Is there any place for protectionism in Ukraine’s open economy?

22.06.2017

The results of the transformation of Ukraine’s economy over the 25 years include its openness to international exchange.

The most representative indicator of the economy’s openness degree is the ratio between the country’s exports, imports, foreign trade and its GDP, i.e. so-called export, import and foreign-trade quotas. For instance, if some country’s exports exceed 10% of its GDP, this is a country with a relatively open economy.

In terms of the export/GDP and import/GDP ratios, Ukraine is an advanced nation with a relatively open economy (see the diagram). Still, in terms of the foreign trade volume/GDP ratio, Ukraine’s economy is fully open. So, the share of foreign trade goods turnover (foreign trade quota for goods) averaged 81.6% in 2006-2016. GDP ukraine

The GDP share of foreign trade in goods and services was still higher at 94.3%, exceeding the 100% level twice – in 2011 and 2015. This percentage grew from 88.1% in 2006 to 97.4% in 2016. This emphasizes the Ukrainian economy’s critical dependence on foreign markets. 

Last year the economy’s openness somewhat decreased in terms of the foreign trade quotas. The reason is that GDP grew by more than 2% in 2016, while Ukraine’s foreign trade turnover did not actually change from 2015.   

Judging by these indicators, the Ukrainian economy is more open than the economies of China, the European Union (EU), Japan and the USA. Their 2016 GDP shares of foreign trade in goods and services equaled 39.1%, 33.5%, 32.6% and 26.4%, respectively.    

Stable trends in the foreign trade quotas of the EU, Japan and the USA over the last decade indicate that the developed economies have found a balance between the foreign and local markets. Domestic consumption and the national market development play a lead role in their economic growth. This is seen particularly clearly on the example of China. The policy of reliance on the domestic market brought about a drop in the GDP share of foreign trade from 70.5% in 2006 to 39.1% in 2016.   

The economy that has developed in Ukraine is more open to imports than in terms of exports of goods. The country’s import quota averaged 43.7% in 2006-2016 compared to its export quota of 37.9%. In fact, Ukraine was an added-value donor for international goods exchange at this time.

The real openness of the economy to international commodity exchanges is stimulated by new free trade areas (FTAs). In June, the last of the EU countries – the Netherlands – ratified the Ukraine-EU Association Agreement. Thus, the free trade area between the EU and Ukraine obtains a finished legal platform. This year, Ukraine and Canada have ratified a free trade area agreement. Negotiation of a free trade agreement with Turkey has come to its final stage; talks on a free trade area with Israel are under way. The possibility of talks on establishing a free trade area with China is publicly discussed.

Nonetheless, the open economy implies reasonable use of government tools for achieving a balance with the external world in terms of commodity exchanges and mutual benefits. For example, this makes itself evident in the fact that after a year since the free trade area with the EU came into force, Ukraine began to actively insist on expanding the quotas for its agricultural deliveries. The EU negatively took Ukraine’s refusal to lift a moratorium on round timber exports. The same concerns the preservation of a $30/MT duty on Ukrainian scrap metal exports that is actually a protective measure.  

These steps of Ukraine are aimed at improving trading conditions, increasing own revenues, protecting the national industry and expanding the share of the domestically created added-value in the country. At the same time, these are only single actions – it is unlikely to be a system political approach.  

The economic policy of the new US President exemplifies a policy specifically restoring the strength of protectionism. Trump’s key message is that the policy of globalization and drastic expansion of free trade areas pursued by US Presidents from both parties over the last more than two decades has led to losses for the American middle class, but enriched the financial elite.

Over the five months of this year, the USA gave up on the Trans-Pacific free trade area, initiated talks on revising the North American Free Trade Agreement (NAFTA) with Canada and Mexico and declared determination to resume talks on the Transatlantic Trade and Investment Partnership (TTIP) between the USA and the European Union on fair terms.

The neo-protectionist statements by the USA caused trading partners to worry. They responded quite rapidly. At the beginning of May 2017, within the framework of an annual meeting of the Asian Development Bank, the finance ministers of Japan, China and South Korea made a joint statement – a clear signal to the USA – that their countries will jointly resist to all the forms of protectionism.

Only a strong economy such as the USA can afford reviving the policy of sound protectionism. Obviously, the existing economy of Ukraine will be all in favor of exactly the statement by the top three export-oriented economies, i.e. it will support freedom of trade.

 

UkrAgroConsult

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