On Ukraine’s trade prospects with the EU

05.05.2017

The European choice of Ukraine determines the country’s strategy on the European Union as the priority foreign-trade partner. The pattern and pace of the national economy’s growth and the European integration idea’s progress critically depend on the development of commodity relations with the EU.

From 2013 till 2015, the volume of Ukraine’s commodity trade with EU countries fell by 35.3%, or by $15.5 Bl. Owing to the Ukrainian economic recovery and the introduced free trade area with the European Union, exports to the EU gained 3.7% last year, while commodity imports from the EU rose by 11.8%.

The country’s foreign trade deficit fell considerably. In the pre-crisis years of 2012 and 2013 it equaled 21.0% and 23.5% of the total foreign trade, respectively. Then this percentage dropped to 8.2% in 2015 and grew to 11.9% in 2016.  

As a whole, the export-import commodity composition was traditional. Imports were dominated by equipment and finished articles with high added value. So, according to Eurostat, machines, transport equipment and various finished articles accounted for 43.8% of the total import volume in 2013 and their share expanded to 45.6% in 2016.

Ukrainian exports consisted mostly of agricultural products, non-food raw materials, animal and vegetable oils, fats and waxes, which represented 41.4% of the country’s total exports in 2013 and 43.3% in 2016.

At the same time, remarkable is that the share of machines, transport equipment and various finished articles steadily grew in 2013-2016. And this upward trend took shape prior to the coming into force of the free trade area.

The free trade regime introduced duty-free quotas for supplying 36 products to the EU. Agricultural businesses raise claims about the limited size of these quotas: experience has proven that many of them get used up within the very first quarter of marketing year. It is believed fair to increase their size tenfold, for instance with regard to chicken meat exports.

The government of Ukraine is now trying to make the European Union expand the quotas.

It partially succeeds in these efforts, therefore this year’s duty-free exports may total some $600 Ml, or about 4.3% of the 2016 total export value.

However, the idea of expanding the quotas suggested by the European Commission particularly for wheat, corn, barley and tomatoes is actively opposed by the European Parliament’s Agriculture Committee (ComAgri). In the opinion of ComAgri, the EU must support Ukraine’s economic recovery efforts, but increasing the quotas may hurt European farmers, who are still suffering from a “deep agricultural crisis.”

No doubt, Europe will protect its market and it will be difficult to get the quotas raised significantly, at least to 10% of the export volume.

The miniscule size of the quotas glaringly contradicts the hopes for a rapid entry into the European market, an expansion of exports and getting an incentive for economic growth. This is rather a recognition prize for the European vector of Ukraine’s development.

In the struggle for expanding the duty-free trade the government may show single achievements and get good PR, but it will not manage to solve the problem of boosting exports to the EU consistently. 

This problem’s solution centers around intensity of the state’s efforts and investments for the creation of conditions and non-paper tools to support national companies in their transition to European management systems and competitiveness, including technical procedures and requirements, certification, quality control etc. To date, just some 300 companies have passed certification for supplying agricultural products and foods to the EU. They represent roughly 7% of the total number of large and medium-sized companies in the sector. 

The EU will control the volume of deliveries of agricultural and food products to its market through non-tariff restrictions. The limits of exports to the EU can be determined by calculating the balance of interests of European importers of Ukrainian products and European producers of similar goods.

The same concerns machine-building products. However, taking into account the technological cycle of their manufacture and use, as well as delivery terms, the situation is still more difficult here. The overwhelming majority of our industrial enterprises lack financial, technological, human, managerial resources to operate in Europe’s markets on their own.

They can only build an export bridge to the EU on the basis of engineering-production, commercial or marketing cooperation with European partners – on order or under tolling agreements. The leading role in building such bridges belongs to European firms and the Ukrainian state.

In the course of Poland’s industrial takeoff at the turn of the 2000’s, companies from developed Western countries came themselves to the Polish market in search for cheap and qualified labor force, an acceptable starting production basis and economic infrastructure for optimizing their production costs and making the business more competitive. According to expert estimates, Polish semi-finished products and articles account for up to 30% of Germany’s industrial production. Ukraine can repeat the experience of Poland, but this requires stability and minimum country risks.

While assessing the prospects of trading with the EU it is also interesting to look at them through the prism of President Trump’s foreign-trade initiatives involving demands to balance trade accounts between countries.

The traditional imbalance in the Ukraine-EU trade will not vanish in the foreseeable future. However, switching the government’s efforts to supporting exports of finished and industrial articles, to international production cooperation will help reduce the drainage of added value from Ukraine via the foreign trade mechanism.

 

UkrAgroConsult

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