Problems of foreign trade of Ukraine

In recent years, Ukraine has passed most of the hurdles of postcommunist economic transformation. Macroeconomic stabilization was accomplished long long. Prices and trade are liberalized. Privatization has proceeded so that about two-thirds of GDP arises in the private sector. For the last three years, Ukraine has had a sound average economic growth of over 6 percent a year, and it is likely to stay around 6-8 percent a year for the foreseeable future.

A fast economic restructuring is taking place. Industries in which Ukraine appears to have comparative advantages have grown particularly fast: steel, food processing, agriculture, and light industry. Within each sub-industry a desirable consolidation of 3-5 leaders is apparent. Although a few oligarchic groups hold out, they are becoming more normal conglomerates, and a sizeable number of new large and medium-size corporations have emerged. While corruption and repression remain problems, business surveys undertaken by the European Bank for the Reconstruction and Development (EBRD) and the World Bank in 1999 and 2002 suggest great improvements. Ukraine's transition to a market economy has succeeded.

In this situation, foreign trade attracts new attention for many reasons. First, with an official GDP at current exchange rates of about $40 billion, the Ukrainian economy is rather limited, and access to export markets is critical for future economic growth. In recent years, Ukrainian exports have expanded fast by slightly over 10 percent a year and are driving economic growth, but clearly much more can and should be accomplished. The old adage "trade rather than aid" describes what Ukraine needs now.

Second, the Ukrainian economy is very open with exports corresponding to about half of GDP, and exports have increased at over ten percent a year for the last three years. Exports comprise the growth engine in the Ukrainian economy.

Third, while the domestic market in Ukraine appears to work reasonably well, regional distortions in foreign trade are all too apparent. The most recent statistics for 2002 demonstrate that as little as 19 percent of Ukraine's exports went to the European Union (EU). According to the gravity model, which assesses how much countries should trade with one another, given the size of their economies and the distance between them, it should have been about 60 percent. Meanwhile, the share of Ukrainian exports going to Russia has fallen steadily to only 17 percent last year. Instead, Ukraine is increasingly exporting to all kinds of new distant Third World markets in Asia and the Far East, notably China, and the Middle East, which are more open. It is more important that exports grow than where they go, but this is not a normal development. With little doubt, this represents trade distortion, and Ukraine would benefit if it were able to export more to big markets in its neighborhood. Although Ukraine is a very open economy, agriculture is considered to be 93 percent self-sufficient, suggesting substantial sectoral distortions as well.

Fourth, Ukraine suffers from a predominance of so-called sensitive products in its exports, that is, goods that are particularly exposed to protectionist measures by other countries. They account for about three-quarters of Ukraine's total exports. Steel comprises 40 percent of Ukraine's exports, while each of the three sensitive commodity groups, agricultural goods, chemicals and textiles, account for over 10 percent. According to the WTO, Ukraine came in the 10th place in the world in terms of suffering from actual antidumping measures from January 1995 to June 2002, with no less than 37 antidumping measures concluded by various countries.

Fifth, Ukraine is now facing critical changes in its foreign trade agreements. Its negotiations about accession to the World Trade Organization (WTO) are approaching their final stage. The EU is suggesting that its Partnership and Cooperation Agreement (PCA) with Ukraine should be replaced with an agreement on a Common European Economic Area (EEA). The Presidents of Russia, Ukraine, Kazakhstan and Belarus just signed a declaration of their intention to negotiate a free trade zone. Thus, Ukraine is facing monumental decisions on its foreign trade relations in all directions.

Yet, sixth, although Ukraine is facing so many important problems and decisions in foreign trade, trade issues have been all but ignored in the country until recently. The preoccupation with getting the domestic market economic reforms has been so great. In the mid-1990s, Ukrainians had a tendency to blame the outside world for their hardships. Now, on the contrary, Ukrainians tend to blame themselves for whatever problems they encounter. While an admirably humble attitude, it does not necessarily reflect the truth.

There are always many barriers to trade. First, everybody mentions the problem for exporters to obtain a value-added tax refund. Another query is what the Ukrainian economy looks like at enterprise level, but it appears a rather normal market economy. Then, the three big trade issues come, trade relations with the EU, trade with Russia and WTO accession. The EU should be Ukraine's main export market, but its imports from Ukraine remain surprisingly low, while Ukrainian exports to Russia are swiftly dwindling. WTO accession appears to be the key to Ukraine's trade policy. Agricultural concerns are a topic on their own, but they appear to be less severe than widely presumed.

Ukraine has great export potential. With an area of ​​0.4% of the total global land and the population at 0,8% of global, Ukraine makes 5% of world mineral and food processing. The main strategic goal for Ukraine - the transition to economic development, export oriented and, therefore, the production of goods able to compete in the global market.

A fast economic restructuring is taking place. Industries in which Ukraine appears to have comparative advantages have grown particularly fast: steel, food processing, agriculture, and light industry. Within each sub-industry a desirable consolidation of 3-5 leaders is apparent. Although a few oligarchic groups hold out, they are becoming more normal conglomerates, and a sizeable number of new large and medium-size corporations have emerged. While corruption and repression remain problems, business surveys undertaken by the European Bank for the Reconstruction and Development (EBRD) and the World Bank in 1999 and 2002 suggest great improvements. Ukraine's transition to a market economy has succeeded.