Abstract
This paper analyzes the possible effects of a customs union between Ukraine and the European Union. The GTAP multi-country simulation model of Purdue University’s Center for Global Trade Analysis is applied. The welfare measure evaluated is the change in equivalent variation (EV). As all incomes in the model accrue to a representative household, EV fully assesses possible welfare benefits for Ukraine from bilateral tariff elimination on trade with the EU. As the model includes Ukraine in the aggregated “Former Soviet Union” region (FSU), EV is estimated for the FSU and then disaggregated on the industry level proportionally to trade shares. The results of our simulations suggest that Ukraine’s EV is particularly sensitive to the inclusion of the agricultural sector into a customs union. Due to the highly protected nature of this sector within the EU, Ukraine would be better off if agriculture were excluded from liberalization. If this scenario is assumed, Ukraine’s monetary gain would be in the order of $40 million.
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Notes
In 2001, real GDP growth for the coming years was projected to be up to 6% yearly (Postup’s Infobank 2001). See also EBRD (2001). In the following years until 2007, growth was in the order of magnitude of 4 to 8% (IER 2008). For more information and data on economic development in those years, see also Broll and Forster (2007).
Further, Chang and Winters (1999) demonstrate that if a country enters Preferential Trading Arrangements (PTA) “other contracting parties [who fail to enter it] may …. be affected adversely, because they are compelled to reduce their prices to meet competition from the suppliers within the PTA” (p. 33).
The top five of Ukraine’s trade partners are ranked as follows (1998): Export—Russia, China (steel), Turkey, Germany, Belarus; Import—Russia, Germany, US, Poland, Italy.
Literature exploring the effects of trade liberalization and specifically aspects of trade diversion include Harrison et al. (1996), Chang and Winters (1999), Kose and Riezman (2000). Kose/Riezman analyze a three-country model and conclude that a small country will have a preference for building a bilateral customs union with a larger country or region. Chang/Winters estimated trade diversion effects of MERCOSUR on the USA, Germany and Japan. Harrison et al. estimate Turkey’s benefits from a customs union with the EU.
In the early 1990s, strong state regulation of foreign trade was prevalent and even in 1999, no time plan was set for Ukraine to join the World Trade Organization (WTO) (e.g., Michalopoulos 1999). In fact, from the point of view of the WTO, Ukraine could still not be considered to be a market economy. However, in the year 2000, in the context of an anti-dumping investigation the European Union recognized Ukraine as a market economy; in the same year, the WTO announced Ukraine could be accepted as a member in the near future if its Parliament approved changes to about 60 laws and provisions as a precondition (Postup’s Infobank 2000, WTO 2000).
The basis for EU-Ukraine relations was laid down in the Partnership and Co-operation Agreement (PCA) on 14 June 1994. Ukraine was the first of the Newly Independent States (NIS) to sign this kind of document with the EU to replace former Agreement on Trade and Commercial and Economic Co-operation with the USSR. The aim of the Parties to the document was it to establish a free trade area by 1998 if appropriate (Article 4 of PCA). According to the Agreement, the Parties grant to each other most-favored-nation (MFN) treatment and the products of the other party should not be subject to discriminatory direct or indirect taxation (A10 and 15 respectively). However, textile and steel products are exempted from the latter clause. Further, the Agreement encourages “the approximation of Ukraine’s existing and future legislation to that of the Community” (A51).
See Hertel (1997) for a comprehensive documentation of the model. Schiff and Winters (2003) generally discuss applicability and limitations of CGE models Sulamaa and Widgren (2002)present an application of GTAP to Russian trade opening; other CGE analyses of Russia’s trade policy options include Brenton et al. (1997) and Alekseev et al. (2003).
A natural next step for Ukraine’s trade relations would then be WTO accession. For related aspects see Burakovsky et al. (2003).
Without further aggregation, this would result in more than 20,000 variables in more than 15,000 equations.
See Geraci and Prewo (1982).
“Asia” contains a number of Asian high-growth countries, China, and Japan. For a detailed mapping of regions and sectors see the appendix.
CEA includes 7 countries: Poland, Hungary, Czech Republic, Slovakia, Slovenia, Romania, and Bulgaria.
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Acknowledgements
The views expressed in this paper are those of the authors and do not necessarily reflect those of the institutions they are affiliated with. The authors acknowledge the hospitality of the National University “Kiev-Mohyla Academy” and financial support by the Kyiv EERC Program in Economics and by the Institute of Economic Research and Policy Consulting (IER), Kiev. They also would like to thank Charles Steele and Roy Gardner for helpful comments and suggestions. The usual disclaimer applies.
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Lutz also holds Research Fellowships at the University of Bonn and at the University of Manchester.
Appendices
Appendix: Aggregation of regions
Definition of new (aggregated) regions
ase | Quickly growing Asian economies (including China) and Japan |
usa | USA |
eun | European Union |
eft | EFTA |
cea | Central European Associates |
fsu | Former Soviet Union |
tur | Turkey |
row | Rest of the world |
Regions mapping
Previous | Previous region definition | New |
|---|---|---|
AUS | Australia | row |
NZL | New Zealand | row |
JPN | Japan | ase |
KOR | Republic of Korea | ase |
IDN | Indonesia | ase |
MYS | Malaysia | ase |
PHL | Philippines | ase |
SGP | Singapore | ase |
THA | Thailand | ase |
VNM | Viet Nam | row |
CHN | China | ase |
HKG | Hong Kong | ase |
TWN | Taiwan | ase |
IND | India | row |
LKA | Sri Lanka | row |
RAS | Rest of South Asia | row |
CAN | Canada | row |
USA | United States of America | usa |
MEX | Mexico | row |
CAM | Central America and Caribbean | row |
VEN | Venezuela | row |
COL | Colombia | row |
RAP | Rest of Andean Pact | row |
ARG | Argentina | row |
BRA | Brazil | row |
CHL | Chile | row |
URY | Uruguay | row |
RSM | Rest of South America | row |
GBR | United Kingdom | eun |
DEU | Germany | eun |
DNK | Denmark | eun |
SWE | Sweden | eun |
FIN | Finland | eun |
REU | Rest of European Union | eun |
EFT | European Free Trade Area | eft |
CEA | Central European Associates | cea |
FSU | Former Soviet Union | fsu |
TUR | Turkey | tur |
RME | Rest of Middle East | row |
MAR | Morocco | row |
RNF | Rest of North Africa | row |
SAF | South African Customs Union | row |
RSA | Rest of Southern Africa | row |
RSS | Rest of Sub Saharan Africa | row |
ROW | Rest of World | row |
Aggregation of industries
Definition of new (aggregated) sectors
1. agr | Food products, plant-based fibers, fishery, beverages and tobacco |
2. for | Forestry, wood and paper products |
3. col | Coal |
4. o_g | Oil, gas, petroleum and coal products |
5. min | Minerals and chemicals |
6. tex | Textiles, wearing apparels, and leather products |
7. fer | Metals and metal products |
8. mac | Motor vehicles, transport and electronic equipment, machinery |
9. ele | Electricity |
10. ser | Utilities, trade, transport, construction, financial services |
Industries mapping
Previous | Previous industry definition | New |
|---|---|---|
1. pdr | Paddy rice | agr |
2. wht | Wheat | agr |
3. gro | Other cereal grains | agr |
4. v_f | Vegetables, fruit, nuts | agr |
5. osd | Oil seeds | agr |
6. c_b | Sugar cane, sugar beet | agr |
7. pfb | Plant-based fibers | agr |
8. ocr | Other crops | agr |
9. ctl | Bovine cattle, sheep and goats, horses | agr |
10. oap | Other animal products | agr |
11. rmk | Raw milk | agr |
12. wol | Wool silk-worm cocoons | agr |
13. for | Forestry | for |
14. fsh | Fishing | agr |
15. col | Coal | col |
16. oil | Oil | o_g |
17. gas | Gas | o_g |
18. omn | Other minerals | min |
19. cmt | Bovine cattle, sheep and goat, horse meat prods | agr |
20. omt | Other meat products | agr |
21. vol | Vegetable oils and fats | agr |
22. mil | Dairy products | agr |
23. pcr | Processed rice | agr |
24. sgr | Sugar | agr |
25. ofd | Other food products | agr |
26. b_t | Beverages and tobacco products | agr |
27. tex | Textiles | tex |
28. wap | Wearing apparel | tex |
29. lea | Leather products | tex |
30. lum | Wood products | for |
31. ppp | Paper products, publishing | for |
32. p_c | Petroleum, coal products | o_g |
33. crp | Chemical, rubber, plastic products | min |
34. nmm | Other mineral products | min |
35. i_s | Ferrous metals | fer |
36. nfm | Other metals | fer |
37. fmp | Metal products | fer |
38. mvh | Motor vehicles and parts | mac |
39. otn | Other transport equipment | mac |
40. ele | Electronic equipment | mac |
41. ome | Other machinery and equipment | mac |
42. omf | Other manufactures | mac |
43. ely | Electricity | ele |
44. gdt | Gas manufacture, distribution | ser |
45. wtr | Water | ser |
46. cns | Construction | ser |
47. t_t | Trade, transport | ser |
48. osp | Financial, business, recreational services | ser |
49. osg | Public admin and defense, education, health | ser |
50. dwe | Dwellings | ser |
Trade data used for calculations
Two sources of trade data used in this work are IMF (1998) and Pakhomov et al. (1997). IMF data (Table A1) is used to calculate Ukraine’s share in FSU’s exports and imports.
Pakhomov et al. (1997) data is used to calculate percentage structure of Ukrainian exports and imports. The original data and calculations are presented in Table A2.
The next table shows the calculation of adjusted trade flows for Ukraine. It uses only relative relationships among different sectors. The table contains exports and imports at market prices and the figures for the FSU are taken from GTAP.
Then the numbers for total adjusted export and import for Ukraine are calculated using shares from Table A1. Finally, the value of each sector’s export and import is computed by applying weights from Table A2 to previously calculated total values. Further, Ukrainian adjusted exports are divided by FSU exports from Table A3 and the same is done for imports. Also, the sum of Ukraine’s exports and imports is divided by sum of FSU’s exports and imports to get weighting coefficients for EV due to the change in world prices. Computed weights are put down into Table A4 (compare Table 6 in the main text above).
GDP data used for calculations
For disaggregating non-trade allocation effects the weighting coefficients computed from the table below are used. Input data are from the World Bank (2001).
GDP at market prices (current $US millions), 1995 | |
|---|---|
Armenia | 2887 |
Azerbaijan | 2894 |
Belarus | 20071 |
Estonia | 4789 |
Georgia | 1900 |
Kazakhstan | 19925 |
Kyrgyz Rep. | 3325 |
Latvia | 4904 |
Lithuania | 6445 |
Moldova | 3093 |
Russia | 337902 |
Tajikistan | 1827 |
Turkmenistan | 4505 |
Ukraine | 49061 |
Uzbekistan | 16294 |
FSU | 479822 |
Ukraine, share | 0.1022 |
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Harbuzyuk, O., Lutz, S. Analyzing trade opening in Ukraine: effects of a customs union with the EU. Econ Change Restruct 41, 221–238 (2008). https://doi.org/10.1007/s10644-008-9050-8
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DOI: https://doi.org/10.1007/s10644-008-9050-8