Evaluation of the results and analysis of the impact of the DCFTA with the EU on agricultural trade in Ukraine

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Evaluation of the results and analysis of the impact of the DCFTA with the EU on agricultural trade in Ukraine

Tamara Ostashko, Volodymyr Olefir, Hanna Lienivova, 1institute for Economics and Forecasting of the National Academy of Sciences of Ukraine, Iryna Kobuta, Food and Agriculture Organization of the United Unions, Markets and Trade Division

Purpose. The purpose of the article is to evaluate the impact of the EU-Ukraine Deep and Comprehensive Free Trade Area (DCFTA) on bilateral trade in agri-food products and domestic food market of Ukraine during the first five years after the entry into force of this DCFTA.

Methodology / approach. Analysis of the impact of DCFTA with EU on the agricultural trade is based on the cost-benefit approach. The results of the implementation of the DCFTA agreement are evaluated in terms of benefits and losses for the main stakeholders (players) in agricultural trade - Ukrainian agricultural exporters, domestic agri-food producers, consumers, and the government sector. Based on the methods of analyzing the structure of the sectoral market, a list of criteria for evaluating the results of the implementation of the Agreement was determined. A comparison method was used to evaluate the impact of the EU-Ukraine Association Agreement (hereinafter Agreement or AA) on agricultural trade and the domestic market of agri-food products of Ukraine. To study the DCFTA's impact, the five-year period (2009-2013) before its implementation was compared with the five-year period after the entry into force of the DCFTA bilaterally (2016-2020). Since Ukraine lost control over part of its territories after the start of the Agreement's implementation, relative indicators were used to assess the impact of the EU-Ukraine DCFTA on the domestic market of agri-food products. The research was conducted based on the data of the State Statistics Committee of Ukraine, UN Comtrade Trade Statistics Database, Eurostat Database.

Results. The analysis demonstrates the undoubted benefits of DCFTA for Ukrainian exporters of agricultural goods: (1) after the implementation of the DCFTA, there was an increase in both Ukraine's agricultural exports to the EU and imports of agricultural products from the EU to Ukraine, and the resulting positive balance in agricultural trade in 2020 was 5.5 times higher than in 2009. (2) the average growth rate of Ukraine's agricultural exports to the EU during the first 5 years of the Agreement (10.3 %) exceeded the average growth rate of agricultural imports from the EU to Ukraine (7.2 %). (3) during 2016-2020, Ukraine's exports of agricultural goods to the EU grew faster than agricultural exports to the rest of the World, which indicates the high effectiveness of bilateral liberalization of foreign trade regimes. (4) the DCFTA with the EU has not yet resulted in significantly reduce of the share of agricultural raw materials (or low value-added primary goods) in Ukraine's exports to the EU. (5) the potential for exports of Ukrainian agricultural products to the EU, including those produced by small and medium-sized agrobusinesses, has not been fully realized due to the low levels of tariff rate quotas, high level of EU import duty rates applied to quantities imported from Ukraine outside tariff quotas and long duration and high costs of the certification procedures for the export to the EU. (6) during the first 5 years of DCFTA implementation, there was no significant expansion of imports of agri-food products to the domestic market of Ukraine. This happened not so much because of the high competitiveness of domestic producers, but because of the low purchasing power of the population. (7) the implementation of the Agreement did not have a significant downward impact on domestic prices for agri-food products in Ukraine. (8) the lowering of the tariff protection of the domestic market did not significantly influenced the domestic production of agri-food products which remained stable, except for the production of grape wines, which decreased during 2016-2020. (9) due to the implementation of the Agreement, the EU has increased its share in the import of agri-food products to Ukraine. However, for some commodity groups there was both absolute and relative decrease in imports. This happened due to competition from other importers, as well as due to import substitution processes.

Originality / scientific novelty. The originality of the study is the specification (adaptation) of cost-benefit analysis methods to identify the DCFTA impact on the main stakeholders in agricultural trade of Ukraine with European Union - exporters, domestic producers, consumers, government sector.

Practical value / implications. The practical use of the study consists of identification of the positive and negative consequences of the DCFTA for Ukraine's agricultural trade stakeholders, as well as factors of these consequences, that allows developing practical agricultural trade policy recommendations, including periodic time-to-time review of trade provisions of the Agreement.

Key words: agricultural economics, agricultural trade, EU-Ukraine DCFTA, exporters, domestic producers, consumers.

Introduction and review of literature

The impact of the DCFTA on the agricultural trade between EU and Ukraine, Ukraine and non-EU countries, local production and consumption, price trends and benefits of local producers and consumers were analyzed in the wide range of research. However, since 2017 the agricultural and food sector in Ukraine had undergone a series of significant events that are not correlated with the DCFTA, such as trade bans with russia, occupation of the part of the Ukrainian territory, COVID-19 pandemic, war conflicts.

Although time series data are not sufficient to use effectively tools of econometric modelling for analysis and forecasting the markets situation after the entry into force of the DCFTA, a number of researchers use combined data and model parameters obtained from the period before the DCFTA and the period during the DCFTA. Using proper data preparation procedures, the obtained results of modelling are considered valid for policy analysis purposes. One of the core approaches is establishing of the linkages between the prices and local markets of trade partners, the approach is widely used in analyzing of the European agricultural trade as it is presented by Baret and Li [1], Fackler and Goodwin [2] and Listorti [3, pp. 15-37]. From the perspective of DCFTA, Hamulzhuk et al. used the autoregressive model approach to analyze the linkages of the rapeseed market in EU and Ukraine [4]. The developed model was used to estimate the increase in trade as well as benefits for the Ukrainian producers. The authors concluded that the level of markets linkage is relatively high, and EU demand is covered with import. Given that due to planned changes in regulation in the period up to 2030 EU demand for conventional biofuel and rapeseed will consequently decrease, the DCFTA is the chance for Ukrainian producers to increase the share in the EU import and keep the volume of exports on the current level. Furthermore, Ukraine takes over the price changes from the EU market with insignificant lag and there is no evidence of the impact in opposite direction, therefore, Ukrainian producers could benefit from DCFTA and development of exports. Kareem et al. [5] and Santeramo et al. [6; 7] presented similar approach and results.

Hamulczuk et al. [8] used a similar econometric approach of evaluating the level of linkages between EU and Ukraine markets, to analyze the perspectives of the sunflower seeds trade during the period up to 2027 and after it. The decrease of the export duty on sunflower seed exports to all the EU Member States until it reaches zero in 2027 and re-structuring of EU market of biofuels will lead to the increase of sunflower seeds export from the EU to Ukraine. However, no stable structural linkage between prices in Ukraine and EU was found by the authors, therefore any structural change, including the two mentioned above could make it impossible to develop medium and long-term analysis and forecasts. Furthermore, as it is shown in the model developed by Bouet et al. [9], the reduction of the export tax for sunflower seed in Ukraine will influence the level of production, but the impact on the level of trade will be much weaker. On the contrary, Kuts and Makarchuk [10] argue that although market of sunflower meals and pies in EU and Ukraine are not highly integrated, markets of sunflower oil are significantly integrated, and there is a possibility, that decrease in local production of sunflower oil in Ukraine will influence prices in EU more than prices in Ukraine, making Ukrainian producers and traders choose export options over local market, thus likely creating a deficit in Ukrainian market [10].

Artuc et al. [11] analyzed the overall effect of the import tariff liberalization (including those ruled by the DCFTA) for agricultural trade and social welfare. Based on the approaches presented by Melitz and Redding [12] and Fajgelbaum and Khandelwal [13], the authors used adopted welfare model of agricultural sector to indirectly estimate the effect of import tariff changes on the volume of import, consumption and welfare. Although, according to the estimation of the research the volume of trade due to the import tariff reduction will increase, there will be a positive effect from the initial inequality, and both local consumers and producers will benefit from changes in trade.

Chattellier [14] and Guyomard et al. [15] analyzed the trade in animal products between the EU and Ukraine before and after signing the DCFTA as well the effect of other EU FTA agreements. The authors observed significant facilitating in trade of core products of the animal origin only in poultry after signing the Agreement, also they mentioned the negative effect on the trade balance for Ukraine.

A number of researchers apply gravity models, CAPRI model and general equilibrium models to analyze the extent to which non-tariff instruments compensate positive effect for the EU FTA trade partners. Although DCFTA provides for partial standard harmonization, Ukraine, among other third parties suffer from the imposed non-tariff limitations and/or restrictions. Ferro [16], Fiankor et al. [17], Santeramo and Lamonaca [6], Kareem et al. [5] presented the results of the analysis of these aspects.

In 2020, the first five-year period from the entry into force of the Economic Part of the EU-Ukraine Association Agreement came to an end, which provides grounds for its revision for the next five years and actualize the task to analyze its impact.

The purpose of the article is to analyze the impact of the Agreement on Ukraine's agricultural trade and domestic agri -food market.

Results and discussion

The timeline and the main developments of the Association Agreement with the EU and developments under DCFTA, and also main changes from the russian side in terms of commercial bans and/or tariffs in relations with Ukraine are presented in Figure 1.

From April 23, 2014, to December 31, 2015, there were autonomous trade preferences for the export of Ukrainian goods into the EU. Since January 1, 2016, the free trade area with the EU has been operating bilaterally, and in September 2017, the Association Agreement entered into force in full. The agreement provides for the establishment of a Deep and Comprehensive Free Trade Area (DCFTA) with the EU.

The signing and start of implementation of the Agreement was accompanied by the introduction of bans on the import of agricultural goods from Ukraine by the government of the Russian federation, the cancellation of trade preferences for goods from Ukraine in trade with Russia within the framework of the CIS FTA (the Commonwealth of Independent States, which includes a number of post-Soviet countries), the introduction of barriers to direct freight transportation through the territory of Russia for Ukrainian carriers. Figure 1 also shows the “mirror” measures of the government of Ukraine in response to restrictions and bans on the import of goods from Ukraine to Russia. The measures, introduced as a temporary instrument during 2015 and 2016, were annually extended by the governments of Russia and Ukraine until 2022, when the government of Ukraine imposed a complete ban (embargo) on the import of goods from the aggressor country.

Since the beginning of the liberalization of trade relations with the EU, enough time has passed to find out to what extent the theoretical expectations from the implementation of the Association Agreement have been confirmed by practical results. Any FTA is a set of compromise solutions that consider the interests of exporters, importers, domestic producers, consumers, and the government sector of the parties of the agreement. In general, as the experience of FTA negotiations with the EU has shown, their outcome was determined by the ratio of the impact on the negotiation process of exporters interested in maximum liberalization of trade regimes and domestic farmers not interested in strengthening the competitive position of importers. Therefore, the methodology of the study is based on evaluations of the effectiveness of the DCFTA between Ukraine and the EU in terms of compliance with the interests of exporters, importers, producers, and consumers of agri-food products, as well as the government sector of Ukraine.

The article uses the following indicators/approaches to describe and evaluate the effectiveness of the Agreement:

Figure 1. The main developments under EU-Ukraine DCFTA, and main changes in russia-Ukraine trade policy

Source: formed by the authors.

1) from the perspectives of Ukrainian exporters:

a) trends of agricultural exports to the EU;

b) comparing the growth rate of exports to the EU under the DCFTA with the growth rate of exports to non-EU countries;

2) in terms of the interests of the government sector:

a) the developments of the foreign trade balance in agricultural goods with the EU and the ratio of exports to imports;

b) a change in the commodity structure of agricultural exports to the EU in the direction of reducing the share of raw materials of plant origin and increasing the share of processing industry goods and products of animal origin;

c) growth in exports of goods produced by small and medium-sized farms;

d) increasing the level of use of zero tariff rate quotas (TRQs) in the export to the EU;

e) increase in the number of enterprises certified to export their products to the EU (this indicator also characterizes the degree of implementation of EU legislation in the field of SPS (Sanitary and Phytosanitary Measures) in agriculture in Ukraine);

3) from the perspectives of domestic agricultural producers:

a) the trends of agri-food imports from the EU to Ukraine in terms of the DCFTA;

b) the share of imports from the EU in domestic consumption of agri-food products;

4) in terms of the interests of consumers:

a) the behavior of prices for food products, in the consumption of which the share of imports from the EU is growing.

Therefore, the evaluation of the effectiveness of the EU DCFTA in terms of the interests of stakeholders of bilateral agricultural trade includes estimation of the above listed indicators and forecasting of developments (or trends) of agricultural trade and domestic agri-food market.

The study of the results of the implementation of the EU-Ukraine DCFTA for the agricultural trade development between Ukraine and the EU uses data on annual exports and imports of Chapters 01-24 of the Harmonized Commodity Description and Coding System (HS), usually referred to as agricultural products or agri-food commodities, during the period 2009-2020. Given the fact that in 2014 and 2015 there were autonomous trade preferences for the exports of Ukrainian goods to the EU, the five-year period of 2009-2013 before the implementation and the five-year period of 2016-2020 after the entry into force DCFTA bilaterally were selected as the basis for the study the of the DCFTA impact.

Evaluation of the effectiveness of the Agreement from the perspectives of Ukrainian exporters

Agricultural trade plays one of the leading roles in merchandise trade between EU and Ukraine. The share of agricultural products in total merchandise exports from Ukraine to EU has been increasing for 2009 -2020 decade. In 2020 the share of agricultural products in Ukraine's export of goods to the EU has reached the level of 35.4 % compared to 22.2 % in 2009 and 30.8 % in 2016.

If we compare the indicators of trade in 2009 and 2020, Ukraine increased the export of agricultural goods to the EU in 2.7 times during this period, while agricultural imports from the EU to Ukraine increased by 83.0 %. The positive balance of foreign trade in agricultural goods with EU increased 5.5 times during this period. The average ratio of annual exports to imports increased from 1.3 times in the period of 2009-2013 to 2.45 times in the period of 2016-2020 (Figure 2). These indicators present the high effectiveness of the DCFTA with the EU for both Ukrainian exporters and importers of agri-food products. The average growth rate of agri-food exports over the 5 years of the Agreement was 10.3 %, and the average growth rate of agricultural imports was 7.2 %. In 2020, when severe restrictions on economic activity were imposed in response to the COVID-19 pandemic, annual imports of agri-food products from the EU increased by 16.6 %, while exports fell by 10.7 %. Nevertheless, the ratio of agricultural exports to imports in 2020 was 1.98, thus exceeding the corresponding indicators during the period 2009-2013.

Comparison of the growth rate of exports to the EU under the DCFTA with the growth rate of exports to non-EU countries, could be one of the parameters for evaluating its effectiveness, as the purpose of the DCFTA is to increase trade between the parties due to the liberalization of trade regimes and harmonization of the regulatory environment.

Figure 2. Agricultural trade between Ukraine and EU in 2009-2020, bln USD

Source: calculated by the authors based on the UN Comtrade Database [18].

During 2016-2019, exports of Ukrainian agricultural goods to the EU grew steadily, and the average annual growth rate was 13.6 % (Figure 3).

However, in 2020, due to economic restrictions imposed in respond to the COVID-19 pandemic, Ukrainian agricultural exports to the EU decreased by 10.7 %. The decline was caused by a decrease in demand, complications in supply logistics due to quarantine restrictions and a drought in Ukraine. This decrease was compensated by an expansion of Ukrainian exports to Asian countries' markets, mainly to the Chinese market. Ukraine's agricultural exports to non -EU countries increased by 5.8 % in 2020.

Figure 3. Growth/decline rates of Ukraine's agricultural exports into EU and the Ukraine's agricultural exports to non-EU countries in 2016-2020 (as a percentage of the corresponding indicator of the previous year) Source: calculated by the authors based on the UN Comtrade Database [18].