Growth of exports to the EU is weaker than expected. However, it is still positive against the background of the collapse of exports to Russia, and the general shrinking of the Ukrainian economy.
In April 2014 the EU unilaterally opened its market for Ukrainian goods. It introduced the so-called “autonomous trade preferences” under which it started implementing its committments under the Association Agreement (and its free trade area chapters) before the signature of this agreement. When, in September 2014, the application of the Agreement’s trade chapters was delayed until early 2016, EU’s trade preferences created a unique situation when the EU decreased its tariff protection from Ukrainian goods, while Ukraine still kept its market protected by tariffs. In order to learn more about the sense and effects of the EU trade preferences for Ukraine, we talked to Nicholas Burge, head of trade and economic section of the EU Delegation to Ukraine.
Can you explain what the EU autonomous trade preferences are?
What we have done is to anticipate one part of the deep and comprehensive free trade area (DCFTA) in the Association Agreement. The DCFTA foresees that both Ukraine and EU should lower tariffs progressively over a period of 7 years. At the end of this time, 98% of duties will be eliminated completely. The DCFTA is asymmetrical, meaning that the EU lowers its tariffs before Ukraine lowers its tariffs, which means that Ukrainian businesses have more time to adjust.
But in addition to that we have made it even more asymmetrical by introducing, in April 2014, the “year one” of the reduction on the EU side. This is what constitutes the EU trade preferences.
Can we say that with this move EU is opening its market for Ukrainian goods, while Ukraine still has more or less closed market for EU goods?
I would not say that Ukraine keeps its markets closed, since compared to some countries Ukrainian tariffs are not particularly high. But the EU trade preferences is a unilateral offer that we made last year in order to help Ukrainian economy to survive and to develop. They will be in place until 31 December 2015, and that is because on the 1st of January 2016 the DCFTA should enter into force.
DCFTA was delayed until 2016 because of Russian pressure. And we understand that Russia will continue to try to block it and to delay it further. What will you do if Russia does this? Will you prolong these preferences?
First of all, the line that we are taking and the line that the Ukrainian government is taking is that we do not want to see any further delay in the implementation of the DCFTA. A red line for us is that we do not foresee any further postponement after the 1st of January, 2016. So I think that the question will not arise.
In the discussion with Russia we have not seen any arguments which validate their claim that DCFTA will damage their economy. If any country says that a free trade agreement between other two countries, or between a trading block and another country, would have a damaging effect on the third party, it would completely undermine the whole world trading system. For example, there is a major trade negotiation on the way between the EU and the US. Now, imagine Mexico, or Canada, or China would say that this agreement would be damaging to them so we want to influence this and be involved as a third party. Nobody is saying that because everybody recognizes that free trade areas are not only good for parties that take part in them, but that they also have a positive effect on neighbouring countries, because they get access to cheaper goods.
Will the EU have problems in WTO because of its unilateral decision? Are these trade preferences legal from the WTO point of view?
It is legal because it is anticipating the agreement which is already signed. As I said, we are anticipating year one of the reductions of tariffs under DCFTA.
I think, however, that if we delayed further, it might be criticised. This is another reason for implementing the DCFTA from 1 January 2016.
The EU trade preferences included not only tariff reductions, but also tariff rate quotas for Ukrainian goods. Can you explain what it is and if Ukraine fills them?
Tariff rate quotas means that we have introduced a scheme of zero tariffs for specific volumes of certain agricultural goods. However, there are no restrictions on the overall quantity of agricultural goods that can be exported to the EU. For example, Ukraine can sell as many chickens to the EU as it can find buyers for, but there is a limit to the amount on which no import tariffs are charged. When Ukraine exceeds this amount, it will have to pay the normal import tariffs. But to be honest the effect of the devaluation almost negates the effect of some of these quotas to the benefit of Ukrainian exporters.
Looking at some of the quotas for 2014, there are some of them which Ukraine was not able to fill at all, because the food safety standards of the EU have not yet been met – for example, dairy products. There are some goods where Ukraine fully filled the quotas – certain grains, honey, fruit juice and so on. But there are many others, which Ukraine was unable to fill. Look at oats, for example, for which quota was set at 4 000 tons, but only 40 tons was used: only 1% of the overall quota amount. Mushrooms – 0 was imported. Sweet corn – 0 (we had a quota of 1500 tons). Poultry was also under-filled, partly because there are two types of poultry: poultry meat and poultry carcasses, and almost no carcasses were exported. Poultry meat exports were a little bit closer to the quota, but still not filled completely.
Did the EU trade preferences bring positive results for Ukrainian economy?
Yes, initially it was very positive. When we looked at the figures for May-June 2014 (two months after it was introduced), compared to May-June 2013, Ukrainian exports to the EU had increased by around 25%. As the year developed, a number of things happened. First you had successive waves of devaluation. Another thing is that Ukrainian economy as a whole shrunk, as a result of external aggression and an increasing lack of confidence. In the 11-month period (11 months of 2014 compared to 11 months of 2013) we saw an increase in exports by 12%. It is not bad, in comparison with collapse of the exports to the Russian market.
Unfortunately in December the economic situation in Ukraine took a further downturn, so we now see end of year figures which show that overall for 2014 the increase of exports to the EU was only 2,6% (all these figures are in dollars). So unfortunately the impact was not as great as it might have been. But if you compare the exports to Russia, the situation here is much worse; exports to the Russian market collapsed by 33,7%.
And you can look at what has happened in a different way. For example the share of Ukrainian exports to the EU, rose from 9% of Ukraine’s GDP in 2013 to 13% in 2014.
What are the key products whose exports increased?
It is primarily agricultural products. Poultry, for example. Some Ukrainian products came to EU markets for the first time, fruit juices for example. So it was mainly food products and processed food. But there were increases in non-agricultural products also: for example textiles, shoes, some machinery.
How would you comment Ukrainian decision to increase its import tariffs by 5-10%? It seems to contradict the spirit of the AA. How does the EU react on that?
Ukraine justified this increase due to balance of payments problems. Any WTO member is allowed to introduce balance of payments measures, particularly when the reserves are very low. Ukraine now has reserves of less than USD 6 billion, which is barely equivalent to one month of exports, while the safety level is 3 months of exports. From a purely technical point of view Ukraine has a possibility to do this.
But first of all we want to see what IMF says about the proposal. Whether or not this is the right measure at the right time is another question. The idea of this measure is to put pressure on imports, but the imports were falling anyway. Ukraine’s trade is now almost balanced. And devaluation of hryvnia has much bigger impact on imports than increase of tariffs.
There is a question of how effective the measure would be. Imports have already fallen because of the devaluation. So the question is whether the increased tariffs target imported goods which Ukraine cannot produce itself. The increase of tariffs on these imports will mean that either some businesses may be forced to stop altogether (because Ukraine cannot produce products which replace these goods) or it could simply add to inflation, since the prices on such goods will increase. We also question why Ukraine wants to introduce 10% on agricultural and food products and 5% on everything else. Ukraine will have to defend its position before the WTO, and many WTO members are very sensitive in particular when it comes to discrimination of the agricultural products.
Let’s talk about legislation that Ukraine has adopted in line with the Association Agreement. There is a law on technical regulations, law on food safety, etc. How do you estimate progress in these areas?
This an important issue. Because, for example, as an exporter you may see lower tariffs on some products but you will still not be able to export them to the EU, because they do not correspond to EU standards. This is the case of Ukrainian milk and dairy products for example.
It’s not only the question of changing the standards, but you also have to get in place the infrastructure and institutions to be able to manage the new system. For example, one of the major change on the industrial side is that rather than having a huge network of state-owned bodies that are authorizing and giving certificates to products being placed on the market – which, of course, creates room for corruption, etc. – we will move to a system whereby industry will self-certify many of its products. But there should be market surveillance in place in order to check if the products being placed on the market comply with safety standards.
Under the DCFTA ultimately we would see the system whereby a certificate issued by a Ukrainian institution will have the same value as those issued by the EU institutions, like British standards institutions etc. But I think we are still a long way from that.
How many years?
In the DCFTA itself the aim is to move sector by sector. Regarding industrial goods Ukraine itself defined its priorities a few years ago – electrical equipment, pressure vessels, machinery, etc. It would be possible to move forward in this area, the legislation is close to being completed, many of the standards are coming into place. I think more needs to be done to get necessary infrastructure and institutions in place. We talk about a handful of years I think. It depends on the willingness of the Ukrainian side to move ahead, and more needs to be done to explain businesses how the regulatory environment is changing.
What would advise for Ukrainian businesses which want to enter the EU markets, in this particular situation when the EU is opening its markets for Ukraine?
First of all, they need to get information. It’s not simply a question of turning up on the EU border and saying “here is my product”, even if you meet EU standards. They need to do some marketing, some market research. Going back to agricultural products, I think there is a potential huge EU market for Ukrainian agricultural products – produced in a traditional way, as they used to be in the rest of Europe 30-40 years ago, which can give a very positive nostalgic message to consumers. They need to start contacting with buyers and learn how to sell their products a bit more. I know it is very difficult, but it is achievable. Language skills are also necessary. You should also remember that EU markets are different, and the types of goods preferred by Poles or Germans are different from those bought by Spanish or Italians. So if you can’t see a market opening, say, in Germany, it doesn’t matter, since you can find your customers in another EU country.