Free Trade Area: Around the corner?

Ukraine is but one step from signing a free trade agreement (FTA) with the European Union, although how long taking this step will take is hard to tell. Ukrainian politicians have for a number of years been declaring that they’re about to sign this agreement, only to later say that the negotiating process is deadlocked, then promising it in the nearest future, and then pointing to issues that remain to be agreed upon.

In early October, President Viktor Yanukovych lashed out at the EU proposals. “At the moment, for example, the EU proposes to simultaneously lift tariff and non-tariff restrictions. This would cost our budget 20 percent of our import receipts from the EU,” he declared, addressing the 7th annual YES summit in Yalta. The European Commission said this statement was totally incorrect. “A free trade agreement generates more economic activity by boosting the trade flows between the two partners. Based on experience, it is totally incorrect to say that Ukraine will lose 20 percent of its state revenues; on the contrary, increased economic activity has the potential to promote increased public revenue,” European Commission spokesman John Clancy said in Brussels, on October 4.

As confirmation of his claim, Clancy said that one study from 2007 estimated welfare improvements in Ukraine of more than five percent, and long-term skilled and unskilled wage increases of more than four percent, as direct effects of an extended FTA with Ukraine.

There is another message from the European community. EU Trade Commissioner Karel De Gucht, being in Kyiv on a working visit (October 28), said three to four rounds of talks would suffice, before the next summer recess, for Ukraine and EU to prepare the final version of the free trade agreement. He stressed, however, that signing this agreement wouldn’t mean actually creating this Free Trade Area, that translations and verifications of terms in all versions would take time, and that the agreement would then have to be ratified by the European Parliament. He made it clear a free trade agreement between Ukraine and Europe wasn’t likely to become a reality before 2011, considering the amount of red tape.

What do Ukrainians expect from this free trade agreement with Europe? Is Ukraine prepared to do business using European standards?

DON’T BLAME THE CHICKEN

Ukrainian chickens appear to have the best prospects here. Frozen chickens cost 50-70 percent cheaper than those supplied from anywhere else in Europe. Yurii Kosiuk, MHP (Myronivsky Hliboproduct) chairman of the board, told The Day that accessing the European market is his company’s top priority. After launching new production capacities and being licensed to export their products to Europe, MHP, for instance, exports in 2013-14 are expected to reach 15-20 percent of their total output, and so MHP sees no serious risks in the opening borders with the European Union, considering that the company’s chicken-processing costs are the lowest in Ukraine.

DAIRY DIVERSIFICATION

Ukraine’s dairy businesses are also aware of Russia’s intention of barring access to Europe. They say a free trade agreement is a priority; that the EU will give an impetus to a number of Ukrainian companies, upgrading their production facilities and keeping their products in line with European standards.

Says Natalia Fesun, director of external relations, Shostak City Milk Factory, now part of the Bel Group (France): “An FTA would allow our business, which is part of an international company, to access new markets and supply raw materials to our [company] factories all over Europe. In other words, our business would be able to diversify the risks, considering that cheese exports are mostly aimed at CIS countries.”

She adds that Ukraine’s dairy products must show a better quality to conform to European standards. For the time being, she says, there is little European-grade milk to be found in Ukraine, although “our government is taking measures to improve the situation, planning to institute European dairy raw materials’ quality standards alongside the Ukrainian ones, so our dairy businesses could have an opportunity to adjust to the new, more demanding rules, during the transition period. I hope this effort will prove a success.”

UKRAINE’S RED MEAT: POPULAR WITH THE EU BUT NOT IN UKRAINE

Ukraine appears to have numerous products for European consumers, which is particularly true of beef, a variety of red meat.

“Signing a free trade agreement with the European Union will have only positive consequences for the Ukrainian beef suppliers, considering that Ukraine is the world’s only country where beef sells cheaper than pork,” says Vitalii Zavadsky, director general, Agrosolutions (his limited liability company specializes in beef and supplies Ukraine’s McDonald’s network with steaks). He adds that, ironically, this Ukrainian industry is on the verge of collapse: “Our market is packed with second-rate domestic and imported meat, so there is nowhere to sell first-rate meat because Europe has barred access to the Ukrainian producers of real beef. We have to sell it at the second-rate price and suffer the losses.” “If the borders are opened, Agrosolutions will use the FTA mechanisms, selling beef at lower prices on the domestic market and exporting it to Europe, [where we will be] charging more,” says Zavadsky.

“SWEET” EUROPE

Ukrainian products appear to have learned to bypass European market barriers, here and there. Ukrainian confectioneries are selling their products as European suppliers, using affiliate companies or partnerships in Europe. Roshen is a good example. The company’s head of marketing, Bohdan Zolochevsky, says they have access to the EU market through a confectionery in Klaipeda (Lithuania), which is also part of Roshen. Zolochevsky insists that candies and chocolates imported from Europe, being sold in Ukraine, are no threat to the domestic confectionery industry: “When developing our products, we think several moves ahead, focusing on EU counterparts and their capacities, rather than local competitors.”

Even after lifting customs restrictions Ukraine’s confectionery business will supply quality products to Europe at considerably lower prices. Roshen feels confident on the Ukrainian market. “Our consumers prefer domestic products, as evidenced by the weak positions of the Russian market operators,” says Zolochevsky.

IN VINO VERITAS: TRUTH IN EUROPEAN WINES

Another FTA-related fear is that Ukraine will be flooded by cheap poor-quality products from EU countries, and that this will damage domestic manufacturers and consumers. Wines offer an example to the exact opposite.

Says Serhii Mazur, director general, Vitis Group (a company that specializes in importing exclusive wines): “The Ukrainian alcohol market could be described as having two supply categories, one for vodka consumers — and our vodkas are of good quality, emulating European standards, proving to be competitive on EU markets — and the other one for the so-called Ukrainian wines. Here I can predict total fiasco.”

Mazur explains that, under Ukrainian legislation, both rectified and conventional ethyl alcohol can be used in wine-making, whereas such wines cannot be sold in the EU countries: “Europe may well demand that we label our bottles with wine containing distilled alcohol anything but wine. In Europe, a bottle that contains a mix of water, coloring agent, flavor enhancer, and distilled alcohol would be qualified as a sham product, a fraud, so I’m sure all our fake wines will have to step down from both the European and domestic market. While there are people willing to buy such products with wine labels, after they see bottles with wine-like labels, they’ll stop buying them.” Therefore, Mazur believes, the Ukrainian consumer, even with the smallest buying capacity, will surely benefit from the opening of [Ukrainian and European] frontiers, considering that the FTA will cause the quality of wines — even the cheapest kinds — to increase.

STRINGENT STANDARDS: RELIABLE PROTECTION

Says Dr. Yurii Pakhomov, Ph.D. (Economics), director, Institute of World Economics and International Relations at the National Academy of Sciences of Ukraine: “The European Union is protected by standards which Ukraine isn’t prepared to meet, so one should think twice before expecting unilateral transparency on our side. To reduce these risks to a minimum, it is necessary to act rationally, rather than emotionally, by studying a given situation at greater depth, preparing to sign this agreement after having analyzed every single clause. We must not plunge headlong into the European market. By no means! We must be sure that the EU market will accept Ukrainian products… Otherwise we may find ourselves taking part in another WTO membership scenario, something we wished could have resulted in better production.”

Dr. Pakhomov is echoed by Oleksii Skrypnyk, director general of the Lviv-based Eleks Software (IT): “The European Union has absolutely different business standards and approaches. These are useful for Ukraine, in the long run. The point is that our country isn’t prepared to practice these standards. There is lots of work to be done by our bureaucrats and businessmen, to raise our economic competitive level. Before signing this document, we have to realize, among other things, the big difference between the ways of doing business in Europe and Ukraine.”

On the other hand, the IT sector, according to Skrypnyk, won’t suffer any changes after the FTA, considering that IT is one of few industries where Ukraine is an effective world market operator, “except that there will be a higher level of competition, but this level has been high enough in Ukraine; we know of some IT businesses that are paying their specialists better than in Poland.”

Skrypnyk, versed in European and international business, is sure that European standards and ideal company models are what Ukraine should learn and practice: “An FTA will be a super-positive experience for Ukraine, because there is no alternative; there is no way to avoid European standards, so we have to work to meet them.”

COMMENTARY

Valerii PIATNYTSKY, Deputy Minister of the Economy of Ukraine

“I suggest we assess the final results only, and what we have now is gradual progress. All I can say is that negotiators have already done much more than is still to be done. And this inspires optimism, not euphoria, on the Ukrainian side.”

Are there any other unresolved items in the FTA treaty?

“What remains unresolved is the use of certain geographical names (for example, in wine production) by Ukrainian producers on European markets. Also unanswered is the question of EU countries paying export subsidies to their producers and their impact on the access of Ukrainian goods to European markets. We should also work on the right to intellectual property and access of Ukrainian power-generating companies to European markets.”

What are the prospects of Ukrainian farming products competing on European markets?

“The European side is suggesting the quotation of about 400 tariff lines by which farming products are classified. We suggest that the EU and Ukraine make mutual concessions about certain groups of these goods by immediately reducing the duty on them to zero. For example, Ukrainian sweets are prepared for a ‘zero option.’ Should this proposal be accepted, the number of tariff lines, on the basis of which the EU side is now suggesting quoting, will be essentially reduced. The European side has also suggested a ‘zero option’ for ice-cream.

“Besides, during the next round of talks, to be held on December 6 through 10, 2010, Ukraine will insist that the EU side increase the number of tariff quotas for agricultural products.”

What is your attitude to the opinion of some experts that once the borders have been opened, Ukraine will have to export the highest-quality products to Europe, leaving the worst at home?

“Let us find out what benefit this country and its businesses will derive from the FTA. Firstly, the FTA promotes the effectiveness of the bodies that control the quality and safety of foodstuffs. So after the European rules of the game have been introduced on the Ukrainian market, the level of sanitary and veterinary control, as well as of meeting public hygiene standards, will increase. Let us not forget that European demands for foodstuff quality and safety are much stricter than in Ukraine, so Ukrainian producers will have to make the products of higher quality and, accordingly, supply them to the market. In other words, the vector of free trade with the EU will promote the quality of Ukrainian products and encourage the inflow of investments. Secondly, competing on the European market will encourage Ukrainian businesses to modernize production facilities, for only a few national industries (for example, confectionery) are applying European technologies. Conversely, the automobile sector will hardly be able to compete with European producers as successfully as the ‘sweet sector’ can.

“In addition, the free trade area will make national business look more civilized and European. It will help form a stable, predictable, and transparent business environment, which will allow Ukraine to attract investors, capital, and new technologies. In other words, the FTA will increase the competitiveness of national industries and create new jobs. I would like to note in this connection that a free trade area with the EU was and still is a top priority for Ukraine.

“Naturally, only the strongest will survive, which is the right thing, because the state cannot possibly give financial support to everybody. The FTA agreement is one about the rules of, not barriers to, trade.”