Following the integration of Central European and Baltic countries into the EU and trade isolation of Ukraine (unless Ukraine joins the WTO), the Ukrainian commodity exports could shrink by at least $816 million, or over $1 billion according to the worst case scenario. A session of the Board of Exporters to be attended by Prime Minister Anatoly Kinakh is slated to open in Ukraine. The session will consider measures to protect domestic markets and expand Ukrainian exports. Participants will also discuss how to improve state policy on exports. Consideration of these problems at the highest state level is especially vital in the wake of the US decision to increase its import duty on steel imported from a number of countries, Ukraine included. The US steps, detrimental to Ukraine’s economy, might lead to the worsening of the country’s foreign trade balance which has been positive for some time and ensured the hryvnia’s stability. Suffice it to state that in January 2002 Ukraine had a $190 million positive trade balance compared to $88.3 million in January 2001. As noted by some experts, protectionism will eventually lead to a trade war, which cannot be won by Ukraine or any other country falling victims to US protectionist measures. Much more efficient would be to work the differences out within the WTO framework, experts recommend. Ukraine, however, is not a member of this organization, and its accession is rather slow. This was the focus of the talk The Day had with Andriy HONCHARUK, First Deputy State Secretary for the Ministry of the Economy and Integration into Europe and head of the Ukrainian delegation at the talks on WTO accession.
For Ukraine the timing of accession to the WTO is as important as it was for the Bolsheviks to begin their October coup: too early today and too late tomorrow. Why is Ukraine faced with such a tough deadline despite its quite good foreign trade indicators?
Entering the WTO is viewed by the Ukrainian president and government as one of the top economic policy priorities and is considered as a systemic factor of the national economy development and the creation of a transparent environment for foreign investors. For Ukraine it is virtually a moment of truth, and the above analogy is justified. The urgency and even vital importance of accession has been basically caused by two external factors. Currently, the WTO is undergoing certain changes, with talks initiated by a group of underdeveloped and developing countries striving to ensure their own economic and trade interests. In response, the leaders of the WTO and its most influential member states have declared the creation of a world trade system that would meet the interests of all members. These multilateral negotiations will mold the trade environment for decades to come, so it is important that Ukraine’s interests be considered. Ukraine, however, has merely an observer status at the talks, while it is essential that it become a full-fledged participant as a WTO member.
Another key factor is the EU expansion due to begin on January 1, 2004, which might have a negative impact on Ukraine’s trade with new EU members. On the other hand, Ukraine’s accession to the WTO could liberalize its trade with the EU, result in lower tariff and non-tariff restrictions, notably, on steel, textiles, and ready-made garments, and clear the way for a free trade agreement between Ukraine and the EU, with an agreement of Ukraine’s associate membership as the next step. Incidentally, Ukraine’s signing on with the Central European Free Trade Association, CEFTA, is contingent on its membership in the WTO. These steps will make it possible to diversify our export flows.
In the course of debates on Ukraine’s accession to the WTO some concern has been voiced that this will put Ukraine among second-rate countries with no access to state-of-the-art technologies. What are your thoughts on this issue?
For any country accession to the WTO entails both advantages and readiness to make certain concessions. As proven by world experience, the former are larger in number. The study carried out by our ministry indicates that Ukraine can sustain fewer losses and receive more advantages, many of them long-term. The experience of the Central and East European states shows that, following their entry in the WTO, direct foreign investment in these countries grew substantially. Bulgaria is a telling example, with investment soaring 3.7 times in the first year after joining the WTO, and another 1.5 times in 1999-2000. After Slovenia became a WTO member, investment increased almost twofold in the first year, stabilizing at this level in the following years. Latvia and Estonia have shown the same stable level of foreign investment in recent years. Given such trends, one can predict that as a result of Ukraine’s accession to the WTO foreign investment in the Ukrainian economy will increase one and a half to two times in the first one or two years. Not necessarily; after Ukraine joins the WTO lower tariff barriers may only affect horizontal investment targeted to meet domestic demand. However, the volume of vertical investment, involving the re-export of ready-made goods, use of state-of-the-art technologies, and imported parts, are expected to grow. This kind of investment prevails in transition economy countries.
Would you agree with the assumption that, once inside the WTO, our domestic market and the purchasing power of Ukrainians will be sufficient to be able to develop in the WTO environment? Given WTO’s agreement to open its embrace for Ukraine today, can we say that our country is prepared for such a step and have turned the corner on most of the related risks? What should be done to step up the preparation?
The terms of joining the WTO for each country are defined by means of complex and often lengthy talks, with every party trying to negotiate a better deal for itself. A common denominator here is the liberalization of foreign trade, which entails cuts of import duties and lower quantitative restrictions. At the same time, any decision on concessions must be cleared with the government, including separate ministries and agencies, something that will ensure that the interests of the industry and service sectors are met.
In negotiating our entry in the WTO, we are opting for the so-called transition periods offering, say, one, two, or five year grace periods for the concessions to take effect, not immediately on accession. This will make it possible to prepare some sensitive industrial sectors for operating in a rather open domestic market. Nonetheless, Ukraine’s tariff proposals at the talks are in line with those of other applicant countries and are reasonably protectionist. As evidenced by the experience of accession to the WTO by other states, latecomers have to make bigger tariff concessions.
A considerable growth of imports, a major risk Ukraine will face once it becomes part of WTO, might result in lower economic growth for industry. However, a survey on Ukraine indicates that WTO membership will not lead to soaring imports because our domestic markets are well protected. Foreign exporters will have to battle against quite sizable shipment expenses, lack of storage and distribution infrastructure in the regions, low purchasing capacity of Ukrainians, and traditional buying preferences, primarily in Ukraine’s rural areas. Still, we must realize the value of competition for economic growth, something that makes companies look for more effective ways of running business, make better goods, cut prices, and improve their marketing policy. Being offered a wider choice of goods and services, Ukrainian consumers stand to gain from increased competition. This is one of the clear advantages open trade and economic systems have over closed ones.
Although many point to the likelihood of a sharp drop in budget revenue due to shortfalls in import duty receipts, Finance Ministry experts say, however, that at present a mere 25% of imports in Ukraine is subject to customs duty, given energy import, customs and tax exemptions, and free trade agreements with other countries. On joining the WTO, all these tax breaks will be canceled, raising the share of taxed imports. The approval of a new Tax Code canceling tax breaks awarded to specific industrial sectors could also prove another step forward. Consequently, one might assert that Ukraine’s accession to the WTO will not lead to shortfalls in budget revenues, promoting instead a transparent and predictable trade environment creating equal terms for all taxpayers, something that will definitely improve the investment climate in this country. Restructuring of the economy, one of the WTO’s preconditions for granting membership, which is under way in Ukraine, is being implemented through more than twenty programs approved by Verkhovna Rada, the president, and government. As a result, export of research-intensive machinery and finished and semi- finished products has increased by 1.6% in 2001. In addition, there will be a grace period for Ukraine to liberalize its trade involving staged decreases of the import duty, in some cases until 2010 for some industrial sectors, notably, the aviation industry. One thing, however, should be borne in mind: the later Ukraine joins the WTO, the shorter the grace period will be.
The Ukrainian group of WTO member countries with whom Ukraine must sort out mutual problems numbers 42 states, with some having given the all-clear for Ukraine’s admission and some not. What stand is taken by other 100 WTO member countries not on the Ukrainian group?
One can say that Ukraine is now in the final stage of joining the WTO. In line with the established procedure, every applicant country must conduct talks with WTO member states which are its major trade partners, belonging to so-called work groups. Thus, although the Ukrainian group is made up of 42 states, bilateral talks are to be held only with 22 countries, with the rest taking part only in multilateral talks.
To date, Ukraine has signed bilateral protocols on access to the markets of goods and services with Mexico, Uruguay, New Zealand, Canada, and South Korea. Similar talks on access to markets with Ecuador, Slovenia, Turkey, and Latvia have been completed. Ukraine has also agreed its tariff concessions with Cuba, Brazil, the EU, Japan, and India. Talks on access to services markets have been completed with Brazil, Ecuador, Cuba, Latvia, and Turkey. In line with the presidential edict, all bilateral negotiations are to be finished by October 2002.
By joining the WTO Ukraine will emerge from the sidelines of the world globalization process. Once in its mainstream, will the speed of our progress be fast enough not to be overpowered by stronger rivals? @TT To use sports terminology, accession to the WTO can be compared with a relegation of a team to a higher league. Of course, one can always bump into a mightier rival there. On the other hand, it is obvious that playing against stronger competitors any team learns from them, raises its class, and eventually increases its chances of success. In addition, by joining the WTO our country will reap numerous economic and foreign trade privileges. In addition to those mentioned, we will get lower tariff and non-tariff restrictions for Ukrainian goods practically on all major developed countries’ markets and most favored nation status on the markets of WTO member states. It means an instantaneous improvement of trade terms with 144 countries, which account for 93% of world trade turnover. Speaking figuratively, the Ukrainian Tavriya car is now having a bad time competing with other models on the world’s highways and typically it has to move in the slow lane. But on joining the WTO we will, most importantly, get protection, that is, the possibility to defend the interests of our producers in line with the WTO’s procedure for settling trade claims and avert the threat of economic and trade isolation of Ukraine. In the first place, our relations with the countries of Eastern Europe and the Baltic states, not merely of Western and Central Europe, are important for us as they account for 30% of our exports. Many countries of the region are already EU associate members and are obliged to adhere to EU legislation in trade by resorting to anti- dumping sanctions, compensatory procedures, and quantitative restrictions on imports from Ukraine.
Membership in the WTO will protect Ukrainian goods from being forced out of the EU markets by goods from Central and Eastern Europe. Otherwise, our steel exports could become the first victim, likely to dwindle by 10-15% or $75-$115 million. With a fair share of certainty one could also predict a drop in ready made textile garments export (except cheap inputs) from the present $400 million to $250 million and in chemical goods exports, with losses estimated at 5-10% or $15-25 million. Simultaneously, accession of the CEFTA countries to the EU and the inevitable mandatory quotas on Ukrainian steel exports will lead to a 50-80% drop in exports worth between $270 and $430 million. As a result, markets in Central and Eastern Europe will be closed to Ukrainian steel. According to the experts, due to higher tariffs to be imposed in line with EU rates, exports of other Ukrainian goods might drop by 5 to 7%. Total estimated losses for Ukrainian exporters to CEFTA countries could reach $330-$510 million, or a third of domestic exports in this area. In total, following the integration of Eastern European and Baltic states in the EU and trade isolation of Ukraine (unless it joins the WTO), Ukraine is likely to lose at least $816 million in exports or over $1 billion under the worst scenario.
Is anything being done, specifically in terms of changing the Budget Code, to find sources of subsidizing these Ukrainian industrial sectors unable to withstand a competition with foreign manufacturers under current conditions?
At present, the state of the Ukrainian economy does not actually make it possible for the government to subsidize certain sectors, although some have been granted considerable tax breaks amounting to almost UAH 9 billion in 2001 alone. Meanwhile, according to the WTO rules, all subsidies are divided into illegal and those which are or are not subject to sanctions. All tax and customs tax breaks are regarded by the WTO as subsidies subject to cancellation. At the same time, write offs of tax arrears of entities, not an illegal subsidy in the WTO’s opinion, could entail protectionist measures, that is, if any damage is inflicted by Ukrainian exports to producers of similar goods in other countries, such countries are entitled to impose restrictions on imports from Ukraine. The following kinds of subsidies not entailing protectionist measures include assistance to poorer regions, subsidies for research or adaptation of companies to new environmental standards, etc. True, WTO rules do not provide for cutting subsidies to farmers, merely setting ceilings for such state assistance. Despite the fact that the government did not subsidize Ukrainian farmers in 2000 and 2001, it is insisting on a $1.37 billion ceiling for itself at the WTO accession talks.
What does the Moldovan experience of joining the WTO indicate? How strongly is Ukraine influenced in its desire to gain WTO membership by the Russian factor?
Since Moldova became a WTO member only on July 26, 2001, no related statistics is available for analysis. Simultaneously, Moldova will probably become a member of the work group on Ukraine’s accession to the WTO and get a leg up on settling its trade claims with Ukraine.
Our major trade and economic partners, Russia and other CIS states, are also on their way to join the WTO, with 2003 declared as a deadline for Russia. If Russia beats Ukraine to WTO membership, it will get an additional effective lever for its economic strategy toward our country. On the contrary, Ukraine will lose its chance to shape its relations with Russia on the basis of trade and economic interests. There has been a certain friction in our trade in the last two years. Since the second half of 2001, Ukrainian exports to Russia have dropped by 25%. A similar tendency prevailed in the first months of 2002. The main reasons for dwindling trade was the implementation by Russia of a new Tax Code and anti-dumping and special investigations launched against Ukrainian imports. However, new trends have surfaced in the relations between both countries due to their desire to join the WTO. For example, a draft free trade agreement abiding by WTO standards and banning any exemptions for any goods from the free trade mode is being prepared now. Yet, the Russians will raise the issue of exemptions, I believe.
