Export Benchmarks for Ukraine: What Are We Striving For?

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Today, when we talk about increasing the export capacity of Ukraine, very often we can hear about the need to focus on exporting the high-tech products, products with high value added and a high level of processing. This statement seems very attractive becausehigh technology, high value added and a high level of processing are important “export benchmarks” which should be strived for.

But it must be understood which goods belong to each group, what are the global trends and what does Ukraine export to avoid making methodological mistakes that affect the general export policy of the country. We decided to show what is behind each of the three concepts and prove that to equate them is totally unacceptable.  Let’s start with the export of high-tech products.

There are several approaches to determine exactly which products belong to high-tech. EU in trade statistics analysis uses the so called “product approach” to create a list of products with high knowledge intensity, i.e. the ratio of R&D spending to total sales. Such products are considered high-tech.

According to this classification, the following groups of products fully or partially are considered high-tech goods:

  • aerospace;

  • computer and office machines;

  • electronics-telecommunications;

  • pharmacy;

  • scientific instruments;

  • electrical machinery;

  • chemistry;

  • non-electrical machinery.

We emphasize that the fact that the product is in one of these groups does not mean that it is automatically included to the group of high-tech products. For example, the group “Scientific instruments” has a subgroup “Measuring instruments and apparatus”. However, the tools for drawing and performing mathematical calculations (drawing machines, calculators), which belong to this subgroup, are not considered high-tech products. And it is quite logical.

What Is the Place of Ukraine in the World Exports of High-Tech Products?

If we look at the global trends of high-tech exports (Fig. 1), we can see that after its share started to drop in 2000, for the last five years the world trade in high-tech products stabilized at 10% of exports. That is the share of high-tech exports at such developed countries as USA, Germany, and Japan.i

Figure 1. Share of high-tech export in the total export of the selected countries, %

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Source: authors’ calculations according to UN comtrade 

Interestingly, the export trends in the US and Japan are very similar: both countries experienced a gradual reduction of the high-tech exports share during 2001-2011.

For the US, this change is the most impressive – in 1999-2000, its share of high-tech exports reached 35% of the total commodity exports, and in 2014 its share was already three times lower. This sharp change in the share of high-tech exports is largely due to the development of global production chains and transfer of the final stages of production to countries with cheaper labor, while the United States retained only the development of technologies which is not measured by the merchandise trade statistics.

In Germany, the dynamics of high-tech exports in recent decades was more consistent with the global trend, although until 2011 the share of high-tech export was slightly lower than the world average.

In Ukrainian commodity exports, the share of high-tech products is approximately 3%. In 2014, it was USD 1.65 bn. As can be expected the share of high-tech exports in Ukraine was significantly lower than globally and the level of the majority of developed countries. But if you compare the country with its closest neighbors, the situation is not so unambiguous. Both Poland and Russia export significantly less of high-tech products than the world average.

However, with almost the same starting positions trends of Ukraine, Poland and Russia since 2004 began to diverge: Poland shows a steady increase in the share of exports of high technology products in the total country exports; Ukraine after the fall of 2004-2005 is at 2-3%, while Russia failed to retain its positions and today its performance is the lowest among the three countries, despite the slight increase during the last three yearsii.

Figure 2. Export value growth rates, annual % changes to previous year

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Source: authors’ calculations according to UN comtrade 

Speaking about the absolute levels of high-tech goods exports from Ukraine, we can state that the “ups and downs” in most years reproduce the vector of the common dynamics of Ukrainian exports with a slight lag.

What Does Ukraine Export?

What are the high-tech products that Ukraine exports? In the first place, it’s aerospace products (with 36.2% on average for the analyzed period), in this product group the biggest exports by aggregate value were of turbopropellers , aeroplanes & other aircraft, mechanically-propelled (other than helicopters), of an unladen weight exceeding 15,000 kg, Spacecraft (including satellites) & spacecraft launch vehicles, turbojets. On the second and third places of Ukrainian high-tech exports there are electronics-telecommunications and non-electrical machinery whose shares in total exports are very similar, 17.7% and 17.6% respectively.

In the “Electronics-telecommunications” group radar apparatus, radio navigational aid apparatus & radio remote control apparatus were the most exported. In non-electrical machinery and equipment, the highest exports were of gas turbines.

Figure 3. Breakdown of Ukrainian high-tech export by commodity groups, %

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 Source: authors’ calculations according to UN comtrade

In some years (and here again 2004 stands out) on the leading positions by the share of high-tech exports belong to the commodity group “Scientific instruments”. In 2004, the share of this group’s exports was 35.7% of Ukrainian exports of high-tech products. The highest exports in this group by the aggregate value was of products from the “Parts & accessories for automatic regulating/controlling instruments & apparatus” group.

To Which Countries Does Ukraine export?

The question “where do we export to?” is not less, and sometimes even more important than the question “what do we export?”. As expected, the share of exports of high-tech products to the countries of the Eurasian Economic Union is high enough for almost the entire analyzed period (with mean of 43%), but in some years it was significantly lower than the average. This primarily concerns 2004 when to the five countries, which at that time were not yet part of the union, Ukraine exported less than 20% of the total high-tech exports, while to the EU-28 it exported 50%.

Figure 4. Breakdown of Ukrainian high-tech export by group of countries, %

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Source: authors’ calculations according to UN comtrade

Note that the dynamics of exports to the Eurasian Economic Union is clearly correlated with exports of space industry products, which are the basis of Ukrainian exports to these countries.

What’s Next?

Ukraine managed to stabilize the level of exports of high-tech products at 3%. Of course, this figure is far from that of the developed countries and is even below the level of neighboring Poland, with whom we “started together” but who then managed to get ahead and show quite a stable upward trend. Moreover, sharp fluctuations in the commodity and geographical structure of Ukrainian high-tech exports are a reflection of long production cycles and lack of sustainable long-term contracts for many commodity items. So what’s next?

The relatively rapid achievement of the goal to increase the high-tech exports is possible if we are included into global production chains in the final stages of production. For example, iPhone sales are formally recorded as exports of China because it’s assembled in this country, although the US receives about 60% of the iPhone sales price, primarily through patents. In addition to the benefits associated with the growth of domestic production, Ukraine can gain access to the already established trade links that will stabilize our exports structure.

Also important is the development of our own high-tech exports and its promotion in many markets, which will reduce the risks associated with the loss of a single partner. However, one should also consider that the exports of high-tech products are gradually replaced with the exports of technology protected by patents. Ensuring a high level of protection of intellectual property rights will allow receiving high income through patents, even if the actual production takes place outside of Ukraine. And this high income and, therefore, increased welfare of the population is the real goal of the economic policy, and not high-tech export by itself.

The article was prepared for the project “Strategic Advisory Group on Economic Reforms in Ukraine” with the financial support of the International Renaissance Foundation.

The article was originally published at Evropeyska Pravda on October 28, 2015 (in Ukrainain),  http://www.eurointegration.com.ua/articles/2015/10/28/7039941/

i Share of high-tech exports was calculated as the ratio of exports of the specified groups of products to the total exports according to UN ComTrade database (http://comtrade.un.org/db/dqQuickQuery.aspx)

ii It should be noted that according to the World Bank, the share of high-tech exports to Russia in 2013 was 10%. This discrepancy with our estimates is due to the peculiarities in computing the share of high-tech exports: according to the methodology of the World Bank, the total exports in Russia include only the processing industry, while the lion’s share of Russian exports comes from the sale of raw materials, especially oil and gas. This correspondingly reduces the total production volume which is used to calculate the share of high-tech exports, and thus increases its share.

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