Is there a ceiling for Ukraine’s foreign trade with China?

06.12.2016

Since 2014, Ukraine’s foreign trade policy has been focused on the following two key points:

a) development of trade relations with the European Union within the  framework of the Ukraine – EU association process;

b) development of alternatives to the Russian/CIS market.

The latter point assigns a central role of China.

The share of China in Ukrainian goods exports and imports has been steadily growing in 2008-2016 (see the chart). From 2008 to 2016, it increased from 0.8% to 6.0% for exports and from 6.5% to 11.9% for imports.

In 2016, China shared the third place (with Poland) as a major partner in goods exports and became the second largest importer after Russia.

China has moved forward to join the ranks of the top foreign trade partners because Ukraine has lost its traditional foreign markets and foreign trade has contracted in value terms after the fall of raw material markets.

The commodity turnover between the two countries grew from $ 6.1 Bl in 2008 to $ 10.6 Bl in 2013 and then dropped to $ 6.2 Bl (2015). In the first ten months of the current year, the turnover amounted to $ 5.3 Bl with a balance of $ 2.1 Bl not in favor of Ukraine.

Ukrainian – Chinese exports and imports follow a standard pattern.

In 2015, exports were dominated by agricultural products (48%), mining products and energy materials (43.1%), timber and woodware (4%). Equipment and mechanisms accounted for 2.1%, but they represented almost 30.3% of Ukraine’s imports. Other noticeable items of import included textiles and textile goods (16.1%), non-precious metals and items made therefrom (9.5%), polymeric materials, plastics, rubber (8.3%), and chemical production (6.9%).

The times are long gone when Chinese entrepreneurs came to Ukraine for equipment and up-to-date technology, offering consumer goods on their part.

Over the last 20 years, China has turned into a mighty, vibrant economy undergoing cardinal structural transformations. According to the IMF, China outstripped the U.S. in 2015 by GDP in terms of purchasing power parity (17.1% of global GDP compared to the U.S.’s share of 15.8%).

The traditional approaches to developing foreign trade with a partner such as China will be increasingly ineffective. The build-up of own capacities, import substitution in China and current signs of a slowdown in globalization processes – in particular, slowing Chinese exports and imports – suggest that, despite a huge potential, operations in the Chinese market will become more difficult for non-commodity suppliers.   

In our opinion, tension will grow in the segment of commodities, too. Once Ukraine overcomes the crisis and its economic development begins, production costs will increase for labor, upgrade of capital assets, meeting environmental requirements and the requirements of technical standards and other regulations in line with Ukraine’s EU integration.

The rise in costs may eat away the competitive advantage of Ukrainian goods, for instance grain and food prices. Their competitiveness is likely to fall in the short run, until substantial growth of workforce productivity and product quality. On the other hand, keen international competition against the background of slow growth in demand will beat prices down, including those in the Chinese market. The behavior of world grain prices in the current season can be mentioned as an example.

The Chinese partners will not be slow to take advantage of various circumstances for bargaining over prices, the more so as the suppliers themselves give occasion to this. Hopefully, the complaints of Chinese companies and official entities about the phytosanitary condition of Ukrainian grain will not pull down Ukraine’s exports or, to be more exact, Chinese demand in the short-term outlook. It is essential: the Chinese market absorbed more than 8% of Ukraine’s total agricultural exports in 2015. 

The strategic ways of upgrading the system of foreign trade relations with China include establishing the following stable and long-lasting chains to create added value:

1) supply of technology, production and trade investments, supply of components (mostly contribution of the Chinese party);

2) production sites, workforce, partial supply of technology and components (contribution of the Ukrainian party);

3) product sales in the markets of Europe, the Near East, North Africa and, probably, the CIS.

At least one base factor for implementing chains of this kind is already available: relatively cheap but quite qualified workforce – the “manufacturing” China was built on this factor in its time. So, as of the beginning of the current year the average salary in Kyiv (not to mention less wealthy areas of Ukraine) approximated $350/month against $830/month paid to employees in China’s industrial regions.

To realize any strategy successfully, a few components are needed, among them being such significant ones as successive energy of actions, pragmatism and qualification of management. Judging by the persistent and soft manner in which China is promoting its ideas of a “new silk road” into Europe, a free trade area with Ukraine and a Chinese agricultural exchange in the country, the Chinese party does have these components.   

 

UkrAgroConsult

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