"Ukraine Report 2003," Number 24
Ukraine Market Reform Group
Kyiv, Ukraine; Washington, D.C.
FRIDAY, April 4, 2003

EXECUTIVE SUMMARY

Ukraine has proceeded far in its postcommunist economic transformation. In recent years, its exports have surged soundly, and they are now driving the country's economic growth. Access to foreign export markets has become a key question for Ukraine's economic future. Trade policy has gained such importance for Ukraine's aspiration's for accelerated growth and reaching its Millenium Development Goals that it should be Ukraine's predominant economic policy and international policy priority. This is an attempt at a formulation of a strategy for foreign trade policy for Ukraine.

The main tenet of Ukraine's trade policy must be to gain early accession to the World Trade Organization (WTO). A realistic but ambitious target is 2004. That requires the Ukrainian government to concentrate single-mindedly on resolving all the outstanding issues. The primary focus should be to accelerate the composition and adoption of a final report on Ukraine's trade regime and adopt all the requisite legislation for entry into the WTO.

Second, remaining bilateral issues need to be resolved to complete the seven remaining bilateral negotiations, notably with the US and Moldova. Third, Ukraine should formulate a clear policy on agricultural subsidies and reach agreement with its WTO partners. For Ukraine, swift entry into the WTO is far more important than the exact conditions of accession, because its membership of the WTO is the only plausible basis of its trade policy. The WTO should be seen as a universal tool for all trade policy rather than an end in itself.

As soon as Ukraine has joined the WTO, it should try to improve its market access to key markets by concluding free trade agreements with the other eleven Commonwealth of Independent States (CIS) countries, the European Union (EU), the US and other key countries.

Ukraine has concluded and ratified a free trade agreement with all the CIS countries. This could serve as a basis for its future trade relations with these states, but this free trade agreement should be based on WTO rules and standards. Ukraine has no reason to waste time on discussing a customs union with any CIS countries, because such an agreement cannot be implemented, and a customs regime designed for countries with very different economic structures will not be beneficial to Ukraine's economic interest. The idea of a currency union in the CIS appears absurd given the devastating failure of the recent currency union and the absence of any advantageous preconditions. Any coordination with CIS countries in Ukraine's accession to the WTO could only complicate and delay it for years. When both Russia and Ukraine have become members of the WTO, they should be able to resolve their many bilateral trade disputes more effectively. To Ukraine, Russia's current discrimination against it in gas pricing is unacceptable and reconcilable with a free trade regime. Russia's export tariffs on natural gas must be abolished or waived, and Russian Gazprom's price discrimination against Ukraine needs to be alleviated.

Ukraine is subject to extreme trade discrimination from the EU. It is not recognized as a market economy, it is not member of the WTO, and it has no free trade agreement with the EU, while its Partnership and Cooperation Agreement (PCA) with the EU has turned out to be almost empty. It suffers badly, having little trade with the EU and enjoying comparative advantages in products, whose importation the EU resists. Ukraine should focus on requesting a comprehensive free trade agreement with the EU rather than a complex and nebulous agreement on a Common European Economic Area. First, however, it must become a member of the WTO.

Ukraine has approximately the same problems on the US market as on the EU market, though the US is less important for its trade since it is more distant. Also with the US, Ukraine should aim at a comprehensive free trade agreement, which requires that it first become a member of the WTO.

Ukraine needs to persuade the EU and the US to declare Ukraine a market economy, which it actually is, with free prices, small subsidies, few trade quotas and low import tariffs. The status of a market economy is important for antidumping investigations. Non-market economies have few chances of winning antidumping cases, and as a consequence prohibitively high tariffs are slammed on them. Antidumping cases tend to focus on steel and chemicals, which account or half of Ukraine's exports. This procedure is independent of the WTO accession and bilateral trade negotiations. Both the US and the EU have already acknowledged Kazakhstan and Russia as market economies. The US steel lobby, however, holds back this status for Ukraine, arguing that its steel industry benefits from tax exemptions, but that is no longer the case.

The EU complaint about an excessive role of the state in the Ukrainian economy, which is less tangible and thus harder to counter, but it does not appear a relevant objection.