Ukraine Market Report — Q1 2016
The EU free trade area took effect on 1 January and eastern trade restrictions took effect the same day. Ukrainian exporters changed direction in a single quarter, and the tariff schedule turned out not to be the difficult part.
Overview
The deep and comprehensive free trade area with the EU entered force on 1 January. On the same day, restrictions on Ukrainian goods entering the eastern market took effect, along with transit limitations.
The reorientation of Ukrainian trade therefore did not happen gradually. It happened in one quarter, in both directions at once.
What actually changed on 1 January
Tariffs. Almost nothing else.
Ukrainian exporters discovered immediately what the archive has recorded elsewhere: tariffs were never the constraint. To sell food or agricultural products into the EU a producer needs sanitary certification, an approved establishment listing, laboratory testing accredited to EU-recognised standards, and traceability documentation.
None of that existed at scale in January 2016. The institutional apparatus was being built — a food safety authority the European Commission would audit, accredited laboratories, establishment-by-establishment approval — and it took years.
Meanwhile the eastern market closed immediately and completely for the affected categories.
The transition cost
This is the sharpest version of a general problem: when a market closes faster than the replacement opens, the gap is borne entirely by the producer.
Ukrainian machine builders and food producers whose output had gone east lost that market on 1 January and could not access the western one for one to three years, depending on their product and how early they had started certifying.
The firms that had begun certification work in 2014 or 2015 — before the agreement was in force — were the ones that came through. Those that waited for entry into force to begin lost the intervening period entirely.
Macro position
The economy stopped contracting and began a modest recovery. Inflation fell substantially from the 2015 peak. The currency was stable.
Sectors
Agriculture — well placed, with grain and oilseed exports needing less certification than processed food.
Food processing — the sector where certification determined everything.
Machine building — the worst affected, having lost an eastern market it could not replace.
IT services — unaffected and growing.
What the quarter settled
That trade agreements deliver access to those who prepared before they came into force, and impose a gap on everyone else.
Related in this archive
Share this analysis
Comments