Economic Impact of the Association Agreement for Ukraine

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Ivan Bandura || Creative Commons

While the Association Agreement covers a wide range of areas, its impact on the Ukrainian economy will also be multifaceted. The Association Agreement (AA) between the EU and Ukraine is a complex document covering a wide range of issues from justice to energy, from free trade to sports. Therefore, its impact on the Ukrainian economy will also be multifaceted. For business, the AA means new opportunities, both domestic and abroad.

Tariffs

The first and most straightforward expected result is an expansion of trade with the EU. The EU launched tariff liberalization unilaterally in 2014. Ukraine eliminated the majority of its tariffs on products originating from the EU in 2016 and, to reduce non-tariff barriers, has been actively harmonizing its legislation with the EU in trade-related spheres like Technical Barriers to Trade (TBT), Sanitary and Phytosanitary (SPS), and customs. Service trade liberalization will follow.

These efforts have already brought gains despite the extremely difficult economic situation in the country and low commodity prices globally. Aggregate exports to the EU reduced lesser than to other countries and some export categories like animal products, glass products, oils and fats, equipment and apparatus expanded. The share of the EU reached 37% of Ukraine’s trade in goods and services, up from 29% in 2012.

The number of exporters to the EU market increased in absolute terms as well as compared to other markets. The most of the new exporters were small and medium businesses.

Positive expectations

According to the survey conducted by IER (Kyiv) in 2015, the Ukrainian businesses are very positive about the DCFTA prospects. About a half of business respondents expects to gain in the first year of the AA implementation and 70% within five years. Despite concerns over costs related to the implementation of new standards and growing competition, the majority expects to gain from lower tariffs and easier procedures.

In addition to direct gains in a trade with the EU, the AA facilitates Ukraine’s trade with other countries thanks to the adoption of internationally recognized EU standards. Ukraine has already benefitted from better access to markets of Asia and Africa.

But the cornerstone of business expectations related to the AA is Ukraine’s internal development. The Agreement anchors a reform path in many economic spheres like public procurement, competition policy, intellectual property rights protection, state aid, etc. It forms much more predictable, transparent and – importantly – internationally understandable regulatory climate in the country. Thus, it makes the country much more attractive to domestic and foreign investors and creates the impetus for economic growth.

Welfare gains

For households, the AA means higher incomes and thus welfare. The IER estimated that the DCFTA implementation would bring welfare gains for all major categories of households, urban and rural, poor and non-poor. Households will also benefit from higher environmental standards, more stringent labor safety requirements, and better social security protection.

The implementation of the AA is a long and challenging process. But for Ukraine, the goal of the AA implementation goes far beyond a higher trade with the EU. The goal is an establishment of Ukraine as the modern, competitive, socially inclusive state, attractive both for doing business and for life.

The article was originally published on http://euforum.nl/en/economic-impact-of-the-association-agreement on 18.03.2016

Veronika Movchan
The Institute for Economic Research and Policy Consulting - Kiev