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July 10, Canada’s Prime Minister, Justin Trudeau, concluded his first official visit to Ukraine, which focused on strengthening the already robust economic and people-to-people ties between Canada and Ukraine. Thanks to the Ukrainian diaspora, Canada is considered a great friend of Ukraine, and charismatic Trudeau is perceived as a consistent ally in the Ukraine-Russian struggle.
One of the reasons of Trudeau’s visit was the adoption of an agreement on free trade area (FTA) between Ukraine and Canada. Signing the document was accompanied by publicity in the media and government’s accolades. Essentially, Canada has a sentiment to the products from Ukraine; it is a sort of Ukrainian fashion.
But what the free trade agreement between Ukraine and Canada (CUFTA) actually means for the states?
What does the document say?
CUFTA proscribes the removal of trade restrictions and complete abolition of trade tariffs on 98% of Ukrainian goods and on 72% of the Canadian ones.
In particular, duty for fish, grains, wine, juice, bread, clothing, metal products, and electrical components to be eliminated immediately after entry into force. The document lets Ukrainian and Canadian companies participate in public procurement in both countries.
Ukraine’s Prime Minister Volodymyr Groysman has estimated that it enables us to enter the market with the volume of $ 500 billion.
According to Deputy Minister of Economic Development Nataliya Mykolska, Ukrainian traditional export products to Canada are base metals - 36%; parts for rolling stock - 12%; machinery and equipment - 9%; tanning extracts - 8%; toys - 6%; wood - 5%. The share of Ukrainian exports of products with added value is about 30%.
CUFTA is an additional factor in the inclusion of our country in the global chain of production of goods with added value. The agreement is more profitable for Ukraine than the similar arrangement with the European Union. Ukraine would have 6900 positions (out of 7000) for the duty free trade. During the transition period, Ukraine will protect its market with the tariffs, which will gradually decrease to zero.
The agreement is quite positive both for Ukraine and for Canada, but there are few important nuances. CUFTA has completely removed three broad groups of products - poultry, eggs, and dairy products, including cheese.
In fact, it means that Ukraine has no special conditions here. Because of the extremely high duty rates, Ukrainian products are simply uncompetitive. Overall, CUFTA set quotas on 108 tariff lines.
International Trade Center elaborated a map that shows the import duty on Ukraine’s above products. In Canada, they are the highest.
Geographical distribution of tariffs applied by the other countries to Ukrainian milk and milk products (2013).
The average rate that Canada applies to the Ukrainian milk is 183.05%
Geographical distribution of tariffs applied to Ukrainian poultry (2013).
Average weighted rate that Canada applies to the Ukrainian poultry is 213.78%.
Geographical distribution of tariffs applied to Ukrainian eggs (2013).
The weighted average rate of duty on the eggs, that Canada applies to Ukraine is 89.2%.
However, it does not mean Canada’s special attitude to Ukraine. This point is acute and in negotiations between Canada and the European Union.
Another important point is a large negative balance of trade between the countries. According to the State Statistics Service, Ukrainian exports to Canada last year fell by 2.4 times - up to $ 30.16 million, while imports increased by 7.7% - to $ 206,240,000.
In fact, Canada sells in Ukraine 6.5 times more than Ukraine in Canada. Immediately there is a logical question whether the contract will be the reason for Canada to start exporting more goods.
Last year, export of Ukrainian services to Canada fell by 23.2% - to $ 67.85 million, while imports - by 27.4%, to $ 57.32 million.
CUFTA will not drastically improve or worsen our trade balance. Ukraine must have effective demand to import more products from Canada.
As for the increase in our exports, this is theoretically possible. However, we are competitors in many markets, especially in the agricultural market.
Ukraine is in the top five producers of agricultural products. Therefore, we should not expect that Canada will buy more of Ukraine’s agricultural products (or vice versa).
Ukraine’s largest trading partner is the European Union. Despite the huge drop in exports last year, 40% of our exports just falls on EU territory.
Far away Canada
Trade between Canada and Ukraine is very specific due to a huge distance between the countries, which automatically makes the export of certain goods simply unprofitable.
The long distance between the countries might impede Ukraine to fully enter the Canadian market. Ukrainian companies cannot compete with local and American food producers. Transport costs take 5% of the cost of goods. If the logistics is more than 10% of the cost, then all sorts of movement will be unprofitable.
However, this is not the verdict for a free trade agreement. A large distance indicates that the countries must rely on the high-tech products.