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Access to the EU – at what price?

Ukraine and the EU have been negotiating an Agreement to create a Free Trade Area for almost two years. When completed, the scale of the move could be comparable to Ukraine’s accession to the WTO. UBI looks at what is at stake for Ukraine

On 18 February 2008 the then European Commissioner for Trade, Peter Mandelson, and Ukraine’s President, Victor Yushchenko, formally launched negotiations for a Free Trade Area Agreement between the EU and Ukraine. The launch almost immediately followed the completion of Ukraine’s accession process to the WTO on 5 February 2008 (Ukraine officially became the WTO member 16 May 2008 after 14 years of talks), which was a necessary precondition for the start of the EU-Ukraine FTA negotiation process.

The FTA is envisaged to become a key

part of the future Association Agreement between the EU and Ukraine (under negotiation since March 2007). Despite being unable to offer Kyiv the prospect of membership in the near future, the EU still wants to keep the country involved in the integration process by providing an access to the European markets for goods, capital and services, as well as to give Ukraine an opportunity to integrate economically.

Prior to the latest global economic crisis

the EU was Kyiv’s largest trading partner, consuming almost 30% of all Ukrainian exports (2008). These are traditionally dominated by metals and chemicals, appreciated for their low prices rather than their quality. In return, the EU dominated Ukraine’s imports with its 41% share represented predominantly by machinery and equipment.

Deep and Comprehensive For the EU, an FTA is a standard instrument for cooperation with third countries, but Brussels calls the agreement negotiated with Kyiv “the most ambitious so far” and claims it will give Ukraine “a part of the EU’s internal market”. The area of free trade, subject to a successful conclusion of the Agreement, will see customs duties, taxes and charges, as well as volume restrictions for bilateral trade abolished.

The FTA between Ukraine and the EU

is intended to become the first in a range of “deep and comprehensive” trade agreements,

Philippe Cuisson and Valeriy Piatnytsky

as it will involve not only removing barriers for trade but also providing for harmonisation and approximation of Ukraine’s regulatory and legal environment with that of the EU.

Ukraine already has bilateral agreements

on free trade with almost all the former Soviet republics and some Free Trade Associations, but, as Kyiv admits, they are mostly partnership declarations which have no provisions for such important issues as, for example, state procurement or dispute resolutions. The future FTA Agreement with EU will have all that and much more. The talks on a future FTA are held within working group sessions, alternating between Kyiv and Brussels.

A Test for Business and State Implementing the FTA Agreement could be a rather costly and painful business for Ukraine. The country will need to spend time and money in order to harmonise its legislature in line with numerous European acquis [laws and regulations].

Currently Ukraine is not ready to fully

liberalise its markets for European goods and will be opening its markets for industrial goods gradually by introducing transitional periods. But even with the latter possibly in place, some observers argue that the FTA might simply kill those Ukrainian SMEs who would not be able to withstand competitive pressures coming from European businesses and goods.

The new FTA Agreement with the EU

will become a challenging test both for the Ukrainian government and businesses. The latter seem to be slow in awakening to the new realities which the Agreement with the EU might bring along. However, some of sectors, representing mostly “old and traditional” sectors of Ukraine’s economy, are already calculating possible losses – for heavy industry, car making, and, most of all, agriculture.

Agriculture – a breakthrough force or a stumbling block? In most of the existing FTAs, free trade rules either exclude agricultural produce or apply “a special treatment” in relation to them.

Agriculture is especially important for

Ukraine, as it is in agriculture Kyiv feels it could be most competitive trading with the EU, and it is in this very sector that the country might be able to achieve the GDP growth it needs so badly.

But it is agriculture which seems to be

a major stumbling block at the FTA talks between Kyiv and Brussels. With all the EU’s declarations about the willingness to see Ukraine as a prosperous neighbour at its door-step, no one seems to have any illusions that the Commission would compromise the interests of its own five million farmers (the memories remain fresh regarding last year’s riots by European farmers pouring milk in the streets of Brussels’ diplomatic quarter in protest against a gradual introduction of a free market

October/November 2010 UkraineBusiness insight 23

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