Free Trade between Ukraine and the EU: an impact assessment

Deep free trade as a major element in a new agreement with the EU

Ukraine has already been granted market economy status from both the EU and the US. Yet, the reforms needed for the domestic market to operate effectively and integrate more deeply into the global economy remain incomplete. In Central European countries, the incentive for reforms was the prospect of membership in the European Union. So far, however, the EU is not ready to make a commitment to Ukraine.

In Spring 2008, the implementation period of the Partnership and Cooperation Agreement (PCA) between Ukraine and the European Union comes to an end and this agreement must be replaced by a new one. Even before the negotiations begin, the EU has indicated it is prepared to offer Ukraine an enhanced agreement. The EU is interested in expanding its influence in the region and to open access to new markets. This means that, even without officially recognized prospects for membership, Ukraine will gain access to the EU's Internal Market and opportunities for more active political cooperation and economic integration.

An important component of such an enhanced agreement is the section on free trade. The most widespread, classical form of free trade that involves the cancellation of export and import duties would not require significant institutional and legislative changes on Ukraine's part. However, it would also not have a serious positive impact in terms of an increase in trade between the two partners. Nor would it become the driver for integration with the EU.

Deep free trade, or FTA+, by contrast, in addition to the cancellation of customs duty, will call for liberalizing Ukraine's services sector and harmonizing its regulatory environment with EU standards. Although an enhanced version of the agreement will require significant financial and human resources, as well as institutional and legislative changes, it could realistically become the basis for a new economic strategy for the country and reinforce Ukraine's integration with the EU.

Adjusting to new standards and rules will cost Ukrainian producers in the short term. In the long term, however, it should help make domestic products more competitive and, as a result, increase Ukrainian exports to global markets. In addition, as the quality of Ukrainian products improves, it will strengthen the positions of domestic manufacturers on their own market.

Meanwhile Ukrainian consumers will have access to higher quality and less costly goods and services. The Government's commitment to implement the reforms needed before signing a free trade agreement with the EU should raise confidence in the Ukrainian economy among foreign investors and spur both FDI and the country's integration into the global economy.