Ukraine is set to join the WTO in May
Ukraine’s parliament has ratified the World Trade Organisation (WTO) accession protocol, so the country will become the 152nd member of the pre-eminent world trade body in May. Ratification underlines that, despite the often-chaotic nature of post-Orange Revolution politics, there is a consensus on the need for deeper integration with the global economy, regardless of narrow sectoral interests. Trade flows will increase upon accession, with steel and agricultural producers the main beneficiaries and automotive producers and small enterprises the main losers. WTO accession will also give Ukraine an opportunity to negotiate better access to its two biggest markets, the EU and Russia.
All in favour
Ukraine’s parliament voted by an overwhelming margin on April 10th to ratify the country’s accession to the WTO. Although five minor laws still must be adopted, the clock is now ticking on Ukraine’s entry to the organisation. This will happen on May 10th, some 30 days following ratification.
Given the polarisation of Ukrainian politics, some observers had doubted whether Ukraine’s politicians could agree on WTO accession by the July 1st deadline. In the event, and despite lingering tensions between the governing parties (the victors from the Orange Revolution) and the opposition Party of Regions, WTO accession was approved by a record number of votes. Some 411 of the 450 deputies voted in favour; only the Communists abstained.
The scale of the pro-WTO vote is a useful reminder of the common ground between the so-called Orange and Blue parties. All of them are backed now by the country’s leading industrialists, whose interests favour deeper integration with the global economy and in particular closer ties with EU markets, as well as Ukraine’s continued evolution towards a business environment that protects property rights and regulates competition.
Trade and development
When President Viktor Yushchenko signed the WTO accession documents in Geneva on February 5th he claimed that membership would boost GDP growth by 1.5-1.7 percentage points and boost investment by US$3.5bn annually. The claims are difficult to evaluate. Certainly, both exports and imports will be boosted by the scrapping of trade quotas and reduction of export and import duties that will accompany WTO accession. This, however, will not necessarily add much to GDP growth. The potentially bigger benefits—an increase in competition on domestic markets and a better business environment, with a consequent increase in foreign-direct investment—are more difficult to quantify.
The financial sector too will face a major turnaround. Foreign banks and insurance companies will be able to open branches in the Ukrainian market (although foreign banks are already a strong presence and a dynamic force). The increased penetration of foreign institutions should encourage consolidation and raise the financial sector’s efficiency, capitalisation and management. This, in turn, should boost economic growth across the economy.
Winners and losers
Without doubt, the major beneficiary of WTO accession will be the country’s steel producers. Currently their access to EU markets is restricted, but the quotas will be scrapped once Ukraine joins the WTO. For some types of steel products, this could result in a doubling of export volumes. Moreover, Ukraine’s government undertook to reduce steel export quotas as an obligation of membership; this too will help the country’s steel producers.
The country’s other big exporting sector, chemicals, could derive some benefit too—albeit to a lesser extent. As with steel producers, they should benefit from lower export duties. However it is not certain that anti-dumping actions against Ukrainian chemicals exports will be lifted as a consequence of WTO accession.
As a result, some agricultural producers could be the second-rank beneficiaries of membership, behind the steel producers. Exporters of wheat and sunflower seeds will benefit from cuts in export duties and it is possible that some export quotas, for example on wheat, could be scrapped too. Other parts of the agricultural industry, which have heretofore been protected from foreign competition, stand to lose. This applies mainly to the dairy and sugar sub-sectors.
In general, small-scale enterprises—including smallholding farmers, stand to lose from WTO accession unless they are able to adapt to stringent EU safety and product-quality standards (for this reason, Ukrainian consumers will benefit from WTO entry). Within industry, two sectors seem set to suffer in particular. Automotive producers have for years been shielded by high import duties on cars; but on accession, this duty will be cut from 25% to just 10%, with the duty scheduled to fall to 5% in 2013. Ukrainian automakers will be cushioned, at least initially, by still-rampant domestic demand and tight restrictions on the import of used cars. However, the reduction in the price of European-made vehicles will inevitably cut into domestic producers’ market share.
White-goods makers will suffer too from lower import duties. By May, these tariffs will fall from the current levels of 5-50% to 5-10%. Companies making goods that have previously enjoyed high levels of duty protection, such as refrigerators, are in for a shock.
The road to Brussels and Moscow
Beyond the direct trade and investment benefits, WTO accession clears the path for a free-trade agreement (FTA) with the EU. This is important for several reasons, including the fact that the EU is a very large trading partner for Ukraine and has the potential to be the biggest; and the interest that third-country investors will have in Ukraine if an FTA is established. Only with unfettered access to the large, wealthy markets of the EU, it could be argued, can Ukraine realistically hope to exploit its potential as a foreign investment target. WTO accession gives potential investors a reassuring framework, but it does not guarantee highly preferential access to markets beyond Ukraine.
It seems increasingly likely that Ukraine will be negotiating a deep and complex FTA with the EU. On one estimate, once complete, this would put Ukraine in accordance with much of the acquis communautaire. On a practical basis (politics aside), this would put Ukraine in an excellent position to seek EU membership.
WTO entry could also help Ukraine in its dealings with Russia. Ukraine is unlikely to overplay its hand in this regard, as officials from the government and presidential administration have made clear. Nevertheless, Ukraine’s support is now needed in order for Russia to join the WTO and this opens new possibilities for the resolution of Ukrainian trade grievances. Earlier this year, Mr Yushchenko said that up to 50% of Ukraine’s trade deficit with Russia was a consequence of restrictions imposed by the Russians on Ukrainian goods. Ukrainian metals and dairy products, in particular, face numerous obstacles blocking their access to the Russian market. One way or another, given that Russia too is expected to join the WTO within a year or so, this situation is likely to change.
The Economist
