This principle is commonly abused by the government officials of the economic sector. Society, in its turn, sees FTA as something exceptionally positive and profitable. Thus, a headline “Ukraine Signed FTA with…” is a perfect way to smooth out any reputational failures. However, terms and conditions of these Free Trade Agreements are often unduly overlooked. Since an agreement on Free Trade Area is bilateral, there is a risk of creating a stiff competition in the domestic market of commodities and services. Therefore, when having no in-depth analysis of all pros and cons of FTAs, Ukraine may face unexpected consequences.
Action Plan of the Cabinet of Ministers of Ukraine anticipates doubling of national export by 2019, including profits from FTAs with Canada, Turkey, Israel, some countries of Africa and Asia. By some estimates, FTAs with these countries can account for the increase in national export by 7–10%.
However, is it all that simple and clear? As a member of most Ukrainian negotiating groups on FTAs, I strongly say - no. In most cases, we deal with negotiators, who stick to the principle “take a stand to protect your land”.
FTA negotiations with the world’s second largest exporter, Turkey, are currently at their final stage. Ukraine and Turkey have always had rather close trade relations. The agreement becomes even more relevant as a result of reorientation of Ukrainian national export caused by its partial loss of CIS markets. As of 2014, export to CIS countries dropped by 31%, while export to Asia and Middle East, including Turkey, increased by 20%.
After negotiating the issues, the parties agreed on most items of the draft agreement. It includes commodities and services trading, competition rules, dispute settlement, intellectual property rights protection, identification of the origin of goods, etc. It’s important to note that Turkey agreed to secure Ukraine’s market status in the agreement for further antidumping investigations. However, the issues of export duties and subsidies require further clarification – Turkey insists that Ukraine should eliminate export duties for bilateral trade. Ukraine, in its turn, finds unacceptable subsidies for agricultural products suggested by Turkey.
The issue of market access conditions for both parties still remains most sensitive. The average tariff for agricultural products in Turkey accounts for around 50%, whereas in Ukraine it’s only 10%. Along with this, prohibited duties (over 100%) apply to 15% of the entire agricultural sector. Moreover, in accordance with Turkey’s obligations in the WTO, 50,3% of rates on import duties may increase unilaterally.
As part of the future Free Trade Agreement with Ukraine, Turkey offers to eliminate duties only on industrial products, applying transition periods to the most sensitive product items. As for agricultural products, the parties must make concessions only on separate product items. It is worth mentioning here, that customs union between the EU and Turkey is based on similar principles. Obviously, under such conditions agricultural market of Turkey will remain closed and Ukrainian export structure will stay the same – raw materials with low added value or even without it, e.g. iron and steel scrap.
Therefore, Ukraine must insist on liberalization of access for all product items (industrial and agricultural) and maximum reduction of import duties. Taking into account that Turkey is a member of customs union with the EU, Ukraine’s already got a liberalized access to Turkish industrial market through Free Trade Area agreement between Ukraine and the EU. The added value of further negotiations for Ukraine lies in obtaining eased access to agricultural markets of the partner-state.
While negotiating the issues on liberalizing the services trade, Turkey is ready to make minor concessions, offering no benefits for Ukrainian market of services.
Taking into account Turkey’s aggressive foreign trade policy and huge productive potential, Ukraine may be considered as an efficient distribution market for many Turkish products. Clearly, they possess considerable competitive advantages and are a huge source of raw materials. So, in case Ukraine accepts all Turkey’s current conditions, Free Trade Area between the two counties will have a negative influence on our economy, GDP, employment, industrial production and foreign trade balance.
For all the above mentioned reasons we need to pursue our country’s best interests, which will result in fair market access conditions and implementation of joint investment projects.
Bilateral FTA negotiations between Ukraine and Israel started in 2013 and are currently at their initial stage. The parties have exchanged views on possible terms and conditions of the agreement.
Considering that the average customs tariff rate in Israel accounts for 6,8% (2% higher than the average tariff rate in Ukraine), mutual tariff liberalization will reinforce competitive positions of domestic manufacturers. Meanwhile, Israel’s average tariff rates on agricultural and non-agricultural production are set at 17,9% and 5,1% respectively. In Ukraine, these rates are at the level of 8,8% and 3,6%. In order to maximize profits from the FTA, it is necessary to reduce Israel’s average ad valorem rates on export duties from 6,8% to 0,9%.
Currently, grain crops and ferrous metals are among Ukraine’s key exported products to Israel. Israel, in its turn, exports to Ukraine a wider variety of products with a higher added value. It’s obvious that Tel Aviv is well ahead of Kyiv in terms of competitive advantages in a number of product groups, especially those with higher added value and technological efficiency. Thus, despite relatively positive forecast on effects of the FTA, Ukraine may turn into a profitable supplier of raw material to Israel, which is not the best option for both countries.
FTA negotiations with Singapore have been held since early 2000s with varying intensity and efficiency. Considering interests of domestic manufacturers, Ukraine is critical about Singapore’s offers on terms and conditions of the Free Trade Agreement. Increased concern is caused by regional context of South-East Asia and foreign trade techniques applied by majority of countries in the region (except Singapore, Australia and New Zealand) – huge amounts of counterfeit products manufactured in the region, intentionally lowered pricing parameters for commodities and products, and unfair market competition.
Currently, Singapore is considering elimination of customs duties for all Ukrainian products. Ukraine, in its turn, pledges to eliminate customs duties for all products shipped from Singapore, except for sugar. During the latest round of negotiations, Ukraine reserved the option to save tariff protection for separate product groups.
The local experts’ research shows that Ukraine can benefit from Free Trade Agreement with Singapore only in terms of increasing national export (by UAH 8 million). However, implementation of the FTA (in case customs duties are abolished) will negatively affect such national macroeconomic figures as nominal GDP (a drop by UAH 129,0 million is expected) and Ukraine state budget income (UAH 4,5 million reduction).
Nevertheless, it is necessary to point out that, currently, a zero tariff rate is applied to 99,9% of commodity nomenclature of Singapore’s import duties. Thus, when it comes to tariff rates, Singaporean market is already open to Ukrainian production. Though, in most cases, in fact, Singapore’s trade policy is formed by non-tariff methods of market access regulation.
Therefore, signing FTA with one of the world’s leading financial centers is by far a brand issue. Besides, for Singapore FTA with Ukraine is an urge to stimulate further investment cooperation.
FTA negotiations with Canada demonstrate how important it is to protect national interests. The protocol finalizing FTA negotiations between Ukraine and Canada was signed in July 2015, although, it was already agreed back in 2010. During countless negotiation rounds and consultations the parties were actively discussing terms and conditions of trade liberalization.
When the document comes into force, Ukraine will obtain access to 98% of Canadian industrial market. The agreement also presupposes elimination of import duties on all agricultural products during transition periods (3, 5, 7 and 10 years), except for 108 tariff lines subjected to global quotas. Ukraine has managed to obtain asymmetric market liberalization to protect domestic manufacturers in sensitive market fields.
Ukraine, in its turn, pledges to abolish tariffs for almost 80% of Canadian export products with further tariffs elimination over the next 3, 5, 7 years. Some Canadian products are subjected to quotas, while some products being eliminated from the FTA. Such conditions will help Ukrainian manufacturers adapt to duty-free trade with one of the world’s most developed countries and will stimulate technological advances. Moreover, Ukraine will retain the right for export subsidies as part of existing WTO commitments.
Although, there are some flip sides to consider. According to expert opinion, FTA with Canada may cause mid-term state budget revenues of Ukraine to decrease.
Moreover, negative impact of the FTA on Ukrainian economy will gradually cause more losses. In the first years after the FTA comes into force, it is expected that state budget revenue will drop by UAH 8 million, in the second year – by UAH 8,8 million. The agreement will not have any considerable influence on the expenditure part of the state budget of Ukraine. Although, in case additional income sources are not found, the expenditure part will be deprived of the abovementioned funds.
The negative impact is caused by political desire to streamline the implementation of the FTA. During all rounds of negotiations Ukrainian team encouraged balanced development of trade and economic cooperation as part of the future agreement, which includes implementation of mutual investment and technical assistance projects to ensure support for the most sensitive fields of Ukrainian economy.
Ukraine is holding FTA negotiations with a number of countries. Almost in each case pros and cons are equal. Therefore, don’t be overly excited about a next Free Trade Agreement before considering all its terms and conditions.
Ultimately, agreement is just an instrument. Its efficiency in the long run depends on state-private partnerships and business initiatives.