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Policy Papers

  • 21.11.2011

    Quantitative Assessment of Ukraines Regional Integration Options: DCFTA with European Union vs. Customs Union with Russia, Belarus and Kazakhstan

    (Code:PP_05_2011)

    Foreign trade plays a crucial role in Ukraine’s economy, amounting to over 100% of GDP in 2010. Despite this impressive number, there is still much room for expansion of foreign trade, which would in turn lead to higher economic growth and welfare. Thus, Ukraine’ foreign trade policy should pursue the goal of increasing the exchange of goods and services with other countries.

    While there is little discussion on the validity of this goal, the question on how to achieve this goal is much more difficult. In particular, the role of regional trade agreements is being discussed in recent years. Such a discussion is necessary, since the relevant literature as well as international experience shows that regional  trade agreements can lead to more, but also to less foreign trade.

    In the case of Ukraine two main options for regional integration have been discussed recently. One is the establishment of a deep and comprehensive free trade agreement with the EU and the other is joining the customs union  between Russia, Belarus and Kazakhstan. 

    This paper makes an important contribution to this discussion by quantifying the effect of both options in terms of its impact on welfare and other economic variables. Furthermore, we provide information about the model and the data used for calculations, making results transparent and replicable by independent experts.

    The results of our research are straightforward. Joining the customs union with Russia, Belarus and Kazakhstan would reduce welfare in Ukraine by 0.5% in the medium- and by 3.7% in the long-term. This result is driven by increase in tariffs in Ukraine and thus trade diversion. On the other hand, a “simple” FTA with the EU would increase welfare by 1.3% in the medium- and by 4.6% in the  long-term. The deep and comprehensive FTA (“DCFTA”) could boost welfare by 4.3% in the medium-, and by a massive 11.8% in the long-term.

    The interpretation of the results is an easy  task. In order to increase foreign trade and thus the welfare of Ukrainian people, policy makers should go for the conclusion of the DCFTA with the EU. At the same time, joining the customs union with former Soviet republics would cause trade diversion and thus make the Ukrainian population poorer.

    Attached file  (152.4 kb)
    Authors:  Movchan Veronika, г
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