What is the price of integration with the European Union, Single Economic Space, and both structures simultaneously? The conference, International Experience of Regional Forms of Integration, organized jointly by the International Renaissance Foundation and the Humanitarian Technologies Development Fund, discussed the pros and cons of Ukraine’s SES membership, as well as what awaits Ukraine’s industries after it joins the WTO, along with the advisability of creating a free trade zone with the EU, and the specifics of integration processes in both Europe and the post-Soviet space. Virtually all discussion participants agreed that Ukraine’s joining the EU is a long-term prospect, while its WTO accession is the steppingstone that will bring it closer to the EU. As for the SES, according to Volodymyr Shevchenko, director of the Department for Cooperation with CIS Members at the Ministry of the Economy and European Integration, membership in this economic union does not run counter to Ukraine’s European aspirations. Ukraine’s stand in principle is clear: it wants a free trade zone without limitations or restrictions, period. Moreover, according to Shevchenko, the SES is being formed one step at a time and with due account of the EU experience and legislation, along with WTO norms and regulations.
However, most experts and journalists did not hide their quite critical attitude toward the idea of Ukraine’s joining the SES. It will be recalled that a free trade zone between Ukraine and Russia has not yet been created despite all the relevant agreements. The 1995 agreement on a free trade zone within the CIS has not been effected for the simple reason that Russia still has not ratified it. Moreover, Shevchenko has some doubts as to whether fuel prices will be leveled as envisioned by the SES agreement.
Volodymyr Hranovsky, chief of a group of aides to Ukraine’s economy minister, pointed to the fact that the SES documents “in fact outline the framework of a customs union envisioning a single customs, foreign economic, and currency policy,” which could disrupt Ukraine’s negotiations with the WTO. Even members of such a major economic union as NAFTA — the US, Canada, and Mexico — each have their own foreign economic and customs policies. A free trade zone is always a legal formalization of intensive economic relations. Meanwhile, under conditions “when trade relations are violated, and there is no mutual understanding in bilateral economic policy, it is virtually impossible to create a free trade zone, let alone a strong economic union, since issues of a much lower level remain unsolved.” As for the EU prospects, Hranovsky believes that at the present stage for Ukraine they are no more than an ideology and a cultural, historical, and political goal, behind which no specific economic interests are yet visible. Currently, Ukraine’s government has no instruments for EU accession. Thus we must set more realistic goals and rise above political pie in the sky. Ukraine’s WTO accession is precisely such a goal. Yet the benefits from joining an economic union and entering world markets do not absolve the country from further developing its competitive strategy on world markets. Consider for example the situation Mexico is facing in NAFTA. Since Mexico joined this union its workforce has become more expensive, which has forced American and Canadian investors to scale back their operations in Mexico and relocate to countries with cheaper labor. This will inevitably slow down economic growth and reduce foreign investment. Thus any form of integration is only an instrument for further economic progress. According to Hranovsky, just like Mexico, Ukraine has taken a passive stand toward its foreign economic interests. Despite some successful tactical steps, it lacks a long-term strategy. Hranovsky has voiced some concerns over the prospects of trade cooperation with Russia: many enterprises in both countries are components of a single infrastructure. They are practically identical in terms of what they offer. That is, if the SES is created, similar enterprises will compete. Apparently, this integration project will bear fruit only if Ukraine, Kazakhstan, and Belarus become territories for the sale or production of products to be managed from a single center in Moscow. It is unlikely that Ukrainian companies will be able to compete with their Russian counterparts, considering the different sales volumes in Russia and Ukraine. Is this the kind of integration we need?
Not hiding his disposition toward the idea of Ukraine’s European integration, Hryhory Nemyria, director of the Center for European and International Research, reminded listeners that two British applications for EU membership were rejected. And only on the third attempt did it become a full EU member. Meanwhile, we have not yet even applied. Moreover, as he put it, the formal signing of the membership agreement should be supported by the citizens in a referendum. For example, opponents of Norway’s EU integration were a majority in referendums held in the 1970s and 1990s after the signing of the EU membership agreements. On the issue of the expected date of Ukraine’s EU accession, Nemyria cited the example of Turkey, which signed an associate membership agreement in 1963, but was not recognized as a candidate for membership until 1999. Still the EU has not yet begun negotiating Turkey’s accession. Ukraine’s relationship with the EU will largely depend on the outcome of its 2004 presidential elections. In other words, Ukraine, according to Nemyria, is waiting to join the line of prospective EU members.
Returning to the issue of the WTO, Lidiya Melnyk, deputy chief of the Department for Cooperation with the WTO at the Ministry of the Economy, stated that Ukraine, Russia, and Kazakhstan are the last major countries that are yet to become WTO members. Today Ukraine is in fact in the homestretch of joining the WTO, but unsolved issues remain in the sphere of trade regime, along with legislative provision of WTO accession. The process of adapting Ukrainian laws to WTO requirements lags behind the general pace of work on Ukraine’s accession to the WTO. Melnyk has forecast that most probably Ukraine will join the WTO in late 2004 or early 2005. According to her, this should accelerate investment, create more jobs, and increase the assortment of products on the Ukrainian market (which will bring down prices). Ukrainian goods will gain access to world markets, and, accordingly, this will boost the country’s exports. Another major advantage is the fact that Ukraine will figure as a market economy in antidumping investigations. Moreover, Ukrainian producers will get a chance to defend their interests in keeping with the WTO procedure of settling trade disputes. After joining the WTO, Ukraine can easily raise the issue of compensation of its losses resulting from EU enlargement in May.
Simultaneously, Ukraine’s WTO accession poses certain dangers. According to Vitaly Vavryshchuk, expert with the Ukrainian Center for International Integration, one should not disregard the regional component of this problem. Namely, oblasts with export- oriented industries like Donetsk and Dnipropetrovsk will get new opportunities to expand their markets. Meanwhile, WTO membership will adversely affect the economies of oblasts that are domestically oriented. On the whole, the price war will become harsher, while state support for the economy will dwindle. Some national producers risk losing their market segments altogether. Among the advantages Vavryshchuk named the introduction of transparent rules of the game on the domestic market and containment of corrupt lobbying, which will reduce the shadow influence of financial and industrial groups.
Meanwhile, Joakhim Farkhat, manager of US Government Technical Assistance Program cum chief aide for WTO issues, believes that Ukraine’s concerns over the fact that WTO membership will adversely affect certain industries because of cuts in government subsidies are too exaggerated. The WTO allows its members to protect their industries by means of lifting duties on imported materials and canceling the land tax, VAT on imported materials, disbursements to the state innovation fund, and so forth. As for compensatory measures, they can be instituted only after the WTO Secretariat has officially confirmed the adverse influence of subsidies or changes in import duties on the interests of other members.
According to Bernard Spinua, expert with the Ukrainian-European Consultative Center, the major obstacle for Ukraine is inadequate legislation. He assured those present, “If Ukraine meets all conditions (stipulated in the Agreement on Partnership and Cooperation — Ed.), it can’t be refused membership in the EU.” Simultaneously, he said that there was a single political decision in the history of EU enlargement, when Greece was admitted to the EU without fulfilling all the requirements. According to Spinua, “The Greeks joined the EU only because most EU members believed they are very nice people.”
COMMENTARY
Aleksandr LIVSHITS , former Russian finance minister:
“None of the creators of free trade zones such as the EU, NAFTA, and so forth had more comfortable conditions than we do. They had never been a single country, nor did they have long-standing partnerships. I often visit Ukraine where I have many friends, and I know your concerns over the SES. Concern number one is: ‘What about our WTO membership prospects?’ Members of all free trade zones — aside from the one we are attempting to create — are also WTO members, and nothing unfortunate has happened to them. Moreover, they created their free trade zones even before they joined the WTO. Problems might arise, but these will be problems and not insurmountable obstacles.
“Concern number two is: ‘What about integration with the EU?’ This concern is quite justified. You can’t board two trains simultaneously, even if they are heading in the same direction, let alone different directions. Thus, the fact remains that one can’t join two free trade zones simultaneously. Since Ukraine has officially declared its course toward the EU, it is quite obvious — unless it changes its course, which is unlikely — that its membership in a free trade zone with Russia, Belarus, and Kazakhstan will be temporary. And that’s that. Consider an example: Estonia signed a free trade agreement with Ukraine. Now it has announced its intention to recede from this agreement, the reason being its EU accession. Ukraine will not join the EU in a year. In my view, it will not join it in five years. According to the EU, this could happen a decade from now. So why can’t Ukraine share a free trade zone with Russia, Belarus, and Kazakhstan for ten years, and then say: Dear friends, I’ve stayed here too long, I enjoy your company, but it’s time to move on? This is quite realistic: to gain some benefits over these ten years, prepare for EU membership, and leave. Why not?
“Concern number three is: ‘Granted, there will be free trade, Russia will give us cheap fuel, and we’ll get hooked on it. Meanwhile, when we join the EU, fuel prices will go up again, and Ukrainian industries will again become noncompetitive, and so forth.’ It’s none of my business to give advice to a sovereign state that I love, but if I were in charge, I would also offer a solution to this problem. Namely, instead of spending the benefits Ukraine will receive from using cheap Russian fuel, it should create a special reserve fund in the budget and enter the EU fully armed.”
Oleksiy PLOTNYKOV , Ph.D. in economics, professor, and chief of the Department of International Currency and Financial Relations at the Institute of the World Economy and International Relations of the Ukrainian National Academy of Sciences:
“In my view, the SES and EU are two incomparable structures. Of course, if you view the SES in a perspective that doesn’t correspond to reality as, say, an organization that envisions a common economic policy and currency, then contradictions are quite obvious. But today we are not talking about such a model. If you view the SES as simply an opportunity for intensifying trade, flows of capital, services, and workforce among neighboring states, then there are no problems in connection with the fact that Ukraine intends to join the EU in the future. In this case, the SES will only liven up economic processes in neighboring states and doesn’t run counter to Ukraine’s European aspirations. Yet I wouldn’t be too optimistic about the dates of integration with the EU — the fact that Ukraine can join it in five or fifteen years.
“As for the common customs policy within the SES, this question has not been raised yet. Now all attention is focused on creating a free trade zone. The desire to institute a common currency, create a customs union, and transfer leverage to a single national body is a vision of the Russian side, but not one that corresponds with the realities of the SES. Understandably, Ukraine cannot join an association envisioning a common currency, nor can it join a confederation of countries. Meanwhile, a free trade zone with SES members is very beneficial for us. That Ukraine joins the SES doesn’t run counter to our WTO membership prospects. If the WTO had any misgivings about this, they would have been made known to us immediately. The WTO Secretariat has not frozen the process of Ukraine’s integration with the WTO, for which reason I don’t see any problems in this respect. I hope that Ukraine will join the WTO next year.”
Dmytro ZHYRENKO
