanction effect at the level of different product groups using the so-called “gravity equation” from the international trade literature (Head and Mayer, 2014). Subsequently, the author uses these sanction effects in a model of international trade (Felbermayr et al., 2023). This allows the author to explore the following “what if” scenario: What would the world look like if there were only the Russia sanctions, but all other economic influencing factors were held constant? Since all other influencing factors are excluded – for example, other crises or political measures in the past year – the “pure” effect of the sanctions can be examined.

Russia bears the brunt

The calculations show that Russia clearly bears the costs of the sanctions (see chart 2). Russian GDP falls by 7.9% in the long term due to the sanctions imposed by the West and Russian counter-sanctions. This means that the sanctions alone permanently lower the level of the Russian economy. In other words, without the sanctions, Russian society would be 7.9% “richer”. The effect remains even if the Russian economy were to grow again in real terms in the future.

In contrast, GDP in the EU decreases by only 0.21%. This corresponds to a sum of 33 billion euros. Of the large member states, Germany is the hardest hit. German GDP falls by 0.26%. This is mainly due to its dependence on energy imports from Russia. In Austria, GDP falls by 0.2% and is thus slightly below the EU average.

Austrian exports fall by 1.7%. Pharmaceutical products (-9.5%) and other transport equipment (-8.6%) are the most affected. Machinery and equipment (-4%) and electronic equipment (-2.2%) are other export-strong sectors that are negatively affected (see chart 3). However, some sectors also benefit from the sanctions. Not surprisingly, exports of petroleum (11.9%) increase significantly. Austria can take over part of the lost Russian exports here. The production of petroleum refers to the processing of crude oil. Austria does not produce oil, but processes more imported oil than before the sanctions, when petroleum was also imported directly from Russia to the EU. Other sectors that benefit from the sanctions are the production and casting of metals and the mining of metal ores, whose exports each increase by 1.6%.

The analysis of the Russia sanctions highlights the complex and far-reaching impact of policy measures on the global economy. While the sanctions hit Russia significantly, with a long-term GDP loss of 7.9%, the impact on the EU as a whole is smaller but still noticeable. The Austrian economy can absorb some of the West’s sanctioned trade flows with Russia. However, it is not enough to offset the economic costs for Austria.


Hendrik Mahlkow has been working an an economist in the WIFO Research Group “Industrial, Innovation and International Economics” since 2023. He is a quantitative trade economist who is mainly interested in environmental economics and geopolitics. Using large computational general equilibrium models, he calculates so-called counterfactual scenarios: “what-if” considerations that allow to evaluate planned policy measures ex ante, or to review already implemented measures ex post. He is pursuing a PhD in Quantitative Economics at the Christian-Albrechts-University of Kiel. Most recently, he spent a research semester at the University of California, Berkeley.


  1. Bachmann, Ruediger, David Baqaee, Christian Bayer, Moritz Kuhn, Andreas Löschel, Benjamin Moll, Andreas Peichl, Karen Pittel, and Moritz Schularick, “What if? The economic effects for Germany of a stop of energy imports from Russia,” Technical Report, ECONtribute Policy Brief 2022.
  2. Balma, Lacina, Tobias Heidland, Sebastian Jävervall, Hendrik Mahlkow, Adamon N Mukasa, and Andinet Woldemichael, “Long-run impacts of the conflict in Ukraine on food security in Africa,” Technical Report, Kiel Policy Brief 2022.
  3. Felbermayr, Gabriel, Hendrik Mahlkow, and Alexander Sandkamp, “Cutting through the value chain: The long-run effects of decoupling the East from the West,” Empirica, 2023, 50 (1), 75–108.
  4. Head, Keith and Thierry Mayer, “Gravity equations: Workhorse, toolkit, and cookbook,” in “Handbook of international economics,” Vol. 4, Elsevier, 2014, pp. 131–195.

Photo by FLY:D on Unsplash

FIW-Spotlight: Current EU trade and political relations with Caucasia in the wake of the Ukraine war

The Russian invasion of Ukraine also put the Caucasia region into the spotlight of the European and Austrian public.

This Spotlight looks at the region’s trade ties with the EU and Austria, their significance for the region and the varying depth of the region’s relations with the EU. Georgia is the country with the currently deepest economic integration with the EU – along with Moldova and Ukraine – through a Deep and Comprehensive Free Trade Agreement (DCFTAs) followed by Armenia’s Comprehensive and Enhanced Partnership Agreement (CEPA), while Azerbaijan’s trade relations with the EU are still governed by a Partnership and Cooperation Agreement (PCA).

Selected key facts on Caucasia

The Caucasus region comprises of Armenia, Azerbaijan, and Georgia. Both in terms of population size and territory the region is comparable to the six West Balkan (WB6) states (Albania, Bosnia and Hercegovina, Kosovo, Montenegro, North Macedonia, and Serbia). The three Caucasus states have a population of 16.6 million and cover 186 thousand km², while the WB6 have 17.7 million inhabitants at an area of 204.5 thousand km² (WDI, Eurostat). To contextualise, Azerbaijan is slightly bigger than Serbia, Armenia is comparable in size to Albania and Georgia is slightly bigger than Bosnia and Hercegovina and Montenegro. In terms of GDP per capita (in PPPs), Georgia’s GDP is comparable to the level of Bosnia and Hercegovina, Armenia’s to Albania’s, Azerbaijan has the lowest GDP per capita in Caucasia (Figure A).

The domestic political situation of the three countries is heterogeneous. Among the three countries Azerbaijan ranks by far worst in corruption and press freedom. To illustrate, Azerbaijan ranks 157th corruption perception and 151st in press freedom. Armenia was ranked 63rd in the corruption perception index, while Georgia was ranked 41st. In the press freedom index Armenia ranked 49th lies ahead of Georgia, which was ranked 77th. By way of comparison, Montenegro ranks 65th in corruption perception while in press freedom Romania ranks 53rd and Hungary 72nd.

Trade ties

The overall share of goods exports of regional GDP was 38 % in 2022 while imports stood at 29 %. The regions exports are dominated by Azerbaijan which accounted for 80 % of the region’s total share, followed by Georgia (11 %) and Armenia (9 %) in 2022. This can be attributed to Azerbaijan’s well endowment with fossil fuels and the resulting exports thereof. The share of imports is more balanced, 41 % of which were imported by Azerbaijan, 35 % by Armenia and 24 % by Georgia.

The most important trading partners for the region are the EU, Russia, and Turkey (Figure B). These top three partners accounted for 74 % of the region’s exports and 54 % of its imports as share of total in 2022. As export partner the EU clearly takes the lead, 57 % of all exports went to the EU in 2022. The significant increase in exports to the EU in 2021 and 2022 can be attributed to surging energy prices and the high share of fossil fuels in exports to the EU. In 2022, Russia overtook the EU as leading import partner though by a narrow margin of one percentage point. Overall, the war in Ukraine has not materialised in large shifts in third country trade patterns until now. Compared to the significance of the region’s trade ties with the EU, its significance for the EU is of a much smaller nature. EU – Caucasia trade accounted for 1.1 % of the EU’s imports as share of extra-EU imports and 0.28 % of the EU’s exports in 2022. To compare, the WB6 accounted for 1.2 % of the EU’s imports and for 1.9 % of its exports.

Exports to the EU are clearly dominated by oil and gas, which accounted for 94 % of Caucasia’s exports to the EU in 2022, dwarfing the remaining sectors (Figure C). European exports to the region are more diversified, both in terms of sectors and destination countries, manufacturing being the most important sector. 41 % of EU exports alone are machinery and transport equipment.

Trade ties with Austria

For Austria Caucasia’s share in Austrian imports and exports (excluding intra-EU trade) is even smaller compared to the EU. Imports from Caucasia accounted for 0.08 % as share of non-EU imports and for only 0.003 % of its non-EU exports. Despite these rather small shares, this region has been a focal region for Austrian foreign policy. Austria has dedicated ambassadors for all three countries though the ambassador to Armenia is based in Vienna and the region is also a focal region for Austrian development policy. Two out of eight focal regions are in Caucasia (namely in Armenia and Georgia) where consequently the Austrian Development Agency (ADA) also maintains offices.

The main Austrian imports from Caucasia are mineral fuels, which are unsurprisingly dominated by Azerbaijan, while the key Austrian exports are machinery and transport equipment, manufactured goods and foods. Austria maintains a positive trade balance with the region. In 2022, it imported goods worth 62.6 million Euro compared to exports to the region amounting to 154.3 million Euro.

Energy Supplies

Caucasia is both an important transit route and source of oil and gas supplies for the EU. Azerbaijan’s gas is exported through the South Caucasus Pipeline via Georgia into Turkey from where it is also exported via the Trans Anatolian Pipeline (TANAP) to European markets. In light of Russia’s efforts to weaponize gas supplies, diversifying gas supplies has been a key goal of the European Commission.

Azerbaijan was the EU’s ninth biggest oil supplier in Q1 2023 (in Q1 2022 it was tenth), but fifth biggest gas supplier in Q1 2023 (Figure E). What figure E also illustrates, is the diversification away from Russian gas from almost 39 % of all extra-EU natural gas imports in Q1 2022 down to 17.4 % in Q1 2023. As part of this strategy the EU and Azerbaijan signed a new Memorandum of Understanding on a Strategic Partnership in the Field of Energy on July 18th, 2022.[1] Though a reasonable step to diversify gas supplies away from Russia, the increased cooperation with Azerbaijan (much like that with Qatar) has also earned the European Commission criticism for putting geopolitics over upholding European values, considering Azerbaijan’s track record with regards to human rights and fundamental freedoms.[2]

A conflict ridden region

Overall, the significance of the region for the EU and Austria is less of an economic than of a political nature. All three countries are involved in unresolved conflicts with one of its neighbours, namely the Nagorno Karabakh conflict between Armenia and Azerbaijan and the conflict of Georgia with Russia over South Ossetia and Abkhazia, regions effectively controlled by Russia.

The Nagorno Karabakh conflict was the most violent conflict which erupted in the wake of the immediate fall of the Soviet empire, resulting in two big wars in 1992 -1994 and 2020. In the first war Armenian forces had conquered the predominantly ethnically Armenia region of Nagorno Karabakh and surrounding territories which are internationally recognised as Azerbaijani, while in the second war Azerbaijan again reconquered the surrounding territories and approximately one third of Nagorno Karabakh.

One indirect consequence of the Ukraine war is the EU’s increased role as actress in conflict moderation, which gained considerable momentum in 2022. In Georgia the EU has been present with its EU Monitoring Mission (EUMM) (and theoretically also in Abkhazia and South Ossetia, theoretically as the EUMM has not gotten access to Georgian territory not under the control of Georgia’s government), while in the Nagorno Karabakh conflict it had been forced to remain on the sidelines only until recently. Azerbaijan’s military victory in 2020 and further flare-ups have put Armenia both under increasing domestic and external pressure. Russian inaptness or unwillingness to support Armenia has brought the EU to the table. In autumn 2022 a civilian EU monitoring mission to Armenia (EUMA) was set up and also several rounds of peace negotiations chaired by the EU have taken place since autumn 2022.

The varying depth of political relations with the EU reflects the differing ambitions of these three states towards European integration, with Georgia and its accession bid clearly taking the lead. Georgia has signed a DCFTAs (Deep and Comprehensive Free Trade Agreement) as part of its Association Agreement which have been in force since 2016. Armenia has upgraded its initial PCA (Partnership and Cooperation Agreement) to a CEPA (Comprehensive and Enhanced Partnership Agreement), which has been in force since 2021 while Azerbaijan’s trade relations with the EU are still governed by a PCA dating back to 1999. A similar pattern can also be observed with membership in the Energy Community an international organisation seated in Vienna “which brings together the European Union and its neighbours to create an integrated pan-European energy market.”[3] While Georgia is a contracting party like the WB6 states, Armenia has observer status and Azerbaijan is not associated at all. The war in Ukraine has changed the political dynamics. Ukraine and Moldova have been granted accession candidate status, while Georgia also applied though it is pending the green light from the European Commission given it makes progress in areas such as the judiciary system, fighting corruption and fighting organised crime. Above all the granting of candidate status is a significant policy shift, given that prior economic and political integration of the EU’s neighbours outside the Western Balkans has been characterised by applying enlargement methodology without the actual prospect of EU accession.


The EU is the key trading partner for the Caucasia region which also the Russian war against Ukraine has not changed. While European imports are dominated by fossil fuels, European exports are in particular manufactured goods. This is a pattern which also applies to Austrian trade with Caucasia, with key differences being that Austria maintains a positive trade balance with the region and the share of fossil fuels in its imports is lower. The significance of the EU’s role as key trading partner has not transformed into a deepening of political ties as the differing trade agreements (EU-Georgia DCFTA, EU-Armenia CEPA and EU-Azerbaijan PCA) and membership in the Energy Community shows, but the Russian war in Ukraine has. From a European perspective the region is particularly significant for (geo)political reasons, for its location in the EU’s south-eastern neighbourhood and gateway to Central Asia, and in the short to mid-term as supplier and transit route for energy.


[2] Caprile, A. & Przetacznik, J (2023) Armenia and Azerbaijan: Between war and peace. EPRS.

[3] Energy Community, Who we are,


Bernhard Moshammer is Economist at wiiw. His research focuses on European economic and political-economic issues. He has previously worked for the Austrian Federal Chancellery on EU affairs and on housing policies at the Austrian Chamber of Labour. He holds a degree in Economics from the Vienna University of Economics and Business and an M.A. in European Interdisciplinary Studies from the College of Europe, Natolin Campus in Warsaw, Poland.

The interactive graphics were created by Alireza Sabouniha. He is a research assistant at wiiw and a master’s student in Economics at the WU (Vienna University of Economics and Business).

FIW-Spotlight: Turkey’s risky monetary policy experiment

The Turkish economy has been struggling in recent years, experiencing rapid depreciation of the lira and a surge in inflation. While this may appear to resemble the emerging market difficulties of the 1990s, and also partly reflects the inflationary pressures affecting all of Europe at the moment, the underlying mechanisms are distinct and mostly self-inflicted. The recent economic situation in Turkey, the 6th most important trade partner for the EU with 3.3%, serves as a stark reminder of the consequences of mishandling monetary policy.

The European Union continues to be Turkey’s largest export and import partner (Figure 1) despite a declining trend in the recent years. Between 2018 and 2022, Turkey’s export share to the EU decreased from 43.1% to 40.5%, while the import share dropped from 33.3% to 25.6%. Austria represents a smaller portion of Turkey’s overall trade: Turkey’s export share to Austria remained relatively stable at around 0.7% over the last years, the import share however dropped from 0.7% in 2018 to 0.5% in 2022.From the European perspective, Turkey is the 6th most important trading partner for the EU with 3.3%. Turkey’s share in Austrian trade is about 0.7% (incl. intra-EU trade).

Over the past decade, Turkey has faced a combination of challenges including unstable growth rates, significant currency devaluation, and surge in inflation (Figure 2). In recent years, the issues have worsened, partially due to external factors such as the COVID-19 pandemic and the war in Ukraine, leading to very imbalanced pattern of growth and a significant accumulation of potential risks within the economic system. Turkish unconventional monetary policy, characterized by low interest rates and heavy reliance on credit, has played a significant role in exacerbating these issues. With President Erdogan securing another term, concerns over the direction of the monetary policy are stronger than ever and raising alarms for the future stability of Turkey’s economy.

However, it is important to note that the economic landscape hasn’t always been this way. In fact, during the first 10 years of President Erdogan’s rule, both he and the AKP were widely regarded as capable, conservative, and careful in their approach to economic policy. Yet, from the mid-2010s, Turkey started grappling with significant challenges. Political risk increased, such as due to Gezi Park protests in 2013 and coup attempt in 2016. Partly in response to this, the government started to erode the capacity and independence of state institutions. 

In an effort to counter the economic slowdown during that period, the government implemented measures such as substantial infrastructure investments and low interest rates to encourage domestic borrowing (Figure 3). The impression increased that the central bank was being forced to keep interest rates low. However, these measures resulted in significant trade deficits, increased reliance on external credit, rapid depreciation of the lira, and a loss of confidence in monetary policy driven by prolonged periods of negative interest rates and mounting inflationary pressures.

Turkish monetary policy experiment as a cure for slowing growth and increasing inflation

Central bank independency in Turkey has been on decline in recent years. President Erdogan’s actions indicate that he does not hesitate to dismiss central bankers and finance ministers if they do not comply with his wishes. Since 2020, three officials were dismissed from their positions without a clear explanation, sparking speculation that their refused to lower interest rates may have been the primary reason for the termination[1]. President Erdogan believes that higher interest rates are the cause of rising prices, not a cure for them. He argues that keeping interest rates low will encourage consumer spending, business investment, and job creation. He also claims that a weaker Turkish lira against the US dollar would make exports more affordable, leading to increased demand from foreign consumers.

There is some truth to his arguments. The weaker lira does seem to have helped export growth in the last couple of years. And cheap credit has certainly supported consumer spending. Yet these policies entail significant consequences. Turkey heavily relies on imports such as fuel, gas, medicine, fertilizer, and other raw materials. When the value of the lira declines, the cost of purchasing these goods increases. Additionally, President Erdogan’s unconventional monetary policy has raised concerns among foreign investors who were previously willing to lend substantial amounts of money to Turkish businesses. Furthermore, implementation of lira saving scheme “KKM”, a state-backed foreign exchange-protected deposit, is transferring the risk of exchange rate fluctuations to the public sector, giving a rise to substantial contingent liability, and posing a risk for domestic financial stability.

At the beginning of 2022, when central bankers in Europe and the United States started to adapt tighter monetary policies by raising interest rates to tackle inflation, Turkish Central Bank started lowering its interest rate. This unconventional strategy has led to sharp depreciation of the lira and ever-more elevated inflation rates, with the year-on-year inflation rate reaching a 24-year high of over 85% in October 2022. Many analysts believe that the actual inflation rate on the streets is even higher than the official figures suggest [2].

To counter the impacts of surging inflation, the Turkish government has implemented several measures. These include raising the minimum wage and public worker wages by 55% and 45%, respectively. Beside the introduction of KKM scheme, the government has also enforced strict regulations on foreign-currency transactions conducted by companies. However, the effectiveness of these measures appears to be limited. As of April 2023, Turkey’s annual inflation rate was 43.7%, showing a downward trend due to base effects, but still extremely high compared to peer countries.

Rising inflation rates in Turkey, along with an increase in import prices and production costs, create major difficulties for households and businesses alike. Low-income households struggle to afford basic necessities as prices skyrocket, while businesses find it challenging to plan and invest in new projects due to unpredictable returns and mounting costs. In Turkey, just like in any other country, inflation is influenced by factors related to both demand and costs. Therefore, raising interest rates alone would not address the issue. It is essential to also keep in mind cost factors such as higher energy prices. Yet it remains clear that as long as real interest rates are deeply negative, the lira will depreciate, imported inflation will surge, and the economy will suffer.

What does the future hold?

With President Erdogan securing another term in office, immediate changes to monetary policy following the elections are unlikely. However, considering President Erdogan’s history of policy changes, and the pressure of the weakening lira and high inflation on the economy, a change of course is possible. If the central bank does raise interest rates, this would not be the first time that it has abruptly changed course; something similar happened in 2018 and 2020. The timing of any reversal will depend on the economic consequences of the current policies. If the lira continues to decline, the state’s contingent liabilities, linked to KKM and other potential risks will escalate. Thus, it remains plausible that adjustments may be made.

Accurately assessing demand and cost factors remains crucial for effectively managing inflation and utilizing interest rate policy in Turkey. A change in the monetary stance to something more orthodox, targeting small positive real interest rates, would not solve all of Turkey’s economic problems but certainly improve macroeconomic stability and provide the basis for a more stable growth rate. However, even without this, the economy has shown itself remarkably resilient. If foreign funding continues to arrive to plug the large current account deficit, it is likely that the year 2023 will end with a growth rate of around 2.6% and an inflation rate ranging between 40-50%, gradually easing the pressure on the exchange rate throughout the year.

[1] See Reuters (2021), Factbox: Revolving door: Turkey’s last four central bank chiefs, available at and CNBC (2021), Turkey’s Erdogan names Nebati as new finance minister as lira skids, available at

[2] See DW (2022), Inflation in Turkey: Researcher won’t hide the figures Erdogan doesn’t want to see, available at, and Euronews (2022), Soaring inflation and a collapsing currency: Why is Turkey’s economy in such a mess?, available at


Meryem Gökten is Economist at the Vienna Institute for International Economic Studies (wiiw) and country expert for Turkey. Her research focuses on macroeconomic analysis, fiscal policy, and monetary policy. Prior to joining wiiw, she worked as a researcher in the Financial Markets and Institutions Unit at Centre for European Policy Studies (CEPS), and as a consultant in the Country and Financial Sector Analysis Division at the European Investment Bank (EIB). She holds a master’s degree in economics from University of Freiburg and bachelor’s degree in economics from University of Heidelberg.

Richard Grieveson is Deputy Director at wiiw and Research Associate at the Diplomatic Academy of Vienna. He specialises in the economies of Central, East and Southeast Europe, with a particular focus on Turkey and the Western Balkans. Previously he worked as a Director in the Emerging Europe Sovereigns team at Fitch Ratings and Regional Manager in the Europe team at the Economist Intelligence Unit. He holds degrees from the universities of Cambridge, Vienna and Birkbeck.

The interactive graphics were created by Alireza Sabouniha. He is a research assistant at wiiw and a master’s student in Economics at the WU (Vienna University of Economics and Business).

FIW-Spotlight: One year since the RCEP agreement

One year ago, the world’s largest trade agreement, the RCEP agreement, was concluded. The trade of the EU and Austria with this region developed very dynamically in the last 20 years, with China playing the main role.

The RCEP Agreement

It has been exactly a year since another chapter of history in international trade was written and the largest trade block globally was formed. This resulted from the Regional Comprehensive Economic Partnership (RCEP) agreement implemented in January 2022, after ten years of negotiations. The RCEP gathered China, Japan, South Korea, New Zealand, Australia, and ASEAN countries into a unified trade block. This agreement assures the gradual elimination of tariffs between the RCEP members until 2040 and almost full commodity trade openness (90%). Great trade and growth implications globally are expected due to the size of this region. To demonstrate, RCEP countries together have approximately 70% higher GDP and over four times larger population than the EU. Thus, what we will likely witness in the next twenty years is a change in the gravity of the trade towards Asia-Pacific and away from the West (Quah, 2011; UNCTAD, 2021).

Strong momentum towards Asia even before the agreement …

Obviously, the dynamics whereby RCEP impacts the future of trade will mostly depend on China, RCEP’s dominant trade member. China alone takes up over half of the RCEP population and production. In addition, its role in international trade grew exponentially after its entry into World Trade Organization in 2001. Twenty years after its entry into WTO, EU trade with the RCEP members increased significantly: imports as a share of the total increased by 4.5p.p and export by 3.1p.p (see Figure 1, left). This trade boom with RCEP mostly attributes to China and at the expense of some other members like Japan whose export to the EU (as a share of the total) decreased from 2.8% to 1.2% over the corresponding period. The same narrative applies to Austria (Figures 1, right), although the RCEP 2020-2001 increase in trade share is smaller than for the EU as a whole.

… especially for high-tech products

However, the share of EU total imports from RCEP increased much more for high-tech goods (see Figure 2): from roughly 15% in 2001 to 24% in 2020. For Austria, the increase is even higher – a jump of 14p.p in the 20-year-period (Figure 2, right). Nowadays, almost 43% of total EU imports of computer, electronic and optical products, 26% of computer, electronic and optical products, and about 20% of machinery and equipment are sourced from the RCEP bloc. The export with the RCEP members also increased, although it represents lower shares of total EU and Austrian exports (see Figure 3).

This makes this sector particularly dependent and thus vulnerable given the further shift toward Asia and the potential changes in trade patterns resulting from the RCEP agreement. With this comes greater economic implications too, as the high-tech sector relies much more on R&D and innovation than traditional manufacturing. As such, high-tech sectors are an important catalyst of technological growth (Hornbeck and Moretti, 2018), especially in the times of digital and green transition. The obvious sign of risks already exists in relation to the recent semiconductor shortage, which put the production of many EU factories at a halt.

However, stagnation of trade relations in the last year

Even though only one year after the agreement implementation elapsed, we can witness a smaller decline or a stagnation of EU-RCEP trade (see Figure 1 and 2). EU export to the RCEP declined by about 1p.p, while Austrian high-tech imports from RCEP decreased by about 3p.p, the largest decline in high-tech trade with the new trade block in last 20 years. Not surprisingly, this shift is mostly driven by China alone (annual decline of 3.5p.p). This annual decline could be only a tip of the iceberg.

It is difficult to distinguish what drives this decline in the EU-RCEP trade as there are many factors at play. After the COVID-19 pandemic, new trends are on the trade horizon (i.e. nearshoring, reshoring, friend shoring) all marking the start of shorter supply chains, away from globalization. In line with this is RCEP trade bloc that is expected to contribute to the formation of the supply chain across the Asian-Pacific. On the other hand, the ‘EU’s Open Strategic Autonomy by 2040’ assumes a higher economic relationship between the EU and its neighborhood as well as its further trade positioning with respect to China. Besides this, the European Chip Act enacted in December 2022 aims to strengthen the resilience of the high-tech supply chains – precisely the EU semiconductor products for which the demand will double by 2030 according to the European Commission. All these trends should strengthen trade between geographically close countries at the expense of more distant countries. Hence, it is very reasonable to speculate that the next twenty years may bring lower trade with the RCEP due to trade distortion effects (see e.g. Stehrer and Vujanovic, 2022) resulting from the agreement, as well as further trade decoupling.


Hornbeck, R., & Moretti, E. (2018). Who benefits from productivity growth? Direct and indirect effects of local TFP growth on wages, rents, and inequality (No. w24661). National Bureau of Economic Research.

Quah, D. (2011). The global economy’s shifting centre of gravity. Global Policy, 2(1), 3-9.

Stehrer, R., & Vujanovic, N. (2022). The Regional Comprehensive Economic Partnership (RCEP) agreement: Economic implications for the EU27 and Austria (No. 054). FIW.

UNCTAD (2021), A new centre of gravity: The Regional Comprehensive Economic Partnership and its trade effects.

Author: Nina Vujanović, PhD (wiiw)

Nina Vujanović is an economist at wiiw, researching topics on international trade, foreign direct investment, and the Balkans. She previously worked as an advisor to the Vice Governor at the Central bank of Montenegro, as a consultant at UNCTAD (Division on Investment and Enterprise) and a research fellow at the WTO (Economic Research and Statistic Division). She published papers in the area of foreign direct investment, productivity, innovation as well as credit risk. She holds a PhD in International Economics from Staffordshire University and Msc in Economic Policy from University College London.

The interactive graphics were created by Alireza Sabouniha. He is a research assistant at wiiw and a master’s student in Economics at the WU (Vienna University of Economics and Business).