You're reading: Ukrainian exporters irked by EU trade quotas

A month after a free trade regime came into effect between Ukraine and the European Union, there are still rumblings of discontent over conditions.

On Jan. 1, the free-trade zone envisaged by the agreement started functioning for both Ukraine and European exporters. Prior to that, for 18 months, a regime of customs-free exports functioned only for Ukrainian exporters.

Now as the free trade agreement is fully in force, most tariffs between Ukraine and the EU will be gradually declining over the next 10 years.

In the meantime, the Ukrainian producers can trade duty-free with the 28-country bloc only within quotas of 36 commodity groups, most of which are set to increase by 25-50 percent over the next 5 years.

However, some Ukrainian farmers argue that the quotas were set too low and the dutyfree trade volumes are exhausted in first weeks of January.

This happened with this year’s corn quota, which is 400,000 tons. Exporters have also used up one third of the duty-free wheat quota of 295,400 tons.

Business is unhappy with the volume of the quotas, said Taras Vysotskiy, CEO Association Ukrainian Club of Agrarian Business. Nevertheless, export will continue beyond the limited volume but the revenue margin will be lower.

“Quotas are political agreements,” he Vysotskiy the Kyiv Post. “Business…would like to export on the base of market factors of demand and supply.”

He thinks those export licenses which run out very fast should be reconsidered first.

“If we exhausted the EU-set quotas in one month that means that we are able to export 12 times more per year,” Vysotskiy said.

Yuriy Kosyuk, the Ukrainian biggest exporter of chicken and owner of agricultural holding Myronivsky Hliboprodukt, counts quotas for Ukrainian export as extremely small. He said that Europe protects its market, “so, I think that the free-trade zone, promoted very strongly today, is an illusion for Ukraine.”

His enterprise exports 250,000 tons of chicken meat annually, so the duty free quota of 16,000 is too small for Kosyuk. “No markets opening has taken place,” the Ukrainian agriculture tycoon Kosyuk said. “Europe says about free-trade zone with Ukraine, while signing a bunch of exceptions and limitations for export of Ukrainian goods. That’s why it is a free-trade zone in one direction, towards Ukraine.”

For Myronivsky Hliboprodukt, Europe is not the biggest market, because according to data sent to the Kyiv Post, only 22 percent of the company’s exports went to EU countries, while 68 percent were split between the Middle East and North Africa.

At the same time, in 2015 Ukraine used only 75 percent of its quotas for various kinds of chicken meat to the EU, according to Oleg Protsenko, a project manager of agricultural reforms at the National Reforms Council.

Statistics also show that it is too early for the Ukrainian producers to complain about drawbacks of the association agreement as they have not applied its full potential yet. They used only 30 percent of all their export quotas to the EU in 2015.

The nation’s exporters exhausted the quotas for corn, wheat, processed tomatoes, apple and grape juice, honey, sugar and oats, while 70% of the approved customs-free volume of malt and poultry was sold.

Goods, like Ukrainian pork and dairy products, did not have the required certification in 2015 to tap into the EU market. Producers also ignored starch (9.6 percent of quota used), garlic (8.8 percent), sweetcorn (0.4 percent), and mushrooms (0 percent), which had no certification issues.

The quota regime makes unprofitable trade with the EU only in three commodity groups. “Beyond the set quota trade is not cost-efficient because the tariff is too high,” said Veronika Movchan from Institute for Economic Research and Policy Consulting.

A research conducted by the institute shows that this category includes processed tomatoes, wheat and poultry.

But at the same time there are many goods which the Ukrainian producers use up and continue exporting paying tariff. An example of this is honey, apple and grape juice.

Movchan said that some quotas were untouched because “they are commodities which are successfully sold around the year so producers are looking for the markets which can offer most beneficial deal.” An example of this is corn.

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Quotas for the Ukrainian dairy exporters are also very low comparing with their production capacity. The EU set a quota at 1,500 ton. In first 10 months of 2015, they sold abroad 22,000 tons of powder milk.

Though 10 Ukrainian dairy producers have received certificates to sell goods to the EU in 2016, it does not mean that they are going to fully use their export licenses, Bohdan Shapoval, expert in export issues told the Kyiv Post.

“The EU market is very conservative and occupied,” he said. “There are pretty good and competitive products from France, Germany and Poland on the market.”

Ukraine can make deliveries episodically to understand the European market but occupying a niche on it is “long and complicated process and needs marketing.”

Though export to the 28 states of the EU might be barred for Ukraine by quotas and competitors, the mere permission to send products to the Union opens over 40 other markets across the world.

As it “proves that we have reached the quality level at which we can freely export out dairy products to a number of other countries,” Shapoval said.

Ukraine also protects its market

Europe is protecting its market but in its turn, Ukraine also set quotas on European imports in three commodity groups, namely poultry, pork and sugar. While the EU allowed Ukraine to deliver up to 20,000 tons of pork annually, the union, in turn, may export only 10,000 tons of the same type of meat to Ukraine. For poultry, the EU can again export only up to 10,000 tons, while the quota for Ukrainian exports of this meat to the EU is double that amount. The sugar in the only agricultural product, for which the quotas for export (20,000 tons) from Ukraine is lower than for import from the EU territory (30,000 tons).

Apart from the placing quota limits Ukraine has also established transition periods for downing tariffs on a number of goods and it also does not eliminate some of its import duties to zero.

“The talks on any agreements are a search for compromises and balance,” Movchan said. “I think Ukraine has fully used the potential of negotiations for protecting its market.”

Movchan says that if Kyiv wants further liberalization of the free trade zone it will have to offer something in return for the European producers.

During the first 11 months of 2015, the value of Ukrainian exports to the EU dropped by 24.7 percent compared to the same period of 2014, because while the tonnage has hardly decreased, the prices of commodities – which constitute the core Ukrainian exports – have declined dramatically. Amid the key losers are semi-finished steel products, corn, and ore.

“We’re working with all our trade partners to find ways to increase our exports to EU countries and compensate for the loss of the Russian market,” Natalia Mykolska, Ukraine’s deputy economy minister, said during a briefing in Kyiv.