Business New Europe: Ukraine fails to gain from EU free trade over six months

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(Business New Europe – bne.eu – October 8, 2014) A report by Ukraine’s Alfa Bank argues that Ukraine has failed to gain from unilateral free trade with the European Union over the first six months. Exports have indeed grown but this has little to do with the free trade zone, says the report.

In April 2014 the EU unilaterally removed or reduced tariff barriers from for Ukraine, opening its huge market to Ukrainian producers, as a prelude to Ukraine’s fully joining the free trade zone when Ukraine removes its trade barriers.

After the EU dropped trade barriers, Ukraine’s imports to the EU surged by 16% on the year, $624m, alone in the second quarter of 2014. The EU’s delegation to Ukraine touted the result as a huge success for Ukraine’s signing up to the European Deep and Comprehensive Free Trade Area, especially as it seems to compensate for an accompanying drop in exports to Russia.

But according to respected Alfa Bank economist Oleksiy Blinov, the growth of exports has little to do with the EU’s removal of trade barriers: Three quarters of this increase can be attributed to one single category of goods – sunflower oil and meal, according to Blinov. This is hardly surprising because Ukraine’s seed crushing plants have worked overtime in 2014 due to a record harvest in oilseed crops in 2013, and the EU has always been an important export market for Ukraine’s oilseed producers, Blinov says.

A significant fraction of the growth in exports to the EU comprises oil and oil products, with large quuntities of oil apparently moved to Lithuania and diesel to Cyprus. These results seem anomalous, since neither of the two tiny countries constitute major fuel markets for Ukraine, which is in fact itself a large importer of oil and oil products. Both Lithuania and Cyprus, on the other hand, have financial sectors geared to helping Ukrainian business evade taxes. “Quite possibly these trade flows took place only paper,” says Blinov.

Other items with rapid growth in the second quarter include metallurgical products, especially cables, supplied to Europe’s car industry, as well as timber. “These diverse categories of goods have one thing in common: There were largely no restrictions on their supply to the European market prior to April’s unilateral opening of the market,” says Blinov.

Most of the growth in Ukrainian exports to the EU are raw materials supplied to EU industries, concludes Blinov, and have never encountered high trade barriers, since such would punish the EU manufacturers. Ukrainian producers have simply been forced to step up raw material exports to the EU due to the collapse in domestic demand. “Ukraine has to exert itself significantly more to benefit from all the possibilities provided by the free trade zone with the EU,” he concludes.

 

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