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Foundation for Effective Governance Ukraine, Kiev, 23-F Kudryavskaya Str., tel: +380 44 501 41 00, fax: + 380 44 501 41 05
www.feg.org.ua, www.debaty.org
Would a free market with the EU bring more benefits to Ukraine
than a Customs Union with Russia?
At the end of March, Ukraine and European Union initialed part of the
Association Agreement. Deep and Comprehensive Free Trade Agreement (FTA)
is a part of the deal, which raises hopes for modernization of Ukraine’s economy.
At the same time, Europe does not provide any guarantees but imposes strict
conditions upon signing the agreement. On the other hand, Ukraine has been
invited to join a trade union of Russia, Belarus and Kazakhstan. The Customs
Union (CU) has already yielded benefits for its member countries. For instance,
Belarus has got a discount on Russia’s energy resources, and Kazakhstan - access
to Russia’s and Belarus’ financial sectors. Both Belarus and Kazakhstan have
guaranteed their access to Russian market. Joining the Customs union would
likely save Ukraine from permanent trade conflicts with its eastern neighbors and
help Ukrainian goods win growing markets of Russia and Kazakhstan.
Since the country gained independence, discussion on directions of Ukraine’s
economic integration always lies in the area of political and values choices. What
are actual economic benefits and costs of Ukraine’s two options? Which of these
options is more beneficial for our country: the free trade with the EU or Customs
Union with Russia, Belarus and Kazakhstan?
Talks of joining one economic
block or the other have been held
since Ukraine’s first days of
independence. So, where is it
more economically beneficial to
integrate?
Arguments FOR the motion
Free trade area with the EU will improve competitiveness of Ukrainian economy.
According to the terms of the agreement, Ukraine will have to adapt its technical,
sanitary and phytosanitary standards to the EU requirements (currently,
Ukrainian goods often fail to meet EU standards). The need to comply with the
European standards will encourage Ukrainian producers to improve quality of
their goods and their productivity. This may be costly, but in the long run, it will
ensure long-term and sustainable competitiveness of Ukrainian exports, not only
in Europe, but in other markets as well. For example, free trade with the EU has
resulted in higher competitiveness of the Turkish automotive, home electronics
and textiles sectors.
Adoption of European standards
will improve Ukraine’s
competitiveness
Free market with the EU will improve business climate in our country and
increase inflow of foreign direct investments. According to the announced terms
of the agreement, Ukraine will have to bring its regulatory, corporate and
antimonopoly, intellectual property protection and public procurement
legislations in line with European rules. The EU is already the main source of
foreign direct investment in Ukraine, and adoption of European legal rules will
bring even more investors to our country. Inflow of foreign direct investments is
also expected from countries interested in access to the EU market. Ukraine’s
obligations to the EU will also improve law enforcement in the country, which,
in turn, will reduce risks for local and foreign investors.
A free trade area with the EU will
improve business climate and
increase foreign direct
investments inflow
Foundation for Effective Governance Ukraine, Kiev, 23-F Kudryavskaya Str., tel: +380 44 501 41 00, fax: + 380 44 501 41 05
www.feg.org.ua, www.debaty.org
Arguments AGAINST the motion
Joining the Customs Union with Russia, Belarus and Kazakhstan will be cheaper
for Ukrainian producers and will help to save country’s industrial capacity.
Technical standards of the Customs Union countries are similar to those of
Ukraine. Because of this Ukrainian goods and services are already competitive in
these markets. Joining the Customs Union does not require Ukrainian businesses
to bear additional costs but expands their sales market. On the contrary, in a free
market with the EU, there is a risk that more competitive European
manufacturers will drive their Ukrainian peers out of business, as has happened
with engineering in Latvia and shipbuilding in Poland.
Membership in the Customs
Union is cheaper for Ukrainian
business
Ukraine’s membership in the Customs Union will make its exports more
competitive. Duty free conditions will apply to energy and raw materials on the
territory of the CU. Ukraine will pay less for natural gas and other important
resources. As a result, production costs of Ukrainian goods will decrease, which
will make them more competitive in the global market. This is particularly
beneficial for the chemical industry and metallurgy, which depend greatly on gas
supply. Cheaper natural gas will save money for population to spend after gas
and utilities bills are paid. Ukraine will feel this effect much faster than from the
FTA with the EU.
Lower prices for natural gas will
decrease the unit costs of
Ukrainian goods
The issue of the economic benefits and costs associated with Ukraine’s integration choice will be discussed during the
public debate held by the Foundation for Effective Governance in partnership with Britain-based Intelligence Squared.
The debate will take place on April 24, 2012. ________________________________________________________________________________________________________________________________
Statistics
International merchandize trade of Ukraine by product group in 2010
0
3
6
9
12
15
18
Agriculture Fuel and mining
products
Chemicals Machinery and transport equipment
Metals and metal
products
with European Union
Export
Import
USD bn
0
3
6
9
12
15
18
Agriculture Fuel and mining
products
Chemicals Machinery and transport equipment
Metals and metal
products
with Customs union of Russia, Belarus, Kazakhstan
Export
Import
USD bn
International merchandize trade in goods of Ukraine
5
10
15
20
25
30
2004 2005 2006 2007 2008 2009 2010
Exports
EU
CU
USD bn
5
10
15
20
25
30
2004 2005 2006 2007 2008 2009 2010
Imports
EU
CU
USD bn
