Both the European Union's free-trade agreement and Russia's Customs Union have serious potential economic shortcomings for Ukraine, particulary in agriculture.
The debate that has raged in recent months over whether Ukraine should sign a free-trade agreement with the European Union or enter a Russia-led Customs Union has been focused on geopolitical questions rather than economic pros and cons.
Both deals, however, have serious shortcomings on this front. This is particularly true for agriculture, a prime area where Ukraine has a competitive advantage.
Years of negotiations with the EU officially came to an end in October last year, although Ukrainian President Viktor Yanukovych’s refusal to free opposition leaders has since put the deal on ice.
Yet resolving these issues and implementing the treaty would not necessarily make life much easier for Ukrainian businesses in the agricultural sector, which accounts for roughly a fifth of total exports but only 10 percent of exports to the EU.
The free-trade agreement would replace tariffs by quotas on most Ukrainian imports. These, however, remain restrictive for key exports like vegetables, grain, eggs, and meat.
“They are not very large compared to Ukraine’s potential,” said Konstantin Fastovets, an agriculture analyst at Renaissance Capital.
Moreover, the EU retains much more leeway when it comes to export subsidies and domestic support for agriculture. According to a report by the Warsaw-based network of economic think tanks CASE, the conditions to which Ukraine agreed upon acceding to the World Trade Organization in 2008 are stricter than those of the EU and its budget for supporting domestic players is much smaller.
In addition to this, some 3,000 EU products benefit from so-called geographical indications, for which the EU wants protection, the report notes. This means local champagnes and cognacs could lose their names and have to be re-branded.
Ukraine could possibly register its own regional products, though past experience has not favored East European countries. Thus, Czech rum lost its name and is now called tuzemak, while vodka was not recognized as being linked to any particular region or production method, allowing French companies who make it from banana skins and molasses to cash in.
This does not mean the Customs Union would be better. For one, joining the trade bloc would limit Ukraine’s ability to set external tariffs independently and would cause a major headache in relations with the World Trade Organization and EU.
According to a United Nations report, one solution would be to reduce the Customs Union tariffs to a level corresponding to Ukraine’s commitments to the WTO. Such a move is unlikely, however, and would still prohibit Ukraine from entering into a free-trade deal with the EU.
Instead, the agreement would have to be set up with the whole Customs Union, in turn requiring Belarus and Kazakhstan to join the WTO, in line with EU rules.
Even if these problems were resolved it is unclear what benefits Ukrainian agro companies would get. Custom Union members produce similar crops and have similar economic structures, meaning they are more competitive than complementary.
Moreover, the Customs Union is highly inconsistent in its harmonization of customs policy. Kazakhstan, for example, will have some 400 unique tariffs in place until 2015. Worse still, quotas set by members themselves apply to a series of agricultural goods.
“That’s the main problem with the Customs Union” Fastovets said. “There is always a benefit from getting access to other countries […] The question is what deal you can get.”
Kyiv Post staff writer Jakub Parusinski can be reached at [email protected].
