Free trade area with Israel: an incentive or a threat to Ukraine’s foreign trade surplus?

15.08.2017

The sixth round of talks on concluding a Free Trade Agreement between Ukraine and Israel was held in late July.

In 2015, the parties represented by Ukraine’s President and Israel’s Premier agreed to set up a free trade area as soon as possible. In May 2017, at a meeting of Ukraine’s and Israel’s Premiers, it was planned to sign an appropriate agreement by the end of the year.

Israel is one of Ukraine’s most effective foreign trade partners in terms of the trade surplus.

While the overall import and export balance of Ukraine has been mostly unfavorable in the last years, the 2011-2017 trade with Israel steadily featured a surplus varying from $270 Ml to $530 Ml a year.

Moreover, both balances became almost equal in 2015: the total deficit of Ukraine’s foreign trade was $611 Ml, while the trade with Israel showed a surplus of $427 Ml.

In the five months of 2017, the balance featured a $197 Ml surplus against $95 Ml a year ago.

Thus, in fact, the trade with Israel permanently compensates for Ukraine’s foreign trade deficit.

The Israeli economy is deeply integrated into the international division of labor and historically oriented to the EU, the USA, China, Turkey. Ukraine’s economy undergoes a painful switch from the East to the West and intensely seeks new opportunities and markets.

The trade turnover between the two countries still falls short of their economic potentials. So, it has averaged just $850 Ml per annum in the last six years.

According to the State Statistics Service of Ukraine, exports, having hit a high of $796 Ml in value terms in 2012, remained at the 2011 level in 2016 ($489 Ml and $510 Ml, respectively).

Imports from Israel grew to $325 Ml in 2011-2014 and then sank to $170 Ml and $185 Ml in 2015 and 2016, respectively. In January-May 2017, exports and imports totaled $282 Ml and $90 Ml, respectively. 

Against the background of Ukraine’s foreign trade dynamics as a whole (see the diagram), the zigzag trend of the trade with Israel looks more pronounced. Impressive is the gap between growth of Ukrainian exports to Israel and its imports to Ukraine in January-May 2017.

The commodity composition of the trade with Israel reflects the real position of Ukraine’s economy in the international division of labor.

The key articles exported from Ukraine to Israel include cereals (36% of the total volume in 2016) and ferrous metals (30%). Substantial shares in Ukrainian exports belong to food production remainders / wastes and oil seeds / oil fruits: 9.3% and 6.6% in 2016, respectively. Taken together with milling products, fats and vegoils, the above-mentioned articles accounted for 89.7% of total exports in 2015, 85.4% in 2016 and 88.1% in 2017 (5 months).

With regard to imports from Israel, they are represented primarily by product categories such as mineral fuels, crude oil and products and products of its distillation (27.3% of total imports from Israel in 2016), chemical products (24.6%), plastics, polymers (6.5%), and electrical machines (7.1%). The combined import share of the above goods equaled 70.4% in 2015, 70.3% in 2016 and 76.4% in 2017 (5 months).

Comparing the product categories dominating exports and imports, it is evident that Ukrainian exports are raw material ones. In turn, Israel exports to Ukraine a more diverse range of products with a higher technological processing degree and a higher added value.  

Basically, this reflects the different levels of labor productivity in the two countries. If it is judged by per capita GDP, the labor productivity gap appears to be more than substantial. So, according to the World Bank, the 2016 per capita GDP value equaled $37,292.6 in Israel and $2,185.7 in Ukraine.

Nations having high productivity and advanced industries benefit more from the international economic exchange. It is a good reason why all of the developed countries protect their economies from international competition and adhere to a certain level of openness. For instance, the 2016 ratios between goods and services foreign trade volumes and GDP in China, the European Union, Japan and the US equaled 39.1%, 33.5%, 32.6% and 26.4%, respectively. In Israel, this indicator was 60.5%. At the same time, the share of goods and services foreign trade in Ukraine’s GDP equaled 97.4%. This emphasizes the critical dependence of the Ukrainian economy on foreign markets. 

The creation of a free trade area with Israel opens opportunities for increasing exports and encouraging, in fact, agricultural producers. Among advanced technology products in Ukrainian exports, the most noticeable to date are goods from the groups No.84 “nuclear reactors; boilers, machines” and No.85 “electrical machines”, whose export shares float around 1%, i.e. roughly $5 Ml a year. These products have no significant prospects in terms of rapidly expanding their presence in Israel. Tough competition, non-tariff barriers and high costs of entering the market of a developed country will long keep Ukrainian industrial producers from penetrating Israel’s market.

At the same time, the reduction or cancellation of import quotas and duties within the free trade area will facilitate growth of Israeli technological exports and more effective outsourcing of raw materials for the Israeli industry.

The launch of a free trade area with Israel may contribute to preserving Ukraine as a resource economy and aggravate the goods exchange disparity: the nation would become still more focused on exporting products with a relatively low added value (agricultural commodities etc.), while Israel would step up deliveries of its products with a higher added value. As a result, the steady surplus in the trade with Israel may begin changing against Ukraine. Further developments in the Ukrainian-Israeli trade after opening the free trade area will either confirm or defy this forecast in practice.

 

UkrAgroConsult

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