Ukraine and its EU dreams
Originally published on FC Novosti.
Ukraine’s parliament, the Verkhovna Rada, has ratified the agreement on a free trade zone (FTZ) with former Soviet countries in the Commonwealth of Independent States (CIS) despite weak countermeasures of opposition. Thus, a priori, Kiev almost managed to implement the idea of "keeping a foot in both worlds" simultaneously carrying out duty-free trade with the West and the East. However, the word "almost" means that the country’s EU plans still remain only dreams.
The FTZ accord with the European Union, which has been prepared for five years, is currently only initialed and to enter into force it must be ratified by all 27 EU countries. Ratification may take years. While the free trade zone with Russia, Belarus, Moldova, Kazakhstan and other nations all in all including eight CIS countries will become operational in the nearest future.
Even if we assume that ratification of the FTZ agreement with the European Union will also happen quickly, the Ukrainian products are not to get free access to the European markets. The country’s core exports comprises agricultural goods, including vegetables, fruits, meat and dairy products. To be marketed in Europe they should apply to the European standards. At the same time, the European standards should be applied to the country’s domestic market. Apart from standardisation under external criteria (size, color, etc.), Ukrainian products must also conform to pesticides and GMOs safety requirements.
The consumer ultimately wins, because the process guarantees the quality of goods, but the Ukrainian farmers will have to seriously restructure their production activities, that will take from three to four years and require a lot of finance. As a result, the price for Ukrainian core exports goods will increase. So to grab a piece of the Western markets, Ukrainians will need the government support, at least for the first five years. In Europe, farmers’ state subsidies amount to 37%, compared to 6% in Ukraine. While within the CIS Ukraine is to boost sales of sugar, cheese, butter and sunflower oil, as these nations recognise the Ukrainian state standards. Nevertheless, in the next couple of years, the standards will have to be brought in line with international ones, as all the CIS countries are the WTO members.
The agreement on a free trade zone represents the simplest form of trade integration between the countries. It does not involve extensive consultations on bringing into compliance the trade policies of member countries. The countries agree only about free trade in certain goods between themselves, at the same time keeping the right to establish independent trade policy towards third states. The member nations remain keeping customs borders and border posts. External tariffs of countries are not aligned. Each of the countries has a right to set up its own tariffs on certain goods that do not coincide with the relevant customs’ fees in the other FTZ member-states.
In such a case, importers are likely to prefer shipping goods through the customs of those countries where the tariffs on these products are lower, and after that deliver them to customers on a customs free basis within the FTZ. In other words, customs payments will be made to the country with the lowest rates on these goods.
Practice shows that the conditions of a free trade zone spread on virtually all products and always involve zeroing duties on almost all goods, says Alexander Knobel, head of the International Trade Laboratory of the Gaidar Institute for Economics policy, an independent non-profit research organisation established in 1990. In this case one does not abolish the so-called "withdrawals". "Until now, there were withdrawals of confectionary products from Ukraine. That is, Russia retains the import duty on the Ukrainian confectionery goods. However, since Ukraine has ratified the FTZ agreement, it will be able to actively raise the issue of zero-tariffs for all commodity items," exert believes.
At the same time, Ukrainian Prime Minister Mykola Azarov complains that the annexes to the agreement contain a number of disadvantageous for Ukraine exceptions. These exceptions to the free trade are crude and gas, that is, the main imported goods that Ukraine gets from Russia, he said. In particular, the issues related to trade in natural gas are regulated by separate agreements. Besides, under the agreement, Russia retained the right to establish oil export duty.
The FTZ agreement ratification and its entry into force promises to Ukraine the accelerated GDP growth. Already in 2013, its dynamics will grow 2.5%, while the budget will receive an additional 9.5 billion hryvnias (some $1.17bn) mainly due to abolishing customs fees. In future the country’s GDP will gain momentum due to expansion of the market to the East and increase from 1% to 2% per year. Let us recall: currently the CIS countries have quotas and duties on the imports and export of goods. The prices on foreign cars (both European and Russian-made models) and various European household appliances will go down on the domestic market due to abolishing customs fees.
Dairy products and potatoes from Belarus, eggs and shoes from Russia, Moldovan and Armenian wines and brandies are also to become cheaper for Ukrainians. All-in-all, Ukraine’s trade with the CIS currently equalling 40% of the country’s import/export operations will rocket by about another 35%, noted Prime Minister Mykola Azarov, who personally represented the document to national parliament.
So far, Ukraine has managed the impossible and is keeping its foot in both worlds. Meanwhile, the FTZ agreement with CIS member-states is not a European straw grasped by the troubled Ukrainian economics, but a real life-line. And it is the Ukrainian exports to the "eastern direction" that will really bring fruit in the coming years.
The exports breakthrough to the West is more dependent not on the economics, but on the political issues. The leading European countries continue to link the ratification of the free trade zone agreement with the EU with changes in Ukraine’s home policies, including free parliamentary elections, which are to be held in October, the so-called "Tymoshenko factor" and the obligatory consideration by the authorities of all opinions, suggestions and even demands of the opposition in the decision making process.
Most of the unbiased experts believe that the European Union seriously burdened by dozens of internal problems, has no time for Ukraine. At the same time, the EU leaders are unanimously opposed to situation, where Ukraine once again comes under Russia’s political and economic influence, as its potential accession to the Customs Union and the Common Economic Space of Russia, Belarus and Kazakhstan will dramatically increase the political weight and competitive capabilities of the new economic formation both on the European and global scale.