Free trade is win-win for Ukraine, Europe – Jose Manuel Pinto Teixeira
Jose Manuel Pinto Teixeira writes: In Ukraine, there are a number of misconceptions concerning the price of the deep trade agreement being offered by the EU.
Writing about free trade talks between the European Union and Ukraine is like explaining molecular physics. It’s simply not a sexy issue. For most people, this subject is too technical to understand. And, of course, you will not find Kyiv’s Femen activists drawing attention to it, like they do for other issues by going topless.
It’s a shame. Fear and a lack of understanding about free trade may cause us to miss out on the extraordinary benefits it offers. Free trade is not only good for big corporations. It is just plain good for everybody. It’s a win-win situation both for Ukraine and the EU. But the real winner will be Ukraine. The EU is its largest trading partner, while Ukraine amounts to a little bit more than 1 percent of EU trade.
Centuries ago, it was believed that trade was a zero-sum game. That one nation could gain from an exchange only at the expense of another. Yet, then came some great minds like Adam Smith, or David Ricardo, who revolutionized economics the same way as Newton transformed physics. They emphasized, that in any voluntary exchange both parties must gain (or at least expect to gain) something. And indeed, the experiences of successful reformers like Poland, the Czech Republic or South Korea suggest that trade liberalization immediately boosts annual economic growth rates by several percentage points.
The EU is interested in expanding the zone of stability and prosperity towards its neighbors. Even before free trade negotiations began with Ukraine, the EU indicated that it was ready to offer Ukraine an enhanced agreement. This means that, even without any recognized prospects for membership, Ukraine will gain access to the EU’s internal market and opportunities for more active political co-operation and economic integration.
An important part of such an enhanced agreement is the section on free trade, called the Deep and Comprehensive Free Trade Agreement, DCFTA in our Brussels jargon. What does the label “Deep and Comprehensive” mean?
A classic free trade agreement would not have a serious positive impact in terms of an increase in trade. Nor would it become the driver for integration with the EU. Deep free trade, or FTA+, which is being offered to Ukraine, would not only cancel customs duties. It goes further and eliminates all trade-distorting elements including Ukraine’s harmonizing its rules, regulations and norms with those of the EU and further liberalizing its service sector. Although an enhanced version of the agreement will require significant financial and human resources, as well as institutional and legislative changes, it could realistically remodel the country’s economy and reinforce Ukraine’s integration with the EU.
But there’s no such thing as a free lunch. There will, of course, be costs. Adjusting to new standards and rules won’t be always easy for Ukrainian producers in the short term. Reform could force some industries to downsize or to close, although more industries will expand and many new ones will be created. The adjustment will also bring social costs; For some people and some communities, the transition would be difficult.
So there are short-term adjustment costs, but do not exaggerate. In Ukraine, there are a number of misconceptions concerning the price of the deep trade agreement being offered by the EU.
One of the biggest myths is the negative impact on the state budget revenue. Currently the revenue from customs duties collected at the border makes up 4.4 percent of the total state budget of Ukraine. With regards to removal of customs duties, experience has shown that this short-term loss of import charges will be more than compensated for by the increased revenue received by the state from indirect taxes (for example value-added tax) paid by companies seizing new market opportunities and by the general boost to the economy.
In addition to the sustainable revenue which we hope trade-related growth will bring, the EU will continue to provide assistance to Ukraine in order to accelerate modernization. It is important, because trade and investment are all about confidence and perceptions matter, so for Ukraine to fulfill its economic potential it has to develop transparent and efficient state institutions. The budget spending on legal and institutional reforms in trade-related areas is or will be supported by the EU through the comprehensive institution building program along with funds from international financial institutions. The total EU technical assistance to Ukraine over the period 2011-2013 will add up to 552 million euros.
Many businesses in Ukraine also fear that all the EU free “deep” trade agreement will do is open the door to a flood of European imports. No so. The agreement is reciprocal. Closer EU integration will provide Ukrainian products with open access to a market 13 times greater than its own, with 500 million consumers.
Secondly, EU products are already getting into Ukraine with few de facto barriers. The average applied tariffs on imports from EU are low, so the impact of liberalization will be limited. Thirdly Ukraine is not a key target market.
Fourthly, the EU is willing to open its product market immediately while giving transitional periods to Ukraine. As a matter of fact, the Ukrainian market cannot be completely opened right away after the signing of this agreement, given that domestic manufacturers are mostly not ready for serious outside competition. This is why the EU is ready to discuss transitional periods for specific areas.
The so-called deep and comprehensive free trade agreement will be implemented progressively and gradually by Ukraine. The EU is willing to envisage a decade if need be. Ukrainian businesses will have time to adjust, to harmonize legislation, to adopt standards and norms, and to build the necessary institutions with external support.
All in all, benefits are likely to far outweigh the costs. In the long term, it should help make domestic products more competitive and, as a result, increase Ukrainian exports globally as the quality of Ukrainian products improves. A free trade agreement with the EU should also raise confidence in the Ukrainian economy among foreign investors and spur foreign direct investment. In the long run, it has been estimated that Ukraine-EU free trade agreement will result in an increase in welfare and wages in Ukraine.
The deep and comprehensive free trade agreement being offered is by far the smartest answer to Ukraine’s recent challenges. Eliminating subsidies and trade barriers would mean that resources could be used more efficiently, in turn reducing inequality, poverty, social tensions and environmental degradation. It could realistically become the basis for a new economic strategy for Ukraine.
It is definitely an exciting perspective. I would dare to even call it sexy.
Ambassador Jose Manuel Pinto Teixeira is the European Union representative to Ukraine.