A Vision for Ukraine in the World Economy*
Defining a Trade Policy Strategy that Leverages Global Opportunities
European University Institute and CEPR
Director, Jensen Analysis
Consultant and former Lead Economist, World Bank
10th September 2013
* This paper was used a background material for the talk of Mr. Pascal Lamy at the 10th Yalta Annual Meeting on September 21, 2013. Financial support from the Yalta European Strategy (YES) is gratefully acknowledged. We would like to thank Michael Ferrantino and Marinos Tsingas for estimates of the impact of improved trade facilitation on Ukraine. The authors alone are responsible for the views and accuracy of the paper.
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A trade policy that is global in perspective and the lowering of trade costs are critical for Ukraine. Competitiveness in today’s global economy requires greater participation in international supply chains. The experience of the “development miracle” countries and other countries that have been most successful in using trade to help sustain high rates of economic growth suggests that Ukraine should consider a trade strategy that is global in scope and work to reduce trade costs.
Ukraine should continue down the path on which it has embarked as regards its trade policy by preserving its preferred market access with partners such as Russia and the EU. It should also expand its market access by negotiating free trade agreements with other countries, while keeping its average tariffs moderate or low.
Today, two regional trade agreements are at the center of attention in Ukraine. One is the proposed Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU; the other is an invitation to join the Eurasian Customs Union (ECU). Ukraine has strong interests in both the EU and the ECU markets. We believe that instead of making a stark choice, Ukraine should focus on addressing specific policy areas that negatively affect trade with both customs unions.
Signing the Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU is expected to bring large benefits to Ukraine from improved institutions for trade and improved market access. We believe it would be a mistake for Ukraine to join the ECU. That would mean it would delegate its external trade policy to the ECU and thereby block itself not only from signing the DCFTA but new free trade agreements more generally.
As an Observer in the ECU, Ukraine could propose a multifaceted approach to “deep” trade cooperation with Russia and the ECU. This could bring its trade cooperation with the ECU even closer than with the EU after the DCFTA and benefit both Ukraine and the ECU members. In part, this will involve intergovernmental trade agreements on matters such as: border control procedures; access for foreign investors in services; a government procurement agreement; and mutual recognition agreement of standards and technical regulations.
More importantly, new approaches should be considered to reduce trade costs. Ukraine could propose the creation of a number of “supply chain councils” organized around the major export sectors for both Ukraine and the ECU countries. Supply chain councils are public-private partnerships that involve the active engagement of the business community, as well as policy officials and regulators—are needed to reduce uncertainty for producers by facilitating trade and cross-border investment flows. National supply chain councils would focus on important ‘backbone’ services such as communications, finance and transport as well as nontariff barriers. They can also play an important role in addressing policy barriers that inhibit greater economic integration with regional trading partners such as the EU and the ECU if they include business representatives and regulators from trading partners to focus policy attention on lowering trade costs due to differences in regulations and standards, customs and border issues, uncertainty regarding the treatment of products, services and businesses, and impediments to supply chain investments.
The councils would have a mandate to identify the most important sources of supply chain inefficiencies as well as actions to resolve them. These supply chain councils would determine the priority areas for intergovernmental negotiations. Businessmen on both sides on the negotiations have on the ground knowledge of the most pressing problems and are likely to have many common interests in lowering trade costs. Recommendations for regulatory reform of these councils can be implemented by governments with the knowledge that they have support from businesses on all sides.