US-Ukraine free trade agreement: Traps and pitfalls

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Zelensky Biden

US Embassy in Ukraine

The fact that such ideas are expressed by the Minister of Foreign Affairs, and not by the Minister of Economy, suggests that we are trying to “fill in” joint protocols and communiqués with references to FTA agreements after the completion of international negotiations against the background of an ominous semantic void.

“More FTA agreements, big and different,” is the main principle of our export policy. And each such agreement is like a nail in the coffin of the Ukrainian industry and an even wider entrance yard in our domestic market, where it is already possible to carry out high-speed drift by BelAZ (Belarusian automobile plant and one of the world’s largest manufacturers of large and especially large dump trucks, – ed.).

Ukraine’s export

The last seven years have seen a total flattening of our economic profile and a decrease in economic complexity. The aircraft industry, space, and ships are already the phantom pains of the decommunized past. But we are losing even simple processing, not to mention industrial products. Dying, not having time to “grow” in 2016-2019, shoe industry, textile. The country is increasingly turning into a cornfield. This is reflected even when writing “liquid” development strategies that are presented in the United States, for example – “digitalization, infrastructure and agricultural business”.

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What does this mean in human terms? Creation of the most convenient and fast channels for the export of agricultural raw materials from the country, when the movement of these flows will be digitized for operational management. This is a country model representing a simplified field-elevator-port chain. There is no place for industry and science in this format. As well as 40 million of the population. After all, even Mongolia, with a population of 3 million people, has relied on processing, and not on pure raw material exports.

Exporting grain and honey, we will be programmed for another 20 years to “export” people until the demographic cauldron boils down to the bottom. Basically, the export model of Kyivan Rus: honey, grain, and slaves. Only without the birth rate of a thousand years ago. No wonder the characters of the spoken genre offered us to rename the country to Rus-Ukraine.

In practice, the creation of an FTA often leads to an increase in our trade deficit, as happened with Canada. Moreover, the volumes of trade were scanty and remain so. The most profitable trade for us is with India. Probably because we have not yet signed an agreement on an FTA with it.

Agreement for the sake of agreement

The aforementioned zero-efficiency FTZ with Canada (even with negative efficiency), attempts to create an FTZ with Albania (the volume of trade is several tens of millions of dollars), Pan-Euro-Med (which we wrote about – transformation into a raw material appendage of Egypt), negotiations with a splinter in the form of the British project of the European Free Trade Association – EFTA (Switzerland, Norway, Iceland, Liechtenstein). At the same time, there is a total loss of traditional sales markets for industrial products and the absence of even hints of searching for new ones.

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Even when signing an agreement on the creation of an FTA with Israel, our officials did not think of expanding its effect on services (primarily IT) and investments. Exactly the same format of a free trade zone in goods and services, as well as free movement of investments, had to be signed with Canada. This is what they do today in Asia when they conclude an agreement on the Comprehensive Regional Economic Partnership: they consider it much broader than just the free movement of goods. After all, a significant part of exports in world trade is now occupied by services. In addition, in such a triple FTA format, weak industrial countries open their markets at least in exchange for investments, over time compensating for the investment deficit by growing trade surpluses.

One gets the impression that the creation of an FTA is becoming a primitive PR stunt for our government, just so that there is something to sign: with  UK, Israel, and now in plans – with the United States and Turkey.

At the same time, 3/4 of our trade turnover with same America is in deficit: we supply goods to the United States for a billion, they for us – for three. As Trump said, if you have a trade deficit with a country, break the FTA agreement with it. This is exactly what he did when he pulled out of the Pacific Trade Partnership, which was cutting jobs in the United States.

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And Biden, by the way, kept this policy. In this regard, Ukraine is acting exactly the opposite – it plans to conclude an agreement on an FTA with the economy (the United States), trade with which is deeply in short supply for it.

What FTA with the US would give Ukraine

Imagine what a cumulative effect awaits us in the event of an FTA with the United States, despite the fact that Zelensky also “brought” a credit line from the American Eximbank for $ 3 billion to support American exports to our country.

This money will be used for the purchase of American industrial goods by Ukrainian companies. Although, given the liquidity of our state banks, Zelensky had to open $ 3 billion to the Americans for the purchase of Ukrainian products by American companies. Although no, our “Ukreximbank” is now lending to road construction in Ukraine for 0,8 billion USD, just in its specialized profile: “godfather’s chip is cut.” About half of the issued by our state bank money will go into the pockets of Turkish and Chinese companies for construction equipment and services, and another part – Belarus and the Russian Federation for bitumen.

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Surprisingly, I have never met in the analytics of our Mineko at least an attempt to calculate for Ukraine the gravitational model of foreign trade, created by the Nobel laureate Jan Tinbergen.

Its essence is as follows: export from one country to another is the essence of the derivative of their economic potential, adjusted by the coefficient of conformity and divided by the distance between them. This formula explains a lot. Indeed, the size of GDP is often cited as an argument when signing an FTA. They say that the United States is the largest economy, which means that it is profitable to trade with them. But this will only happen if the size of the US GDP compensates for the gap in the levels of correspondence between our goods and the American ones, and also compensates for the distance between countries.

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And here it is just the opposite – the level of discrepancy nullifies the factor of “hugeness” of the American market for the Ukrainian goods that we are now producing. It’s like saying to your grandmother at the station market, selling sunflower seeds: go, grandma, to the Kyiv passage, there are shops of leading brands, the public with money, the market capitalization level is a million times higher than your customers running to the commuter train.

Thus, the choice of trading partners is always a simulation and search for the most favorable balance of three factors affecting exports: the level of compliance, the distance between countries, and market capacity. The size of GDP is only one factor out of three, and the first two may well outweigh it. Obviously, in terms of the level of compliance, we are still far from the EU, Canada, the United States, and UK. With the EU, this negative is compensated by the minimum distance and the size of GDP, and in the case of the USA, the distance between our countries is already a minus, not a plus. Here comes Tobler’s first law of geography – everyone interacts with each other, but those who are closer interact more strongly.

Self-respecting countries are very careful about signing agreements on the creation of an FTA, carefully formulating compensators and demanding bonuses for liberalizing sales markets. For example, the Japanese, having created in 2007 the Economic Research Institute for ASEAN and East Asia (ERIA), which over the past 10 years has been actively generating ideas for future integration in the form of the Asian free zone created in 2020. trade. A decade of research has clearly modeled the economic consequences for each participating country when a trade agreement is signed. Compare this with the “analysis” of the agreement on the establishment of an FTA with the EU in Ukraine. Although there was no analysis, emotions raged, and everything was explained by the “historical choice”.

Ukrainian trade whipping pear

But there is one more factor that we do not talk about, and which turns any FTZ for Ukraine into the murder of its domestic market. The fact is that in the structure of our exports, the share of raw materials is rapidly growing: we are already exporting ore, not metal, seeds, not sunflower oil, corn, not mixed feed and biofuel (these processed products also form exports, but part of raw materials is no longer processed into a finished product).

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They are traded on world markets without signing FTA agreements: it is difficult to find a country that would introduce quotas and duties on the import of raw materials – everything is the other way around, the export of raw materials is limited and taxed with the help of duties (this is what almost all raw-material countries do, except Ukraine). Thus, in order to sell ore and grain in Europe or anywhere in the world, an FTA is not needed at all. The exchange commodity will be bought in any case at the quoted price.

Thus, Ukraine is a unique trading pear: we sell commodities that industrial economies need, but we do not pose any trade threat to them in terms of exporting goods with a high level of added value. But they agree to sign agreements on an FTA with anyone and completely open their market for imported goods.