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    May 17, 2016

    The Eurodream ends, the EU nightmare begins: "Free trade" zone destroying Ukraine's economy

    May 17, 2016 - 
    Yurasumy, PolitRussia - 
    Translated by J. Arnoldski 

    The free trade zone between Ukraine and EU is already in full force. Of course, there are still some relief measures for the Ukrainian side from the point of view of observing standards within the country and some other transitional points, but the first results of Kiev’s rash decision are already clearly visible: exports have declined sharply (to 21.7%)  even in comparison to the failure-filled year of 2015; the return to a trade balance deficit amidst a threefold devaluation of the national currency; and the impoverishment of the population. The country’s leading economists are saying that this is only the beginning of the difficult economic path to Europe which few can traverse (if anyone tries). Meanwhile, Ukrainian politicians continue to step on the same rake in preparing some kind of anti-Ukrainian free trade zone with Turkey and Canada, or for anyone on that matter, even the most onerous partners, just so long as they’re not Russia. 

    Free trade and quotas

    When Ukrainians were told about free trade with Europe in 2013, they were always told that, following the signing of the free trade association with the EU, the door would be opened to European markets for Ukrainian goods, albeit not for all goods, but 95% for sure. 

    Surely, Ukraine can sell as much whalebone and walrus meat to Europe as it sees fit, but the problem is that Ukraine doesn’t produce them. The remaining 5% of goods includes “by pure chance” all the things that Ukraine can produce not only for itself, but also for export. This 5% means either a quota, or creates conditions for Ukraine which a priori do not allow Ukrainian products to compete only on the European market, but only on the domestic one. Want examples? Here you go…


    Traditionally, Ukraine has already been one of the leading suppliers of wheat, corn, and barley to the world market. And it is on precisely these groups of commodities that Europe has imposed a quota. But Europe has not only imposed a quota. It has strongly defended this limit despite Kiev’s pleas to increase it. For example, in 2016 Kiev received a quota for corn and its processed products at 400,000 tons, and wheat and its processed products at 950,000, with barley and its by-products at 25,000 tons. 

    This amounts respectively to 2.5%, 6.1%, and 6.5% of exports of these crops for the 2014/2015 marketing year. Moreover, it should be understood that Ukraine exported grain to Europe even before the signing of the free-trade agreement with the European Union.

    As a consequence, the quota for maize has been selected for the first two weeks of the current year, that is, to the end of the holidays, while for wheat are allocated the first two months of winter. Barley has not yet been selected. 

    The main exports of Ukrainian wheat, and especially barley, are to be realized before the New Year. That is, last year’s entire stock of barley is to be sold. This is caused by the fact that the quota has not yet been selected, but rest assured that it will not be sold, as few who desire to sell their barley to Europe are allowed to.

    The second illustrative example is beef. It would seem that Ukraine, having a good forage base and a cheap labor force, could easily overwhelm Europe’s cheap meat. But this will never happen because European farmers have significant subsidies which allow them to dramatically reduce the cost of their products. 

    On the contrary, Poland, abiding by the rules of free trade with Ukraine, is now capable of overwhelming Ukrainian cheap meat. Today, in Kiev’s market, “elite” beef tenderloin costs more than 200 gryvnia. In Poland, it costs two times less (around 15 zloty or 100 gryvnia). Why is this so?

    It’s all quite simple: the Polish farmer receives a subsidy of 250-300 euros from the government for one hectare of cultivated land, which dramatically reduces the cost of the fodder base of animal husbandry. But the European “friends” who especially pushed the free-trade agreement with Ukraine will ban subsidies for Ukrainian agricultural producers. Thus, Ukrainians should not expect any sharp growth of beef production in the country, but rather the displacement of Ukrainian with Polish meat which, under similar parameters of quality, will still be significantly cheaper than Ukrainian.

    On this note, the head of the Ukrainian State Service on Issues of Food Safety and Consumer Production, Vladimir Lapa, and the leader of the Head Veterinarian Inspectorate of Poland, Krzysztof Jazdzewski, recently signed a veterinarian certificate which will allow Polish manufacturers to sell their meat in Ukraine. 

    In the free trade agreement, no kind of quotas were registered for Poland, and this means that we are awaiting cheap Polish meat and the destruction of an entire industry in Ukraine followed by a rise in the cost of meat. No matter how many times this turns up, Kiev still steps on the same rake. And all of this because someone really hastily wanted to sign up for the economic bondage of the country (to spite the frostbitten ears of Russia), and call this a “breakthrough to Europe.” 

    The free-trade zone with the EU - not just a right, but an obligation

    Ukrainian producers recently discovered yet another interesting feature of the international documents. By signing them, Ukraine gains not only rights, but also assumes certain obligations. Such agreements do not involve any changes to the rules of the game as is the case with Ukrainian scrap metal.

    Ukrainian metallurgies are one of the main suppliers of foreign currency in the country, and they also make up a significant part of Ukraine’s GDP and employee hundreds of thousands of people (directly or indirectly). But metallurgists are now faced with problems. The point is not even that part of production in Donbass has been lost, but the fact that even the remaining part of Ukrainian enterprises need scrap metal to work on technology. Earlier, Ukraine didn’t have such a problem with raw materials. Moreover, a significant part of it could be safely exported. 

    But in 2015, Ukrainian metallurgy began to experience a shortage of scrap metal. Turkish “partners” proposed much better conditions to Ukrainian metal collectors, so the priority went abroad. On April 21st, 2016, Ukrainian metallurgists, who have a fairly strong lobby in the Ukrainian parliament, could have pushed for the adoption of the special law which would have introduces additional export taxes for scrap metal exports. This immediately caused tension between the WTO and Ukraine, but Kiev was ready for this. While the proceedings of the WTO dragged on, a new tax was temporarily introduced. Kiev simply expected to “skip” and raise fees at the same time while the proceedings were ongoing, only for the WTO to later remove them following the delivery of its verdict. 

    But Kiev was not ready for what came next, since the EU supported the WTO’s demands. In a special statement, EU officials informed their newly-minted Eastern partners:

    “The EU considers that Ukraine's increasing duties on its exports of metal scrap would represent a trade restrictive measure contradicting both the spirit and the letter of the multilateral and bilateral commitments the country has undertaken. In particular, under the Deep and Comprehensive Free Trade Area (DCFTA) with the European Union, Ukraine has committed itself not to introduce new customs duties on exports and to dismantling existing ones over a transitional period.” 

    The EU warned that if Ukraine went through with this, it would no longer be able to count on Europe for further aid. In the end, on Friday, May 13th, Poroshenko was compelled to impose a veto on the adopted law. 

    Ukrainian industrialists and officials have full recognized that although the agreement with the EU must be fulfilled, unconditional friendship with the EU, when they beg them for forgiveness and are made concessions, is already in the past. In the near future, this decision will affect the output of Ukrainian metal production and lead to financial losses as well as the elimination of jobs. No one even wants to talk about what is going to happen with Ukrainian machine-building, which has already lost tens of thousands of jobs, with the end far from near. For the second year in a row, Ukraine has set an anti-record. According to the recently released statistics on 2015 trade, the country continues to confidently lose their domestic market:

    In 2014, for the first time Ukraine sold less domestic gods than it imported. In 2015, once again the share of imports increased, and it is likely that this same pattern will go on, this being so even despite the triple devaluation of the gryvnia over the course of the new government’s reign. The Ukrainian market has gradually come to be controlled by imports. The more time goes on, the more the Ukrainian government feels not the pluses, but the minuses of European integration. At the beginning of the year, precisely for the benefit of the free-trade agreement with the EU, Ukraine reversed incremental import duties on imported goods, which before generated 15-20 billion gryvnia yearly for the state budget. But at the end of 2015, European officials announced that Ukraine had already received all the money provided for it by the agreements, and that Ukraine should no longer rely on handouts from the EU. Now the minuses are really being revealed in the form of lost business revenues, budget pitfalls, and lost jobs. 

    But that’s not all. The so-called “grace period” will also end very soon, and Ukrainian producers will have to adopt new European standards. According to calculations, this  will require as a minimum 100 billion gryvnia over the next few years.

    In short, the euphoria of European integration has passed, and now weekday work has begun. The lump of problems which seemed small and distant in 2013, has come all the closer and grown into a big tumor. But this is not stopping the “reformers.” 

    Even the scandal of the free trade zone between Turkey and Ukraine has not been able to be escaped, as the Turkish “brothers” have decides that “friendship is friendship, but business is business.” The same problems arose for the Ukrainian delegation concerning the same agreement with Canada. The free trade zone was agreed upon, but once again without considering any Ukrainian interests. I would like to ask these wonderful reformers: “Why do you need these ephemeral ‘victories’ which with a probability of 100% will merely turn into more ‘defeats’ in the near future?” 

    The pitiful result

    In general, the calculations of European Union officials have turned out to be correct. Stronger and better-defended European business is beginning to penetrate Ukrainian markets and, the more it does, the more Ukrainian ones are pushed out. The quotas, standards, bans, and other innovations of European integration imposed upon Ukrainian business have already chipped away at its revenue, and further losses will only continue. The step-by-step appearance of European companies working on raw materials on Ukraine territory (such as the automobile industry) which the Ukrainian authorities love to be proud of, first of all do not compensate for even a tenth of the jobs lost and, secondly, in their work schemes do not provide any revenue for the Ukrainian budget. 

    The conclusion is sad but nothing new. Based on existing results and trends, the destruction of Ukrainian manufacturing will be the main outcome of the free trade zone between Ukraine and the EU. You’ve finally made it! 

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