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The essentials between EU treaty and Customs Union

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Sept. 19, 2013, 10:25 p.m. | Op-ed — by Marcin Swiecicki

Marcin Swiecik
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The European Union is the largest market in the world, about 10 times as large as the Russian, Belarusian and Kazakhstani markets combined. Under the Deep and Comprehensive Free Trade Agreement, more than 95 percent of trade is to be liberalized. The experience of central European countries proves that open access to the EU market gives enormous stimuli to small as well as big industries. Only in 1995-2003, after an Association Treaty was signed, but before entering the EU, Poland’s exports to the EU increased 2.6 times.

Besides liberalization of trade, the free trade agreement aims to deepen and comprehensively harmonize economic legislation. The mechanism for bringing legislation in-line with the EU’s, such as Twinning programs, are designed to assist Ukraine to modernize its economic legislation. The chief EU negotiator Philippe Cuisson compared the legal status of relations between the EU and Ukraine after the implementation of the free trade agreement with that of Norway or Switzerland.

The free trade agreement will provide Ukrainian companies access to EU service markets and public procurement. The public sector comprises one-third of the EU economy. It means that Ukrainian companies can compete on equal footing in construction works, transport services, supplies of goods and services for central and local governments in the entire EU. If not as the main contractor, they can qualify as a valuable subcontractor in the beginning as it happened to many companies in new member countries.

When Ukraine changes its laws, administrative procedures and restructures some of its institutions so that they mirror the rules and regulations of the 28 EU member states, the EU will treat Ukrainian institutions as their own and will accept their authority and judgement. It means that a product approved in Ukraine will be accepted without any further checks in the EU.

Ukraine will become much more attractive to foreign investors, making Ukrainian industry competitive. The same happened to Polish, the Baltic states’, Romanian and Bulgarian industries. Free trade between Ukraine and the EU will open vast opportunities for deep integration including highly specialized intra-industrial integration. Ukraine is not as rich in natural resources as Russia. Therefore, Ukraine has to focus on exporting processed goods. Russia is not able to bring to Ukraine competitive technologies, access to global distribution networks, etc. Russia itself is a negligible exporter of processed goods (except for weapons). Of course, the free trade agreement will not suffice to bring investors to Ukraine. Combating corruption, illegal company takeovers, enforcing reliable protection of property rights, fostering an independent judiciary, and other measures are also needed. 

The free trade agreement is based on World Trade Organization rules whereas the Kremlin-led Custom Union is not since Belarus and Kazakhstan are not WTO members. It means that any arbitrary decisions and trade disputes within the Custom Union will not be subject to an internationally recognized dispute resolution mechanism. Disputes do happen quite often. 

Under the free trade agreement, only the agricultural sector will have restrictions between the EU and Ukraine. But the free trade agreement will be reviewed after five years. Restrictions in agricultural trade might be lifted then to benefit both sides, whereas the Customs Union treaty also implies exceptions, perhaps even more.

The free trade agreement can bring a lot of investment and new jobs, but at the same time some will be lost due to the opening of the Ukrainian market and increased competition. One should remember, however,  that the essence of this transformation will be that Ukraine will be gaining highly productive and competitive jobs on a global scale whereas it will lose the least competitive,  low productive jobs that engage a lot of energy, raw materials and labor but bring little wellbeing. It is worth noting that the Ukrainian market is already relatively open for competition but is not attractive for foreign investors under present conditions.

Under the free trade agreement, Ukrainian companies will also secure measures that protect against unfair competition, such as, dumping, illegal subsidies, etc.

Having the free trade agreement, Ukraine can keep FTA agreements with other countries in force, including Russia, Belarus and Kazakhstan. Rules of origin protect unlawful flight of EU goods into other markets through Ukraine as in all other free trade agreements across the world. Therefore, the free trade agreement provides no justification for any “sanctions” against Ukraine on the side of Russia, Belarus or any other country with which Ukraine has a free trade agreement. Of course, it would be good for Ukraine to upgrade the free trade agreement with Russia to a WTO status agreement in order to base it on recognized international rules, including a dispute resolution mechanism, protection against arbitrary decisions etc. Problems in trade happen between the best of friends. The EU has many trade disputes with the U.S. but in civilized way, under WTO rules.

Joining the custom union with Russia, Belarus and Kazakhstan would make the free trade agreement with the EU technically next to impossible. Ukraine, if it joins the Customs Union practically cannot have a free trade agreement with a third party like the EU. 

Joining the Customs Union with countries that are not members of the WTO like Belarus and Kazakhstan would also require Ukraine to re-negotiate an accession agreement with the WTO that took 15 years to conclude. Free trade agreements and a customs union with countries that are not WTO members are deprived of that body’s arbitration should a trade dispute arise. To summarize: a free trade agreement with any country or group of countries, even with non-WTO members, is compatible with a free trade agreement with the EU, the Customs Union is not.

Successful implementation of a free trade agreement will open the way to negotiations on joining the EU, the Schengen Area, etc. It is possible within one generation. When Poland negotiated an Association Agreement with the EU in 1991, the EU did not agree to put a membership prospective in it as joint statement, only as Poland’s wish to join. Only in 1994 did the EU agree to negotiate accession, which took place finally in 2004.  The same sequence transpired with other central European states, the Baltic states and now with the Western Balkans. There is no doubt that after successfully implementing the free trade agreement and the rest of the Association Agreement, that membership will be possible for Ukraine. In 1990 gross domestic product per capita in Poland, the Baltic states, Bulgaria and Ukraine were more or less on the same level. Today GDP in Ukraine is about one-third of their level. Gradual integration with the EU gave enormous advantages to these countries that have chosen this path of modernization. It is possible also for Ukraine.

Marcin Swiecicki is a member of Poland’s parliament, and the former minister of foreign economic relations, and former director of the UNDP Blue Ribbon Analytical and Advisory Center in Kyiv. 

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