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Thursday, March 15, 2018

“Duty and are now very low”

“The concept that the European goods will displace Ukrainian, exaggerated,” – said the newspaper VIEW Ukrainian economist Veronika Movchan. It entered into a polemic with a number of our respected colleagues from Russia and Ukraine, speaking about the high risks for the Ukrainian economy the policy of economic rapprochement of Kiev with Brussels.

On Wednesday, Russia issued a sharp warning to Ukraine in connection with signing the last of the Association agreement with the EU. Moscow refuses from consultations with Kiev on the agreement on Association with the European Union and will impose unilateral action to protect their own national economic interests, if Ukraine will refuse from non-constructive position and will go on ratification of the agreement, said the Minister of economic development Alexei Ulyukayev.

Disputes that will bring Ukraine the Association agreement with the EU – life or death – do not cease for several years. In the press and then there are the opposite statements of experts and the leadership of various countries about the benefits and losses that gets Ukraine, signing the agreement. It was the refusal of Viktor Yanukovych to sign it in November last year became the trigger for milanovsky and the seizure of power by nationalists in Ukraine.

Yanukovych refused European integration, believing that the Ukrainian economy will not sustain such a shock, as the opening of borders for 28 European countries and the closure of the Russian market and the Customs Union. Since then, political instability has only worsened the situation in the country, so the Russian presidential Advisor Sergey Glazyev says the signing of the Association agreement with the EU is economic suicide for the Ukraine.

However, some Ukrainian experts insist that trade liberalization with the EU will help Ukraine avoid economic collapse. Thus, the research Director on scientific work of the Institute for economic research and policy consulting (Kiev, Ukraine) Veronika Movchan promises that thanks to the Association with the EU in Ukraine will be an economic growth and increasing incomes.

The arguments against the Association of Ukraine with the EU is widely known and very convincing, can not be said about the arguments of supporters. So curious, how exactly argue economists claiming beneficial for Ukraine Association with the European Union. That is why the newspaper VIEW joined with Veronika Movchan in the discussion, to understand how her position is justified.

Competition from the EU

OPINION: IN your article you say that the Association with the EU will improve the quality of goods in the domestic market, including the products of Ukrainian manufacturers. This is due to the harmonization of Ukrainian legislation with European legislation in the field of food safety, water quality, air and waste management. However, the Institute for Economics and forecasting National Academy of Sciences of Ukraine ruled that the modernization of the Ukrainian industry and its adaptation to the European norms of technical regulations and phytosanitary requirements needed 130 billion euros. Where Ukraine will find the money for it? If money can be found, as Ukrainian producers will improve the quality of goods?

Veronika Movchan: I can’t agree with the valuation of investments in 130 billion dollars, which really gave this institution. The calculation methodology is questionable.

The Institute has taken all investments in Eastern Europe – Poland, Hungary, the Czech Republic and Slovakia for more than 20 years of preparation for EU membership and adaptation after the accession to the EU. Then I weighed this assessment on the number of people and increased it by 1.5 times. I don’t know, why did you choose this ratio.

Absolutely not clearly, all the expenses, including huge spending on infrastructure and transportation that were deemed necessary for Ukraine to implement the agreement on Association with the EU as a whole. And for the requirement of harmonization of legislation in the spheres of technical regulation, sanitary and phytosanitary standards. I think that this assessment greatly exaggerates the necessary investment. And it does not take into account that Ukraine is harmonizing its legislation with European for many years, since the days of Kuchma.

Veronika Movchan: “I expect continuation of gradual price increases” (Photo: from personal archive)

Now, according to the Ministry of economic development and trade, which deals with technical regulation of 27 sectoral regulations, which Ukraine undertook to harmonise within the Association, 22 already introduced in Ukrainian legislation. Perhaps they need a little update, because Ukraine is not always focused on the latest EU standards. But the changes are not big. While 16 of 27 technical regulations in 2013 were necessary for Ukrainian economy.

As for agriculture, then, according to the Ministry of agrarian policy and food, about 60% of the standards in agriculture and 40% of standards in food industry of Ukraine are harmonized with the European.

In plant now there is no problem. The main problems in animal production, primarily milk and all products from it. There are still no established procedures to guarantee the quality and purity of milk. But this is not a new problem, and I think in a year or two it will be resolved in the same way as happened in the poultry industry.

Much that is written in the agreement is a continuation of the work that was started long ago. So to say that Ukrainian producers are not ready, so for them it is something new.

OPINION: If not 130 billion dollars, how much investment need for harmonization of the legislation to bring Ukrainian factories and farms in line with European standards?

V. M.: It is very difficult to calculate. But it’s a small investment. Hundreds of billions there is no point in talking.

OPINION: Where are the Ukrainian producers will get the money?

V. M.: Someone will take the credit, someone will attract private foreign investors. But the main source of domestic investment in Ukraine – it is the reinvestment of profit.

OPINION: all of this (loans, modernization, construction) and requires more time.

V. M.: But change is also delayed. In compliance with the technical regulations is provided on average three years, although we’ve almost all done. As with sanitary and phytosanitary norms even longer history. In the text of the Treaty provides that only after ratification will create the strategy for the harmonization of standards. I think we can expect a long transition period.

OPINION: are You talking about increasing the range of European goods on the Ukrainian market due to Association with the EU. But the European competition will certainly replace the products of Ukrainian producers with the local market. The Ukrainians will stop buying its own goods will start rising unemployment, the decline in local production, isn’t it?

V. M.: the Range of European goods will increase, but slowly, gradually.

OPINION: Why gradually?

V. M.: Because in Ukraine the market is not closed and now: toll very low. In industry the average duty of 4%, it will gradually decrease to zero. In agriculture and food industry duties of about 10% and will decrease to 1-2%.

The change in duties from 10% to zero we might not even notice in the background of all other shocks, positive and negative, will affect the Ukrainian economy. In addition, the zero will not be on all products, and some are transitional periods up to 7-8 years.

And now we have a fairly large assortment of European goods. Of course, there will be new competition will gradually increase. But I think that the concept that the European goods will displace Ukrainian, exaggerated.

We have a good example. A few years ago Ukraine signed an agreement on free trade zone with Norway and Switzerland. I can assure you that the dam neither Swiss cheese nor the Norwegian salmon is not observed. Yes, the trade is gradually increasing, but without tectonic shifts. Especially if Ukraine will be able to drastically reduce corruption, the profit margin, which will remain the business will increase, it will be reinvested, so as to sustain the viability of many Ukrainian companies, even with increased competition from the EU.

In addition, if the flow of imports not offset by exports, you can always increase the cost of imports due to the currency exchange rate in Ukraine floating. In this case the European goods will become less competitive in the Ukrainian market. Floating exchange rate – this is a very good regulator of flow of imports, is much more effective than customs duties.

OPINION: WHILE individual sectors of the economy did not suffer due to more competitive products from Europe? For example, twothree years, Ukrainian milk producers will upgrade their farms to meet European quality standards. At this time on the Ukrainian market will be European milk, which will be supplied duty free. Who will win this competition?

V. M.: Duties will be reduced gradually. For the products of agriculture is a gradual linear decrease for five, six, seven years, that will be enough for adaptation. There are still non-tariff barriers, which also will decrease gradually and on bilateral basis. They will be initially to deter the influx of European products. In the agreement everything is quite balanced.

Prices and inflation

OPINION: Your Institute believes that the Association with the EU will lead to the fact that some goods become cheaper and inflation will slow down. And the prices will grow only on some products, including medications. However, as you indicate, the experience of Ukraine’s accession to the WTO showed that the expected fall in the price of cars because of the abolition of fees did not happen. Why now at the end of the duty-free goods will become cheaper?

V. M.: Some goods may become cheaper, and inflation would slow. If all goods were cheaper, there would be deflation. And I do expect continuation of gradual price increases, but very slowly.

OPINION: what products can be cheaper?

V. M.: This question must be considered for each market separately. If the goods from Europe went on a monopolistic market, where the demand is huge, such as in the automotive market of Ukraine, the European manufacturer will not reduce the price and take the profit itself. If he came on to the market relatively competitive, the emergence of another seller, cheaper, will make those who was a little bit to reduce their ambitions to profitability and sell a little cheaper, or at least not to raise rates so quickly. What product is how it will behave, it is very difficult to say.


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