What will the free trade zone with Turkey give to the Ukrainian economy.
New terms of foreign trade between Ukraine and Turkey promise benefits to both countries. What are the benefits of a free trade zone agreement with Turkey for Ukrainian producers, reports the Chronicle.info with reference to Focus.
Ukraine and Turkey on February 3, during a visit to Kiev by Turkish President Recep Tayyip Erdogan, signed an agreement on the establishment of a free trade area (FTA). As First Vice Prime Minister — Minister of Economy of Ukraine Yulia Sviridenko notes, the absence of such an agreement did not allow Ukraine to completely move away from the Soviet structure of the external economy, logistics and production chains. The FTA agreement, according to the Deputy Prime Minister, will become an impetus for increasing industrial cooperation, mutual investment and trade.
Raw materials and weapons. What Turkey and Ukraine Trade
Turkey is one of the largest trade partners of Ukraine. Yegor Kiyan, an economic analyst at the ICPS, emphasizes that over the past 20 years, the trade balance with Turkey has been in surplus, that is, exports exceeded imports. The fall in trade between countries occurred only in the crisis years of 2009 and 2015-2016.
Svetlana Taran, head of the Trade+ Center for International Trade Analytics at the Kiev School of Economics, emphasizes that in 2021, exports to Turkey increased by 70% compared to 2020, reaching the level of the pre-crisis 2013. As a result Turkey's share in the structure of Ukrainian exports reached 5.9%, which was the third highest after China and Poland. Trade turnover between Ukraine and Turkey last year amounted to about $7.38 billion (export — $4.14 billion, import — $3.23 billion). However, Taran notes that exports to Turkey grew solely due to the rapid growth in world prices for metallurgical and agricultural products.
In 2021, almost half of Turkey's export earnings came from ferrous metals, in second place with about 40% were agricultural products, primarily cereals, seeds and sunflower oil.
Vitaliy Lomakovych, adviser to the Minister of Finance and founder of the Growford Institute, adds that the share of raw materials in exports from Ukraine to Turkey in 2007-2019 increased from 16.7% to 52.3%, while the share of intermediate products decreased from 78% to 39, 8%, and means of production — from 4.9% to 2.2%.
Thanks to the FTA agreement, in addition to metallurgists and the agricultural sector, manufacturers of food products, furniture, and glass containers will gain access to the Turkish market. This will contribute to the diversification of the export structure
«Ukrainian exports to Turkey are extremely undiversified, which makes them very sensitive to changes in prices for basic goods. At the same time, many positions that Ukraine exports to the EU are not supplied to the Turkish market,” Svetlana Taran comments. The expert explains this situation by the closeness of the Turkish market, the trade regime of which is the most protected among the countries of the World Trade Organization (WTO). According to the Ministry of Economy, the average level of customs duties for Ukrainian goods in Turkey is 29%, but for some groups of goods it reaches 65% and even 145%.
As the Focus explained at the State Institution «Office for Entrepreneurship and Export Development», before the entry into force of the Free Trade Agreement with Turkey, domestic products entered this country under the terms of two trade regimes — a generalized system of preferences and the greatest assistance regime within the WTO.
«Turkey joined the WTO on very favorable terms, which allows it to set high import duties, in particular on food products, the institution clarifies. — At the same time, import duties on a number of industrial goods are quite low. For example, Ukrainian honey is subject to a duty of 38.5%, sunflower oil — 22.5%, and turbojet engines, which we actively export to Turkey, have 0% import duties, as well as parts of aircraft (according to the generalized system of preferences)&# 187;.
Recall that for the Turkish Bayraktar Akinci drones, which are in service with the Ukrainian army, the engines are supplied by the Zaporozhye Engineering Design Bureau «Progress» them. Ivchenko.
«Turkey is one of the few countries with which we have effective relations in the field of arms production. This suggests that the political component has become the basis for broad economic cooperation,” explains Vitaly Lomakovich. He adds that according to the results of 11 months of 2021, Ukraine was in sixth place among the countries exporting Turkish defense and aviation products, having spent $123.2 million on the purchase of Turkish weapons, which is 600% more than in 2020%.
The Ukrainian trade regime is much more liberal, and, accordingly, imports from Turkey to Ukraine are more diversified. According to the Office for Entrepreneurship and Export Development, the main categories of imports from Turkey in 2021 included: nuclear reactors, boilers (10%); ferrous metals (7.5%); mineral fuels (7.5%); edible fruits and nuts (7%); means of land transport, except for railway (6.5%); clothing and knitwear (5.5%).
Preparations for the signing of an FTA agreement with Turkey lasted about 12 years. Yulia Sviridenko calls this process «diplomatic protracted construction».
«The parties could not reach a consensus on the most sensitive issues, in particular, on the export of metallurgical and agricultural products from Ukraine. For the latter, Turkey proposed to establish quotas for duty-free supplies, which did not suit Ukraine. And Turkey tried to completely or partially exclude ferrous metals from the agreement», explains Svetlana Taran.
In the end, this year the parties came to a compromise. As Taran explains, metallurgical products were included in the deal, although the duty was set to zero only for some positions, while for many goods it was reduced or quotas were set. On the other hand, in the interests of Ukraine, they left an export duty on scarce scrap metal to prevent its export to Turkey.
FTA with Turkey: two sides of the deal
According to the FTA agreement, Turkey zeros duties for Ukraine on 10,337 commodity items (95% of goods exported by Ukraine), introduces tariff quotas or reduction of duties on another 1,348 types of products. Zeroing will take place in stages over three to 11 years. For example, duties on a number of types of vegetable oil for technical use will be reduced to zero in four stages by January 1 of the fourth year from the start of the FTA, and the exemption from duty on copper, aluminum and products made from them will last for eight years.
The Ministry of Economy says that the FTA agreement with Turkey will become an impetus for building up industrial cooperation, mutual investment and trade. However, some industries in Ukraine are unlikely to receive preferences from the FTA
«Given that Turkey has very high duties, the positive effect of the FTA will be felt first of all by Ukrainian exporters, Svetlana Taran believes. “Thanks to this, in addition to metallurgists and the agricultural sector, manufacturers of food products, furniture, and glass containers will gain access to the Turkish market. This will help. diversification of the export structure».
In particular, for Ukrainian glass containers and plastic products, the duty will be zeroed within four years.
However, not all economists welcome the signing of the FTA agreement.< /p>
«The government, focusing on expanding opportunities for exporters of metals and grains, provides bonuses to large businesses. Large financial and industrial groups will benefit from the signing of the FTA, which will allow them to «get better» after the anti-oligarchic law», emphasizes Yegor Kiyan. Small and medium-sized businesses, he believes, will have to compete fiercely with cheap goods that will be supplied from Turkey.
Vitaly Lomakovich notes that the signing of the agreement will have a negative impact on domestic producers of vegetables and fruits, some types of confectionery, textiles and the engineering industry. Even without an FTA, Turkish vegetables are expanding into supermarket chains, while domestic producers are unable to compete with importers against the backdrop of high gas and electricity prices.
Among Ukrainian businesses that may suffer from an FTA with Turkey, experts name light industry. But there is also a downside.
«Ukrainian light industry makes extensive use of Turkish fittings and fabrics, which will become cheaper thanks to the Free Trade Zone. Such Turkish components can be used in production, and then exported to the EU at a preferential duty,» says Svetlana Taran. While the use of imported Turkish raw materials does not allow declaring goods as produced in Ukraine, this is a barrier to duty-free exports to European countries.
Great hopes. The effect of signing an FTA with Turkey for the economy of Ukraine
Assessing the future effect of the agreement, the media most often refer to the forecasts of the Institute for Economic Research and Policy Consulting, according to which the FTA will add 2.2% to GDP and 2.6% to household income. Egor Kiyan calls this a fantasy: «Taking into account the specifics of the distribution of our GDP and national wealth, even a fivefold increase in profitability in some sectors, especially resource sectors, will not guarantee noticeable growth within the entire economy. That is, the effect for the Ukrainian economy will be positive, but not maximum» «.
However, the significance of the new FTA probably goes beyond the economic relations between the two participants.
«Now, thanks to the agreement, all the friendly countries of the Black Sea basin are Georgia , Moldova, Bulgaria, Romania, Turkey and Ukraine — will be united by free trade agreements with common rules,» Yulia Sviridenko notes. Russia, which does not have a trade agreement with Turkey, will lose in competition with Ukraine in the Turkish market.