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The Free Trade Area between Ukraine and EU: prerequisites and contradictions

1. Introduction.

There are several general and specific preconditions in order to establish Free trade area between Ukraine and EU. Among general is an internationalization and globalization of modern economy, common geoeconomical space, development of global chains in production, innovation, corporate and value spheres. Specific factors related first of al to Ukrainian economy. Ukraine is a member of the main world financial and trade institutions: IMF, World Bank, EBRD, WTO. Economy was transformed from plan to market in terms of privatization of property rights, liberalization, creating of market institutions, banking and legislative system etc. Open character the economy – more than 50 % of GDP is realized on the foreign market. On the other hand, Ukraine has a rather positive experience of collaboration with EU ( Agreement of Programme the Partnership and Cooperation (PPC - 1994); Wider Europe – Neighbourhood: A New Framework for Relations with our Eastern and Southern Neighbours (2004); Eastern Partnership (2009). On the base of previous cooperation at present the main project is a preparing the Agreement of Association including Free Trade Area.

In spite of above mentioned there are some contradictions in process of negotiations. It has to underline the political constrain because in Ukraine now is a “precapitalist” economy, oligarchic capitalism; institutional, commercial, spiritual constrain. In one”s turn there are turbulences events in EU in particular in Euro Zone. It needs to take into account of the both sides.Начало формы

It is worth emphasizing that we are not dealing only with a free trade area, but with a part of an association agreement between Ukraine and the EU as a precondition for real bringing Ukraine closer to European structures and further accession to the EU following the example of other countries of Central- and South- Eastern Europe.

^ 2. Socio-economic situation in Ukraine. So what is the socio-economic situation in Ukraine the day before free trade area agreement signing? After a sharp GDP fall in 2009 on more than 15% due to the global financial crisis and domestic economic imbalances, we observe the economic growth in 2010 and 2011 - respectively 5.9% and 8.7% in industry and 3,2% in agriculture by 6 months of 2011. The negative balance of foreign trade of the first half of 2011 was 4625.9 million U.S $.

According to the aggregates indicators the place of Ukraine in the world economy today is as following. According to the United Nations report 2010 "Human Development Index", Ukraine's GDP per capita at purchasing power parity was U.S. $ 6535, that is on 39% lower than the average world level. For this indicator Ukraine has moved from 51 place in 1993 to 89-th. In the world competitiveness rate Ukraine takes the 57th position, according to the terms of business activity indicator (international rating Doing Business 2010) it takes 142 place among 183 countries. According to the World Bank estimations, the Ukrainian informal sector is approximately 50% of official GDP, which creates real problems handling the economy, dramatically reduces the institutional capacity of the country. However, Ukrainian economic and intellectual potential form important conditions for developing an optimistic scenario of the future free trade area agreement. Firstly, the country has comparative, competitive and reweald advantages in a number of industries, particularly in space and military-industrial complexes, aircraft and shipbuilding, agriculture, in electric production, in transit (the national transit coefficient is one of the largest in Europe and is equal 3.75). Secondly, the level of Ukrainian education, in particular higher one, is at the 16 place, and the level of general education of the population in Ukraine belongs to the first ten countries. Thirdly, natural resources, favorable geographic location contribute to a mutually beneficial trade with the EU and the deepening of integration processes. Thus, according to the National Academy of Sciences, the national wealth of Ukraine is 3099, 98 billion dollars, including mineral-raw and fuel-energy resources - 813, 76 billion dollars, land - 792, 5 billion dollars. These are the main socio-economic parameters on the eve of the signing of an agreement between Ukraine and the EU.

^ 3. The main content of the Free trade area (FTA). It is worth recalling that the negotiations on an Association Agreement and enhanced free trade area between Ukraine and the EU began in February 2008. From the outset it was stressed that this is not a standard (typical) agreement but a comprehensive, enhanced FTA or "FTA +", which is a part of an association agreement and an important step to bring Ukraine into the EU. It includes 15 spheres of cooperation in trade and the actions connected with it.

The aim of a free trade area between Ukraine and the EU is forming a common economic space of Ukraine and the EU in the framework of gradual economic integration into the European single market through gradual implementation of main four freedoms - free movement of goods, services, capital and labor. The FTA agreement is the natural continuation of previous agreements between the EU and Ukraine, it is based on the experience of joint programs and projects implementation, taking also into account the adaptation of Ukraine's trade regime with WTO requirements and standards. The Free Trade Area agreement includes the following:

- full liberalization of trade in goods, including industrial products (energy, agricultural products, fishery products, etc.), that means a free and unhindered access to relevant markets;

- non-tariff restrictions reducing in Ukraine for manufacturing trade through harmonization and / or mutual recognition of the EU technical standards conformity assessment;

- non-tariff barriers reducing in agricultural trade in the framework of cooperation in sanitary and phytosanitary measures;

- a significant liberalization of service markets;

- ensuring an effective regulation of foreign direct investment promotion and protection;

- freedom of companys’ establishment;

- introduction of measures to gradually ensure the capital and payments free movement;

- ensure transparency and predictability of Ukrainian internal market regulation according to the European and international standards;

- convergence of Ukrainian internal policy to the generally accepted rules of international and European practice, particularly in the field of competition, corporate governance, intellectual property rights, government purchasing, etc.;

- provision of bilateral customs cooperation, including customs procedures simplification and improving the customs work efficiency in the context of trade facilitation;

- usage of effective dispute settlement mechanism.

Free trade regime is a part of a comprehensive and deep free trade area in the format "FTA +" with a focus on regulatory cooperation.
       Taken into consideration that an integral part of deep and comprehensive FTA will be gradual adaptation of Ukrainian legislation and practice into line with EU norms and regulations, the process of implementing international and European standards and tools in the relevant areas of cooperation becomes the task of special importance.

^ 4. Ukrainian obligations in the WTO. An important step that accelerates the process of preparing the Free Trade Area agreement draft, has become Ukraine's accession to the WTO and bringing its trade regime in accordance with the requirements and standards of the leading world trade international organization. Currently, three main types of import duties are used in Ukraine: preferential - for goods imported from countries that are members of customs unions or special customs zones together with Ukraine, as well as under the special preferential customs regime defined by international treaties and agreements member of which Ukraine is; privileged rates of import duties applicable to goods originating from countries or economic unions covered by the most favourable regime in Ukraine; full import tariffs are specified in the contract with the WTO and are used for the remainder of the goods. According to the Tariffs Schedule for Ukraine, the import duty rates were brought into connection levels, transition periods were established for 320 tariff lines (about 3% of the total commodity nomenclature of Ukraine). These include certain types of machinery (vehicles), metals, plastics, furniture, some varieties of meat, fish, seeds and alcohol. After the transition period (in 2013) the average customs duty rate will be equal 5.1%, including for agricultural products - 10.1%, for manufactured goods - 4.8%. Zero import duty rates are set for 10% of agricultural production tariff lines and on more than one third of industrial products tariff lines. Export duty rates are also changed; quantitative restrictions, subsidies, technical regulations and standards, sanitary and phytosanitary measures are under condition. Investment regime, trade related intellectual property rights, trade in services and government purchasing are also driven in line with WTO requirements. These agreements within the WTO framework and previous cooperation experience between Ukraine and the EU provide sufficient preconditions for the completion of negotiations and signing the FTA agreement.

^ 5. Dynamics and structure of foreign trade in Ukraine. The Ukrainian foreign trade, unlike other spheres of the economy, has developed steadily over the past two decades, although the dynamic growth was disturbed due to the world financial crisis of 1997-1998 and 2008-2009. In 2009 the exports of goods and services decreased by 37, 4% and import - by 45%, including from the EU countries - by 45.8% and 44.6% respectively. This confirmes the deep Ukrainian external dependence on world markets. The main markets for Ukraine are CIS countries (approximately 39% of turnover) and the European Union (29%); the main share in Ukrainian export form goods, that cover about 80%, and services, respectively - 20%.

                     Table 1. The structure of foreign trade (1996 - 2009)






Export

Import

1996

2000

2005

2009

1996

2000

2005

2009

Total amount (bn US $), % of total

14.4

14.6

34.2

39.7

17.6

14.0

36.1

45.4

Food and
live animals

14.8

5.6

9.0

15.2

6.1

4.6

5.3

8.2

Beverage and tobacco products

1.3

0.7

1.4

1.6

1.4

1.3

1.3

1.4

Non-food raw materials

9.1

12.7

7.2

9.6

4.7

5.5

4.0

3.4

Mineral fuels

4.5

5.6

9.8

5.4

47.8

43.0

29.6



32.2

Oils of animal and
vegetable origin

1.3

1.6

1.7

4.4

0.2

0.3

0.5

0.7

Chemicals
industry products

12.7

9.0

9.0

6.2

6.7

8.6

11.7

15.3

Industrial
production

36.9

45.1

43.6

36.1

11.5

12.8

14.8

13.7

Machinery and transport equipment

14.6

12.9

13.8

16.6

17.1

17.6

26.5

18.5

Mixed industrial
goods

3.6

4.5

3.7

4.0

3.7

3.5

5.5

5.8

Other products

1.2

2.4

0.8

0.9

0.9

2.7

1.0

0.8


         Source: The trade policies impact on human development. - Kyiv, 2011, p. 41 (ukr.).

As it is seen from the table, the products of industrial production, machinery and transport equipment, livestock and crop production, chemical industry products, raw materials dominate in Ukraine's exports. Almost a third of imports form mineral fuels, close to parity is the exchange of machinery and transport equipment, mixed manufactured goods. At the same time the industrial goods, chemical products trade and others is asymmetric. In the export to the EU countries more than half (58.4%) falls on low-tech products (raw materials, chemistry, metallurgy), agricultural and food industry accounts 17.6%, machinery - 11.7%. The leading articles of Ukrainian imports from the EU are machinery (42.1%), chemicals (21.3%), agricultural and food industry (8.9%). In the EU imports the share of lower-tech products is equal 35.1% compared to 76.6% from CIS countries imports.

^ 6. Quantitative and qualitative parameters of the FTA. As it was noted, after the agreement entry into force, the customs duties will reset for more than 93% of national industrial and 80% of agricultural production; for the rest of Ukrainian exports to the EU will be used preferential tariffs, particularly for a certain amount of pork, poultry meat, grain, etc. For other goods that are sensitive to both sides, a transitional period of 2 to 10 years for the gradual completed tariff withdrawal or reduction will be introduced. Still there are some controversial issues connected with the accession to the EU energy market (although Ukraine is a member of the European Energy Community), transportation and usage by Ukrainian beverage and liqueur production producers the geographical names, which will require a long transition period for re-branding. Ukrainian party is not satisfied with the quotas size on grain exports, livestock and poultry.

There exist also certain conceptual differences in the approaches to the trade relations regulating mechanisms as well as during preparation of the deal and after its adoption.

7. Conclusions. Calculations undertaken by independent international centers before free trade area talks indicates a positive effect for Ukraine. This influence will manifest itself in accession to the EU market, that is 13 times greater than Ukraine's domestic market, which results in growth of the welfare for approximately 5% and increase wages for 4%. This is not a very impressive performance due to some reasons. Firstly, after Ukraine accession to the WTO, tariffs on trade with the EU are quite low. Secondly, the calculations include mostly static effects, that are connected with trade creation or trade diversion, changing terms of trade, the distribution of income, reducing prices due to increased competition. Dynamic effects will occur as a result of increasing total production efficiency, structural changes, implementation of technical-technological and institutional innovation, economic growth, increased employment, etc. Free trade area, the transition to European standards of business conducting should enhance the confidence of foreign investors and stimulate the inflow of foreign investment. On the other hand, Ukrainian enterprises have “to play” according to the European rules, have to be ready to face foreign competition, to increase the technical and technological level and quality of its products.

Among the common problems that will slow down the process of fully free trade area establishment and receiving positive results for both parties are as following. For Ukraine: improperly developed economy with uncomplited reformation period, which without fundamental political and economic modernization has no future. The main shortcoming of the current Ukrainian economy is the institutional failure, which manifests itself at all levels of the economic system. For the EU: the lack of common economic and social policy, monetary and fiscal policy; unilateral European social model financing, the growth of public debt; high unemployment level, especially among young people; branched administrative (bureaucratic) burden both in many countries and in the European Commission as well, the Euro Zone instability that endangers the European integration prospects.

In spite of such difficult conditions the signing an association agreement including a Free Trade Area with Ukraine could provide some impetus to our European integration strategy, at least in the framework "Wider Europe-Neighbourhood" and "Eastern Partnership".

Anton Filipenko, Doctor of Economics, Professor of Taras Shevchenko Kyiv national university.


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