Ukraine. A year of life in the free trade area with the EU

01.03.2017

Almost a year ago, on January 1, 2016, the EU-Ukraine free trade area became effective, which was introduced under the economic part of the EU-Ukraine Association Agreement signed on June 27, 2014.

Ukraine came to this event with the following key foreign-trade indicators. Exports and imports, particularly in the trade with the CIS and the EU, were on the decline in the period before 2016 (see the diagrams). As of the moment when the free trade area came into force, the export figures were as follows:

  • $38.1 Bl in total value;
  • $7.8 Bl to CIS countries (20.5% of total amount)
  • $13.0 Bl to the EU-28 (34.1%).

The following figures were achieved for imports:

  • $37.5 Bl in total value;
  • $10.5 Bl from CIS countries (28%) and
  • $15.3 Bl from EU countries (40.8%).

The foreign trade policy aimed at changing the strategic foreign-trade partner and prioritized development of commercial relations with Europe in line with European integration was fulfilled in terms of exports in early 2014. At that time exports to the EU reached the volume of export shipments to the CIS. In terms of imports this happened in the middle of 2013 (see the diagrams).

By 2016, Ukraine became the 24th on the list of key export markets for the EU (below Morocco but above Malaysia) and the 28th on the list of key goods suppliers to the EU (immediately after Israel and before Morocco).

In view of deteriorated economic conditions and rising production costs in the country in 2013-2015, leaving the free trade area with the CIS (common customs space) triggered a slump in exports, by $14.3 Bl in the above-mentioned period. Exports to the EU also shrank at the same time, by $3.8 Bl.

Comparing the drops in exports to both country groups and taking the unfavorable economic conditions as “equally affecting” exports to the CIS and the EU, it can be conditionally said that leaving the common customs space cost $10.5 Bl worth of export-oriented domestic production.

Exports to the CIS totaled $6.03 Bl in 2016, down $1.8 Bl from 2015, while imports from the CIS also shrank, by $1.9 Bl to $8.6 Bl. In the trade with the EU, on the contrary, growth was seen both in Ukrainian exports (up $0.5 Bl) and imports (up $1.8 Bl). This consolidated the trend towards changing the country’s strategic foreign-trade partner.

This trend was accompanied by the following processes:

  • Intensifying tension in foreign-trade relations with the CIS, first of all with Russia, shrinking export deliveries and national production volumes, and consequently restrained economic growth (by 2-3%). Apart from losses caused by shrunk exports, Ukraine incurred $0.4 Bl worth of direct losses and $1 Bl worth of indirect ones in 2016 due to a trade and transit embargo imposed by Russia, said Ukraine’s first vice-premier S. Kubiv.
  • Stabilization of the negative balance in trade with the CIS at a level of $2.5 Bl in 2014-2016.
  • Growth of trade deficit in foreign trade with the EU. Trade at a loss for Ukraine initially decreased in 2015 against 2014, to -$2.3 Bl, but then increased to -$3.6 Bl, i.e. by 57%, in 2016
  • Certain understanding by the European partner of the losses incurred by Ukraine due to its historic choice to change the strategic foreign-trade partner. So, the signed agreement on economic association with the EU and consequently lifted tariff barriers opened $0.4 Bl worth of the European market to Ukraine – this is some 1% of its 2015 total exports. In the end of 2016, the European Commission agreed to meet Ukraine’s wishes and expand the 2017 duty-free quota for agricultural producers by $196 Ml.

Thus, assessing the effect of the year-long stay in the free trade area with the EU solely from the quantitative viewpoint, the following can be concluded:

1. The loss in exports to CIS countries has not yet been off-set by their increase to the EU;

2. The change of the strategic foreign-trade partner from the CIS to the EU has not improved the foreign trade balance neither generated any significant impetus for growth;

3. To compensate for the negative balance in trade both with the CIS and EU countries, it is necessary to open new strategic markets to Ukrainian exports and begin pursuing pragmatic, strong and consistent foreign-trade and foreign policies for their development.       

For now, there is less “fodder” for Ukrainian producers in the EU zone and it is much more difficult to get than in the CIS zone. But the art of economic policy in a competitive market economy consists right in successful baiting of a competitor, not in feeding him. 

 

UkrAgroConsult

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