First year of EU-Ukraine FTA: key results

Author : Veronika Movchan

Source : 112 Ukraine

In the first ten months of 2016, exports of goods to the EU grew by 2.4% in nominal terms
23:16, 29 December 2016

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What are the main results of the EU-Ukraine free trade agreement?

In order to give an adequate answer to this question, we must understand what exactly has changes and when. A year has passed after launching a deep and comprehensive free trade area (DCFTA) with the EU, January 1, 2016t his section of the Association Agreement entered into force under the temporary use. However, in reality the situation is very ambiguous. Actual changes associated with the DCFTA could not be fit into the "Procrustean bed" of the calendar year. Some changes have taken place earlier or later, and only a few of them became visible actually since 1st of January.

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The key change that took place in January 2016 was beginning of import duties reduction of European goods.

According to calculations of the Institute for Economic Research and Policy Consulting, in the first year, the average duties on EU products decreased from 4.5% to 1.7%. So we would expect the growth of imports from the EU. Indeed, according to the State Statistics Service, in the first ten months of the year imports from the EU increased by 7.9%.

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Nevertheless, we cannot say that this increase was only due to reduced import duties exaggeration. A very important factor was the abolition of additional temporary import surcharge, which operated during 2015 and amounted to 5-10% depending on the category. Equally important factors were the exchange rate, currency regulation, and the level of domestic demand.

The situation is even less trivial with the access to the EU market. Although DCFTA has been launched only in January 2016, Ukraine received duty-free access to the EU market for most goods in April 2014, when the EU granted autonomous trade preferences, which completely repeated the mode of access to the EU market during the first year of the FTA.

Then 95% of EU import duties on industrial goods and 84% for agricultural products were canceled. At the same time, the so-called tariff rate quotas began to operate. When in 2016 the DCFTA was launched, the openness of the EU market was consistent with its obligations and, therefore, this year Ukrainian exporters did not receive additional tariff preferences (like two years ago).

The next reduction of import duties with the EU will start from 2017.

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Accordingly, the positive incentives from market opening would be visible still in 2014-2015. However, their effect was almost entirely offset by the influence of other powerful factors, such as the loss of territory and assets deep banking crisis and falling world commodity prices, particularly for grains and metals. It has negatively affected the indexes of Ukrainian exports. According to preliminary estimates of the State Statistics, in the first ten months of 2016, exports of goods to the EU grew by 2.4% in nominal terms and, obviously, much more in real terms, since there is still downward price trend in many markets .

Among the products that determine the dynamics of exports to the EU are sunflower oil, supplies of which increased several times and provided the major share of the total increase. The increase of goods export machinery, including auto parts production, actively developing in Western Ukraine, also is positive, albeit its effect is much smaller. Another factor in the growth of export supplies were wood and its products.

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In January-October 2016, the EU was the only region, where Ukrainian exports raised. Accordingly, the importance of the EU as a trading partner of Ukraine continued to increase; Ukrainian share of EU exports of goods reached 37% compared to 34% a year ago.

The business, including those engaged in foreign trade, can highly esteem the DCFTA effects. A survey conducted as part of the "Dialogue on Trade Facilitation" implemented by IER with financial support from the EU, showed that business valuation is cautiously optimistic.

More than 28% of exporters and importers (1,000 respondents from all regions of Ukraine) pointed to the positive effects of the Association Agreement, while only 6% of respondents noted the negative impact. However, most about 60% of respondents took neutral positions.

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The most positive effect of the Agreement was voiced by those companies that conduct exports and imports, allowing them to participate in international production chains. Among these companies the proportion of those who benefited from the implementation of the Agreement, was 36%.

During the first stage of the Agreement, big business has got more benefits than small or medium one.

According to the survey, 23% of small enterprises highlighted the gain, 27% medium, and 43% big business entities. It was the reflection of better institutional capacity of big business to exploit new opportunities.

Returning to the question of changes related to DCFTA, we should not forget the harmonization of legislation, which should contribute to stimulation of foreign trade, and improve internal business and investment climate attractiveness.

January 2016, began the countdown charts in commitments in the area of legislation harmonization, which is connected with the DCFTA (technical regulations, food safety, customs services, trade in services, government procurement, intellectual property rights, competition policy, etc.).

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Let us consider few examples. In 2016, in the area of technical regulations continued harmonization of sectoral legislation and preparations for negotiations on the signing of the Agreement on Conformity Assessment and Acceptance of Industrial Products (ACAA).

However, larger changes took place in 2015 and previous years, when general legislation was adopted and harmonized. Convergence of technical regulations became more active, more than 14 thousand older standards were abolished. Together with the adoption of standards harmonized with international and European ones, it provided the increase in the share of international European standards and national standards of Ukraine to 60%.

How to measure progress in the field of technical regulation? Speaking of comprehensive reforms progress, at the end of 2016 many changes have been done. If we evaluate the measures taken after January 1, 2016, the assessment will be much more modest.

Another interesting example is public procurement. This is definitely one of the most successful reforms. And it is very important for the implementation of the DCFTA, because the ultimate goal is to provide an equivalent reciprocal access to public procurement markets of Ukraine and the EU.

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But can we say when exactly the reform started? Before the DCFTA, when the pilot version of ProZorro was launched and a new law on public procurement was adopted? Or in 2016, when the law came into force?

Speaking about business, apparently, the most important thing was acquisition of access for milk and dairy products to the EU market in 2016.

It was not caused by the DCFTA, but a result of hard work of government and business to ensure compliance with the EU on the product safety. However, the main work, associated with the free trade zone with the EU has just begun.

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The same situation is in the other areas. A few years ago, a new Customs Code was adopted, which brought Ukrainian legislation to European standards in this area. But many of the innovations still require implementation. In particular, the institute of authorized economic operators provided by the Code.

Thus, today we can say cautiously highlight the positive assessment of the implications of the DCFTA, as evidenced by official statistics and data, survey data and entrepreneurs, and analysis of legal harmonization.

However, we can expect that in the coming years the advantages DCFTA will be used by the small and medium business. This should significantly increase positive results of trade liberalization with the EU.

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