Free trade with the EU: what will it change on Ukrainian market?

Provisional application of the free trade area provisions between Ukraine and the EU kicks off on January 1, 2016. Remember that Ukrainian manufacturers were eligible to export their products to the EU market under the DCFTA within the EU autonomous trade preferences since April 2014. This means that the EU has unilaterally opened its market for Ukraine already last year. Since January, however, Ukraine starts opening its market too.Earlier opinions were expressed that Ukrainian businesses would lose because of competition with European goods and manufacturers. On the other hand, opening of Ukrainian markets under the DCFTA could bring benefit to the consumers as competition and supply increase lead to lowering prices.

EU STRASBOURG KALLAS

On the eve of DCFTA’s entry into force we asked experts if those benefits and risks are real now.

мовчанVeronika Movchan, head of the Centre for economic studies of the Institute for Economic Research and Policy Consulting, a Ukrainian think tank:

– I have never believed that Ukrainian manufacturers would face substantial risks from the deep and comprehensive free trade area with the EU. First, there was enough time to prepare as the text of the Association Agreement had been finalised back in 2011. Second, Ukraine is a country, which is even now quite open for international trade. Import duties are low. When the free trade area comes into effect, it will not immediately eliminate non-tariff barriers. Therefore, there is no reason to think that opening of the border for European goods would be dramatic. Moreover, devaluation of hryvnya has become a significant barrier for imports as prices of imported goods raised dramatically, while the purchasing power of Ukrainian citizens has not increased.

As for the expected benefits for Ukrainian consumers, possible increase in choice of goods on the Ukrainian market will not so much lower prices, but can slow down the inflation. Another positive impact for citizens may consist in development of the economy, as free trade area can give boost for development of businesses. Implementation of the DCFTA prescribes reforms and simplification of the conditions to do business, which will have an impact on investment climate, create new industries and jobs, increase competition.

Even now the situation is slowly improving. For instance, more Ukrainian companies can enter the EU market in the field of live stock breeding, which is traditionally quite a close sector in the EU. Non-food industries start producing their goods under the EU technical regulations. Deregulation laws are being adopted. It takes time to achieve critical amount of the reforms necessary for successful implementation of the DCFTA, but these reforms will allow to fully take advantage of the free trade with the EU. So far, our policies remain quite nervous and unpredictable, unfortunately.

луценко-фотоDmytro Lutsenko, technical regulations expert

It is a myth that Ukrainian businesses are not competitive. Majority of enterprises can compete. The real problem, however, is that businesses have to rebuild their business operations. They need to develop marketing to promote their products and their brands. They need to take a deeper approach to documentation issues. In other words, many businesses are ready for the DCFTA, but they should learn European rules and practices – not only legislation, but also details of different processes. Also, they should know how to apply this knowledge to practice.

Maybe prices will decrease because of DCFT A but it will not be as significant as some people expect. Indeed, there will be a slight increase in supply, which can bring prices down a bit. But competitive environment should be in place to produce a significant change. For instance, new players should enter the market. Market opening is not the most important thing; what is the most important, is proper implementation of the antitrust laws and application of competitive practices.
It is also important that the implementation of European rules will cause deregulation. Ukrainian system of technical regulation is currently extremely complicated. The European one is easier in a way, and Ukraine will need to cancel a lot of such laws.

Where formal rules are concerned, abolition of overlapping and contradictory rules and regimes will make business environment somewhat easier. But in order to increase investment attractiveness, adopting rules is not enough: it is also necessary to observe them. An overall business ethics plays its role, such as prevention of illegal or forced takeover of businesses.

If Ukraine implements the EU norms within the DCFTA without improving its system of investor protection, then European goods will enter the Ukrainian market without European producers. But if Ukraine implements the European rules and fights against corruption and illegal takeovers, it will become more attractive. Goods made in Ukraine will be sold not only in the EU, but also worldwide. The Association Agreement with the EU, including deep and comprehensive free trade area, is a good chance for Ukraine. It will be a shame if Ukraine misses this chance.

бровкоOleksandra Brovko, expert at “Ukrainian Investment & Trade Facilitation Center” (ITFC), an NGO:

Discussing the issue of increased competition due to the DCFTA, it is more correct to discuss separate market segments instead of the Ukrainian market as a whole. It makes no sense to compare, for example, the impact of DCFTA for agricultural goods with that for high technology and industrial products. Even the current market condition in these segments is different. Another issue that requires attention is trade in services, which will also meet higher competition and cooperation.

Undoubtedly, the situation on Ukrainian market will change, although it is difficult to predict how exactly Ukrainian and European products will compete, and what will be the impact of such competition on Ukrainian manufacturers. Again, the situation in one field may differ from that in the other. For instance, even, under a regime of EU’s unilateral preferences, one can buy Belgian or Latvian chocolate in Ukrainian supermarkets. We can assume that Ukrainian and imported chocolate will compete in the same price segment. Ukrainian producers import raw materials (cocoa beans), so the prices are relatively comparable. Another situation may arise in the dairy industry. Ukrainian dairy products differ from the European ones in variety and taste. Ukrainian consumers got used to the domestic products. Therefore, presence of European products will not necessarily leads to a drop in demand for domestic dairy products. It is possible that certain European products will find a buyer and occupy a niche in the Ukrainian market, where they have no Ukrainian competitors.

In addition, hryvnia devaluation is a specific barrier for growth of imports, since imported goods remain expensive. On the other hand, the planned abolition of the additional import duty as of January 1, 2016 slightly increases the risks for Ukrainian producers. Additional 5-10 percent duty creates a certain barrier for imports. This abolition, however, will make benefit Ukrainian producers who import raw material for their manufacturing.

One should also keep in mind that the free trade area with the EU is asymmetrical, namely Ukraine will be cutting import duties over a certain transition period. This will enable Ukrainian producers to gradually adapt themselves to the new competitive environment.

As far as the potential investments are concerned, security challenges and those related to Ukraine’s territorial integrity are currently the main obstacle for the European investors. Even before the Association Agreement with the EU, Ukraine signed agreements on mutual protection of investments with the EU member states. Therefore, in terms of investment protection, the DCFTA rather complements the existing commitments.