A Vision for Ukraine in the World Economy

Presentation of David G. Tarr New Economic School

February 27, 2014

• Jointly authored paper with Jesper Jensen and Bernard Hoekman

• Was a background paper for the presentation of Pascal Lamy at the Yalta annual meeting of Yalta European Strategy (YES), September 21, 2013.

• Financial support from the YES is gratefully acknowledged. The authors retain full responsibility for the views

The Ukrainian choice of Eurasian Customs Union versus the European Union

• In 2010, the Russian Federation, Belarus and Kazakhstan formed the Eurasian Customs Union (ECU) and have invited Ukraine to become a member. Ukraine has Observer status

• Ukraine negotiated, but did not ratify, a Deep and Comprehensive Free Trade Agreement (DCFTA) with the European Union (EU).

• Summer of 2013: severe delays at the border crossing points between Ukraine and Russia this summer that led to some riots

• In 2013, Russian officials have argued Ukraine should reject the DCFTA—saying it will impose large costs and even saying the DCFTA is tantamount to Ukrainian suicide

• Many Ukrainians accuse Russia of intentionally causing these delays to apply pressure

Yanukovich government refusal and demonstrations

• The EU required as a condition of the DCFTA that Ukraine release former Prime Minister Yulia Tymoshenko from prison.

• In November 2013, the Ukrainian Parliament voted not to release Tymeshenko for medical attention in Germany.

• Two hours later, Ukraine notified the EU that it would not sign the DCFTA at the European Union-Eastern Partnership Summit in Vilnius at the end of November 2013.

• Many Ukrainians saw the refusal to sign the DCFTA as Ukrainian capitulation to Russian pressure.

• Well known demonstrations started in Kiev shortly thereafter, spread to other cites in Ukraine and eventually led to the fall of the Yanukovich government.

A Trade Vision for Ukraine

I come back to the ECU and DCFTA.But first it would be best to consider these agreements in light of an overarching vision of how Ukraine can use integration into the global economy to achieve its national development and growth objectives.I ask what is a good trade vision for the new Ukrainian government.

Need a Global Perspective and lower trade costs

• The experience of the “development miracle” countries and other countries that have been most successful in using trade to help sustain high rates of economic growth suggests that Ukraine should consider a trade strategy that is global in scope and work to reduce trade costs.

Table 1: Gross domestic product per capita based on purchasing-power-parity (PPP) (Current US dollars).

Country 1982 1992 2002 2012* 2012/1982 2012/1992

Chile 3,012 6,185 10,440 18,419 6.1 3.0

Hong Kong 8,540 20,093 28,342 51,494 6.0 2.6

Korea 3,012 9,436 18,859 32,272 10.7 3.4

Mauritius 2,107 5,116 8,858 15,592 7.4 3.0

Singapore 8,792 19,882 34,726 60,410 6.9 3.0

Taiwan 4,425 11,892 21,591 38,749 8.8 3.3

Ukraine n/a 5,164 4,007 7,374 n/a 1.4

United States 14,015 24,700 36,950 49,922 3.6 2.0

Notes: (*) IMF estimate.

Source: International Monetary Fund, World Economic Outlook Database, April 2013http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx

Year Ratios

Table 2: Ranking on the Global Competitiveness Index and Several of its Components, rank out of 144 Countries in 2012-2013.

Overall

Global Competitiveness

IndexInstitutions Infrastructure

Goods market

efficiency

Labor market efficiency

Financial market

development

Chile 33 28 45 30 34 28

Hong Kong 9 10 1 2 3 1

Korea 19 62 9 29 73 71

Mauritius 54 39 54 27 70 35

Singapore 2 1 2 1 2 2

Taiwan 13 26 17 8 22 19

Ukraine 73 132 65 117 62 114

United States 7 41 14 23 6 16Source: World Economic Forum, The Global Competitiveness Report 2012–2013http://www.weforum.org/issues/competitiveness-0/gci2012-data-platform/

Detailed components

Table 3: Rankings of Selected Countries from the Doing Business Database for 2013: Overall Ease of Doing Business, Trading Across Borders and its Components

Ease of Doing

Business

Rank

Overall Rank on Trading

Across Borders

Documents to export (number)

Time to export (days)

Cost to export per container

(US$)

Documents to import (number)

Time to import (days)

Cost to import per container

(US$)

Chile 37 48 6 15 980 6 12 965

Hong Kong 2 2 4 5 575 4 5 565

Korea 8 3 3 7 665 3 7 695

Mauritius 19 15 5 10 660 6 10 695

Singapore 1 1 4 5 456 4 4 439

Taiwan 16 23 6 10 655 6 10 720

Ukraine 137 145 6 30 1,865 8 33 2,155

United States 4 22 4 6 1,090 5 5 1,315

Source: World Bank Doing Business 2013 database.http://www.doingbusiness.org/

Trading Across Borders

A Trade Strategy

• 1. Avoid the anti-export bias of a high tariff—all the development miracle countries did this, using different approaches

• The Ukrainian average MFN tariff is about 6 Percent. The tariffs are not high—low anti-export bias.

• Ukraine should continue to use low tariffs and negotiate free trade agreements with other countries

A Trade Strategy2. Improve the Business Climate and

lower trade costs

• Ukraine ranks poorly on measures of the business climate and trade facilitation.

A Trade Strategy 3. Supply Chain Councils to Expand Participation in International Supply

Chains• Competitiveness in todays global economy

requires participation in global supply chains.• Global supply chains allow specialization in

components so the sub-sector is not as dependent on a variety of efficient domestic input suppliers

A Trade Strategy 3. Supply Chain Councils to Expand Participation in International Supply

Chains• Many factors affect trade and operating costs which

determine the ability to participate in supply chains.• E.g., certification and conformity assessments for

standards; competition in services markets; border management efficiency; import tariffs; transport logistics.

• Many or most of these issues involve legitimate regulatory functions so reducing the inefficiency is complicated.

• Supply Chain councils are the best way to address the complicated interrelated issues.

•

Supply Chain Councils

• A supply chain council is a public-private partnership that involves the active engagement of the business community, as well as economic policy officials and regulators that focuses on the supply chain as a whole in a sector or area of trade.

• It cuts across regulatory silos to address the key bottlenecks.

Regional Trade Agreements

• Trade with the ECU is 33% of exports and 40% of imports

• Trade with the EU is 25% of exports and 31% of imports

• Trade with both the ECU and the EU is important for Ukraine and Ukraine should endeavor to have good trade relations with both of these trade blocks

Eurasian Customs Union1. Develop Deeper Aspects of Trade

• Schiff and Winters: Biggest gains come from “deep” aspects of preferential trade agreements. Some possibilities for deeper trade between Ukraine and the ECU through intergovernmental agreements are the following:

• 1. Improve border crossing and processing; PARTLY• 2. provide foreign investors in services with market access and national

treatment rights; YES• 3. agreement on certification and conformity assessment procedures on

standards—use mutual recognition agreements; NEGATIVE IMPACT• 4. mutual recognition agreements on qualifications of professionals; NO• 5. no antidumping actions against each other; NO• 6. bilateral labor agreements on temporary movement of labor; NO• 7. government procurement agreement. YES

Eurasian Customs Union1. Develop Deeper Aspects of Trade

• There are other possibilities• Specific negotiation priorities would be

determined by supply chain councils.• In many of the examples, an agreement would

bring the ECU and Ukraine closer than the EU and Ukraine, even if Ukraine and the EU agree to the DCFTA

2. ECU: Develop Intergovernmental Supply Chain Councils

• Trade agreements and what should be negotiated should be determined by intergovernmental supply chain councils, with private sector representatives well represented on all sides.

• Businessmen from the different countries have many common interests

• Recommendations could be implemented by governments and negotiated in trade agreements, knowing there is support from business on all sides

Incompatibility for Ukraine of both membership in the ECU and the DCFTA with the EU

• Membership in the ECU requires Ukraine impose the common external tariff of the ECU, including exemptions for free trade agreements

• The ECU does not offer tariff free access to the EU

• The DCFTA offers tariff free access to the EU in Ukraine

• Therefore, the DCFTA is inconsistent with Ukraine as a full member of the ECU

ECU membership for Ukraine would violate its WTO commitments

• The ECU common external MFN tariff is 10 percent in 2013.

• Ukraine’s average bound WTO tariff is about 6 percent.

• Ukraine would have to raise tariffs and violate its WTO commitments

• WTO members could retaliate by imposing tariffs on key exports of Ukraine, like steel and agriculture products.

Estimates of losses to Ukraine from applying the ECU common external tariff

• See Movchan and Giucci (2011).• Similar results found for Kazakhstan by Jensen

and Tarr (2011).

What is Russia’s objective for Ukraine and the ECU?

Is it expanded trade and closer trade relations? If so, I explained a variety of mechanisms to pursue. These strategies are Win-Win, leading to benefits for both Ukraine and the three members of the ECU. Is it to impose the common external tariff on Ukraine to protect Russian industry at the expense of Ukrainian consumers paying for high priced or lower quality goods from Russia? This is a one-sided gain strategy that is not sustainable.

EU DCFTA with Ukraine—what was negotiated

• Tariff free regime between EU and Ukraine for 98 percent of goods in value.

• Ukraine will have an independent external tariff for third countries. (A Free Trade Agreement).

• Ukraine to adopt the EU acquis—15 chapters• Movchan and Giucci (2011) estimate benefits• But some aspects of the acquis could present

more costs than benefits.

Sanitary and Phyto-Sanitary Measures (SPS)

• Need to move away from GOST standards—GOST standards are non-tariff barriers, since they regulate trade in areas without a health or safety concern and are not science based. Plus, they are outdated and do not adequately protect health and safety.

• But full and immediate application of EU SPS standards for the Ukrainian market (as opposed to exports) will force large parts of the Ukrainian industry out of business and raise food costs.

EU SPS chapter is anti-development

• The DCFTAs require Ukraine, Georgia, Moldova and Armenia to adopt EU SPS standards for their domestic markets, not just exports to the EU.

• Messerlin et al. (2011)—will cause food prices in Georgia to rise by 90 percent.

• But domestic demand is not there yet for higher quality and higher priced food.

• Experience with the Eastern Expansion of the EU—major blow to the food sectors in Estonia, Latvia and Lithuania (World Bank, 2007).

• US Free Trade Agreements in Latin America allow the developing countries to use their own SPS standards in their home markets.

• Need a differentiated, case by case, product by product approach, adopt higher standards when the costs of adjustment are low and the demand is there e.g., Latin America and the US

• DCFTA calls SPS harmonization a “process.” Possibly “wiggle room.”

Should Ukraine sign the DCFTA• Agriculture--Very little improved market access.• SPS is a strong negative• Government Procurement—Ukraine announced it will sign

the WTO GPA agreement- meaning the benefits are plurilateral and independent of the DCFTA.

• EU will continue to apply antidumping actions against Ukraine

• Nonetheless, improved market access in goods and positive institutional development

• The DCFTA probably conveys benefits. • The EU has not linked the DCFTA to EU membership; but

many Ukrainians see it as a step toward the goal of EU membership

Conclusions

• Ukraine should continue to use low tariffs and negotiate free trade agreements with other countries

• Ukraine needs to lower trade costs—a key priority.

• Supply chain councils should be developed to reduce trade costs.

Ukraine and the ECU

• Membership in the ECU blocks Ukraine from pursuing a needed global trade strategy

• Ukraine could propose the creation of a number of “supply chain councils” organized around the major export sectors for both Ukraine and the ECU countries.

• Ukraine could propose a multifaceted approach to “deep” trade cooperation with Russia and the ECU. This could bring its trade cooperation with the ECU even closer than with the EU after the DCFTA and benefit both Ukraine and the ECU members.

Russia’s objectives for Ukraine and the ECU?

Russia can pursue closer trade relations with Ukraine through a variety of mechanisms that are Win-Win for all parties.

Pressuring Ukraine to join the ECU to impose the common external tariff to protect Russian industry at the expense of Ukrainian consumers paying for high priced or lower quality goods from Russia is not sustainable.