This step could eventually backfire, leading to zero or even negative economic results for the country. Furthermore, the benefits to the protected car industry are likely to be short lived.
In early 2013 Ukraine increased car import duties, which World Trade Organization members have decried as being unjustified and implemented with procedural violations. Ukraine is now facing sanctions from the European Union, Japan, Russia, South Korea and Turkey in retaliation. Turkey has already imposed duties on Ukraine’s walnut exports.
There are two possible outcomes. First, Ukraine would “trade” protection of its car sector for worse terms of trade for a number of exporting sectors. This would likely adversely impact the food industry (food products are sensitive export items that importing countries specifically like to target). It is very possible that the damage exporters would face from those sanctions could end up being higher than benefits to the car producers. And yes, domestic consumers are those who pay the price for more expensive imports.
The second outcome is that Ukraine would withdraw from its decision to increase the duties. Against this is the car industry, which enjoys a strong lobby and has support across all political parties. However, if Ukraine signs the free trade agreement with the EU in November (along with the Association Agreement), such special treatment of the domestic car producers would have to stop.
So, does the car industry deserve the political and economic price Ukraine might have to pay? It is true that the sector has been hit hard by the economic crisis: car production declined by 25 percent in 2012 and by about 50 percent in the first half of 2013. But, contrary to what the government claims, the car industry is hardly economically significant: in fact, its share in total industrial output and employment is less than 1 percent. Of course, the government is to fight for each job, you have to ask yourself why jobs in the car sector are more important than those, say, in the food sector. One could argue that Ukraine’s major car companies should not get any government attention at all, as they have little chances in competing with major car producers, be it globally or domestically.
Now if the business environment improves, the domestic car industry does have prospects. It could attract investments, integrate into the European supply chain and the country could see growth of intra-industry trade. International investors have long been eying Ukraine to start producing car components, given the country’s proximity to major car plants in the EU. However, after unexpected policy changes in the early 2000s (among other things, tax privileges were abolished), those few investors who came to the country have since left.
Eventually, it is sound domestic policy and good business environment that enable a country to compete internationally. It goes without saying that it is better to attract private investments to create new jobs and generate trade flows rather than waste public money protecting uncompetitive industries. Yet, there is always a place for effective state aid policy, which does not distort competition and is not favoring specific companies. Ukraine state aid policy is not effective at the moment, but it better be if the country wants to shield regions and employees hit by economic recession (which is still ongoing) and not be hit by trade sanctions.
Ukraine should change its strategy in pursuing economic interests in the WTO: instead of blocking imports, Kyiv should promote its exports. Though the WTO is indeed notorious for its inefficiency, it remains the best platform for small countries to settle trade disputes. This is something that Kyiv should not neglect, given persistent protectionist policies in other countries, particularly recurring problems that Ukrainian products face in Russia and Customs Union. Unfortunately, the country has already taken a number of steps that have damaged its image in the organization: Reuters, the news agency, has quoted diplomats calling Ukraine’s behavior in the WTO over the past few years as “aggressive and eccentric.” Ukraine desperately needs to win back the support of WTO members to make sure it is not left alone on the battlefield in the future.
Ildar Gazizullin is the director of the economic policy and business program at the Kyiv-based Institute for Public Policy.
