On January1 it was a year since Deep and Comprehensive Free Trade Area between Ukraine and EU came into force. Positive stimuli due to the EU market opening would have to become more tangible for Ukraine, but they have been leveled by the war, assets loss, banking crisis and fall in world prices for raw materials (grain and metals in particular). This has significantly affected Ukrainian export. Professor Olha Melnyk, ScD, Head of the Department of Foreign Trade and Customs of Lviv Polytechnic National University, told PolUkr.net about the consequences of FTA.
– How successful was the first year in FTA for Ukrainian economy?
– There were no dramatic changes in Ukrainian economy this year. However, it is changing its orientation from the countries of the former USSR to EU countries. We can notice the tendency towards European economic integration of Ukrainian economy.
In the last year, the average customs duty on goods from EU has decreased from 4.5% to 1.7%. Although FTA has been operating for only a year, Ukraine obtained duty-free access to EU markets for most of its goods in April 2014. At that time EU repealed customs duty for 94.7% of industrial goods and 83.4% agricultural goods. Since then there have been tariff quotas according to 36 types of goods, which allow us to import to EU only a certain amount of produce, mostly agricultural, and after that duty should be paid. In 2017, the scope of these quotas is planned to be widened according to 8 types of produce. According to the State Statistics Service of Ukraine data, during nine months of 2016 the sale of goods from Ukraine in EU increased by 3.3% and amounted to 35.7% in the structure of Ukrainian export. And Ukraine takes up only approximately 1% in EU export structure.
In EU we mostly sell agricultural produce, food, machine-building goods, timber and paper pulp, consumer goods; not so much of metallurgy and mineral products.
Original export items of Ukraine include snails. The volume of their sales has increased 115 times (in the last three years). Ukraine sells them in EU seven times more than leaf lard.
– How does this all affect Ukraine’s economic integration with EU?
– Because of hryvnia’s devaluation, Ukraine has become attractive to foreign manufacturers. Last year there appeared a lot of enterprises with EU investments, which work on imported raw materials. It means that raw materials are imported to Ukraine to be processed. Then it comes back to EU readymade. These raw materials are imported from EU as “temporary import”. That means they are not taxed. If these imported raw materials come from other countries, they will be taxed.
In Western Ukraine there appeared a number of machine-building enterprises from EU countries which work on imported raw materials. For instance, in 2016 “Fujicura” ltd. opened a cable networks factory for 3, 000 employees in two stages. It produces goods for European manufacturers. Since 2003 a German company “Leoni” has been in business in Nezhuhiv near Stryi. It also produces cables. “Kromberg” company in Lutsk does the same. In all these cases we can speak about cable goods manufactured from imported raw materials. Apparently there is a tendency towards increasing the number of such enterprises in the years to come. The conditions are beneficial for both parties. The level of salaries in Ukraine is very low. In Europe it is impossible to find salaries of 200–300 euros a month. Social growth tension, the standard of living have decreased significantly. That is why, creating new jobs, investing in the economy of Ukraine, building new factories, using modern technologies are positive phenomena.
– How does this change Ukrainian economy?
– EU is becoming a key strategic partner for Ukraine. That’s why we should reorient to EU standards as soon as possible. The biggest costs connected with this concern machine-building enterprises. It is difficult for them to meet EU technical regulations. They are seeking ways to come to EU markets. For example, they are working on imported raw materials, or look for their place in unique niches.
Ukrainian economy is slowly changing. If you look at the food industry, new regulations have already been introduced because of FTA. These regulations are for higher standards of quality and safety. These standards will make the quality of our goods which are sold not only in EU but in Ukraine as well. Every day dozens of inconspicuous steps are taken towards European economic integration of Ukraine. It happens on different levels, beginning from the national one and ending with the local one. These are quality changes.
As far as the export of our goods and services in EU (Ukraine sells goods for 85% services – for 15%. – PolUkr.net) is concerned, the regime of autonomous trade preferences for Ukrainian goods was operating from April 2014 till December 2015. From January1 2016, FTA provided even more favourable conditions for entering EU market. The first year was spent adjusting, informing and studying. 2015–2016 became more active periods in terms of co-operating with counterparties from EU.
On the background of the war with Russia and operating FTA, during nine months of 2016 the import of goods from EU into Ukraine increased by 4,9% and constituted 44% in the structure of import purchases, and the import share from RF decreased to 12,5%. As far as the goods structure of import is concerned, we mostly buy gas, medicine, cars (excise tax on them has been reduced according to the changes in the Taxation code of Ukraine directed to stimulate the development of second-hand vehicles. – PolUkr.net), oil products, insulated wires, which are to be recycled in Ukraine, tractors. Despite the devaluation of hryvnia, which led to EU goods becoming more expensive for Ukrainians, the volume of import from EU is increasing.
– What has changed in the work of Ukrainian Customs? How far has this barrier in the trade with EU been overcome?
– In Chapter 5 of the Association Agreement between Ukraine and EU customs issues to promote trade are defined. Most tasks for customs bodies outlined there have been completed. There has been developed and realized a mechanism for customs bodies to issue free certificates of origin EUR.1, which provide grounds for applying trade preferences to Ukrainian goods within FTA; the institute of an approved exporter has been implemented; Ukrainian customs have joined the concept of integrated border management; since August 2016 a mechanism of a “single window” has been operating. However, unfortunately, it is difficult to implement it fully because there should be made changes to a number of laws and acts.
There are problems with the checkpoints with EU countries. They are not enough in Ukraine. As far as the quality standards are concerned, they do not meet EU regulations. Since the prospects of Ukraine becoming a member of EU are very distant, we should built up checkpoints which could provide a more civilized crossing of the border for cargo carrying vehicles as well as for private citizens. It is common knowledge that more and more often there are huge queues on the border. It is connected with the fact that in the last three years the flow of passengers and cargo from EU has increased by almost 50%, and the throughput of checkpoints does not meet the demand.
Of course, many problems in the work of customs bodies remain unsolved. They include corruption, inadequate qualification of certain employees, organizational institutional problems. However, the public can affect their solving because there are public councils acting within the customs. So more influence and pressure from the society are necessary for quality changes.
– The latest screaming example of corruption in the customs, if I’m not mistaken, is the so called “nut mafia”?
– It should be said that this example proves corruption not only in the customs but also in other government institutions. As far as export of walnut is concerned, it is realized through certain companies. They have exclusive access to obtaining a license. These companies buy walnuts from households for peanuts, and sometimes even take them illegally. Evidently, certain government structures benefit from this. It is a very profitable business. The export of walnut is registered according to an understated price, and then it is sold in EU 3–7 times more expensive, depending on the level of processing.
– FTA between Ukraine and EU is deep and comprehensive. It should affect all economy of Ukraine, and not only trade with EU…
– FTA provides for decreasing duty, tariff and non-tariff regulation, harmonization of Ukrainian laws with the laws of EU countries on technical regulation, in the sphere of food safety, customs services, state purchases, protecting intellectual property rights, competition policy… The system of state purchases ProZorro has become one of the most successful reforms in Ukrainian economy. A complete reloading of the system of certification and standardization of Ukrainian products is taking place.
More than 14, 000 ГОСТ standards, which existed in Soviet times, have been cancelled. Technical regulations which meet EU standards and norms have been resolved instead. Ukraine has already ensured the increase of the percentage of international and European standards among the national ones up to 60%.
The laboratory basis is changing completely. Now it has to comply with EU standards. Sanitary and phytosanitary measures are taken. FTA will not allow our economy to return to the Soviet norms and standards. Things happening now in Ukraine lay the foundation for progressive movement for the next 10-20 years. This is a platform, which we use for our further development.
– How difficult is it for Ukrainian small and medium manufacturer to obtain a certificate to trade in EU?
–This problem has been relevant for years. Conferences are held regularly, where manufacturers ask how to obtain certificates of regularity. The problem begins with translating EU norms, because there are thousands of standards for thousands of types of products. However, there is a resource on European Commission website - «Еxport helpdesk». This is an information database for potential exporters to EU. You should type in relevant data and you will receive information about all measures of tariff and non-tariff regulation, which refer to your products. There are also indicated safety and technical regulations…
In the past we knew that our products meet state norms (ДСТУ). Now manufacturers are taking on responsibility for the quality of their products, and indicate which standard system they comply with. It a manufacturer sells products in EU, and they don’t meet the norms indicted on the label, his/her further co-operation with partners in EU will suffer. Business is now responsible for maintaining the quality of products.
– In which countries and what exactly does Ukraine sell?
– Key buyers of Ukrainian goods are Poland and Italy. They have approximately 15% of export each. 10% goes to Germany, 8% – to Spain, 7% – to Hungary. The key export goods in EU are sunflower oil, furniture, timber, consumer goods, insulated wires. We have traditional partners in EU – particularly thanks to Ukrainian diaspora in these countries. We have the best trade with those countries where there is a significant Ukrainian diaspora, close cultural links.
As an example, Lviv Polytechnic students study according to the program of double diplomas in S. Staszic Mining and Metallurgical Academy in Krakow. Nearly a hundred of them haven’t returned to Ukraine. After completing their studies, they found employment in Poland as foreign trade managers. Now they work for Polish enterprises which co-operate with Ukrainian business, set up logistics, seek partners, possibilities to sell Polish products in Ukrainian market and vice versa. There are even cases when our students found their own business in Poland.
This co-operation is developed by other Ukrainian higher educational institutions. Ukrainian Ministry of Education supports such programs of double diplomas because students then have an opportunity to compare experience and realia. This will help improve higher education in Ukraine.
– What do we sell the most in Poland? And what do we buy?
– We mostly sell agricultural products, food, timber, mineral products, fertilizers, consumer goods. Clothes made in Ukraine using imported raw materials are sold in Poland. You can often see world brands made in our country in Polish supermarkets. It indicated specifically – «Made in Ukraine». We buy consumer goods, food, building materials, machine-building products in Poland.
– If I am, for instance, a Ukrainian manufacturer of furniture or juice, what do I have to do – step by step – to start selling my goods in Poland or Italy?
– In the last two years people have become more informed about export to EU. There appeared several practical guidebooks for exporters, for example, - “Basic guidebook to internationalize your business and enter EU markets” by Oleh Miroshnychenko, published with the support from the International Fund “Revival”. There you can find information sources, requirements, procedures, mechanisms for entering EU market. Also there is a wonderful guidebook “Successful export to EU” published by Lviv Chamber of Commerce and Industry. It is considered to be a practical guidebook for small and medium enterprises. Ukrainian Ministry of Economic Development and Trade informs people about export to EU. Its website includes special blocks on EU and FTA export. Apart from this, there is also a Council for promoting export to EU within the Ministry. Its aim is to help national manufacturers to enter European markets. It constantly holds exhibitions and fairs in EU. They organize promotion of national manufacturers, where partners from European countries are invited. Also there are several grant projects to inform Ukrainian businessmen. So those interested can find this information.
– What kind of products is it profitable for Ukrainian businessmen to manufacture in order to become successful in European markets in the next few years?
– Agricultural products remain primary for our manufacturers. Although EU set tariff quotas which we use up all the time, there are still quotas for a number of products. For instance, in 2014–2015, Ukraine did not have access to European market of milk and dairy products. Today we have it. Now our dairy products manufacturers should comply with EU regulations.
The enterprises working on imported raw materials are successful. There should be progress in this field in the next few years. For example, “Fujicura” CEOs are intending to create jobs for 6,000 people in the next year or two. In the long term prospects, they plan to expand to employ 15,000–18,000 people. There are also good prospects for consumer goods, which are traditionally profitable for manufacturing and selling in EU.
It is positive that the percentage of Ukrainian products with high value added is constantly growing. Key task for Ukrainian manufacturers is to manufacture as many as possible products with bigger value added, and sell fewer raw materials. For instance, we already sell sunflower oil, not sunflower seeds. This is the result of the fact that in the 1990s Ukraine imposed additional duty on sunflower export. Thus oil industry started to develop. We should continue doing the same.