Two years after Ukraine’s WTO accession in May 2008, policy makers have once again to take strategic decisions as to future trade policy of the country. It is hard to overestimate the importance of such decisions, since they do not only affect trade flows, but also the speed of structural reforms, an issue of practically same importance as trade itself.
Two main options are on the menu: the establishment of a far-reaching free trade arrangement with the European Union (“FTA+”) and the participation in a customs union between Russia, Belarus and Kazakhstan, the formation of which was started on January 1, 2010. While many policy makers seem to favour both ideas, in reality these two approaches are not compatible with each other. Thus, there is a need to take a strategic decision regarding Ukraine’s future trade and regional integration policy.
The establishment of a FTA+ wit the EU would clearly be in the economic interest of the country. Ukraine’s exporters would have a better access to a very large and stable market and, at the same time, Ukrainian companies would be able to import advanced capital goods at relatively lower prices, thus improving their competitive position. The adoption of juridical norms and technical standards clearly involves costs for Ukraine, but this would also contribute to a better access both to the EU and to the third countries’ markets, since EU standards are international standards.
The participation of Ukraine in a customs union with Russia and other CIS countries would bring only limited advantages to exporters, since Ukraine already enjoys free trade with the CIS countries. The biggest appeal for Ukraine seems to be cheap energy imports from Russia. But, in our view, cheap energy imports are unlikely in the long-term, despite the recent agreement with Russia on gas prices. Besides, this benefit is of a debatable character, since it would create a higher energy dependency and slow down the modernisation of the country regarding energy efficiency.
Consequently, the strategic decision should be clearly in favour of establishing a FTA+ with the EU. At the same time, Ukraine should maintain good trading relations with Russia and other CIS countries, since they do matter for Ukraine’s economy. If possible, existing bilateral FTA with the CIS countries should be further elaborated to include trade in services and other trade-related topics.
Concerning the FTA+ with the EU, Ukraine should take the following next steps to facilitate negotiations. In trade in goods, more progress in technical regulation and sanitary and phyto-sanitary reforms in line with Ukraine’s WTO commitments is clearly needed. In trade in services, the primary goal would be to continue improving access under the mode 3 of service supply (commercial presence). Finally, intellectual property rights protection improvement is mandatory to facilitate innovations and ensure long-run stable economic development of the country.
