Free trade area between Ukraine and Canada: advantages and hazards

On Tuesday, March 14, 272 deputies of the Verkhovna Rada of Ukraine ratified a free trade agreement between Canada and Ukraine. The agreement provides for preferential treatment for certain groups of Ukrainian goods exporters, mainly agricultural and production sectors (duty-free access for all industrial products).

Liabilities of Ukraine are:

– realization of full liberalization for 72% of goods, including fish and seafood, grains, peanuts, oil seeds and other oilseeds fruits, chocolate, bakery and confectionery, fruit juices, mineral water, beer, wine, etc.;

– import duties cancellation with the use of transitional periods of 3, 5 and 7 years for 27% of the goods;

– partial liberalization for sensitive agricultural products – meat and frozen poultry by-products, butter, cheese, margarine and blends etc.; removal of sugar from free trade and establishment of tariff quotas for frozen pork and by-products, high-fat bacon.

The analysis of cooperation between the two countries shows that in 2016 the share of Canada in the total value of external trade is less than one per cent – 0.63%, including 0.08% – exports and 0.55% – import.

The share of Ukraine in the foreign trade of Canada is much smaller: in 2015 it was 0,041%.

The balance of Ukraine’s foreign trade with Canada is negative, indicating the excess of imports over exports. Therefore, opening of the Ukrainian border for Canadian exports will potentially increase its share in the volume of foreign trade. In the commodity structure of Ukrainian export to Canada the following products dominate:

• copper (29.73%);

• railroad transport and supporting machinery (11.52%);

• colouring pigments, paints, varnishes and related materials (8.13%).

Primary goods dominate in the commodity structure of imports from Canada, more than half of total imports is coal. Production of the pharmaceutical industry is 10.5% totally.

Therefore, taking to consideration that fact that Canada opens 98% of its commodities market to the Ukrainian exporters, and Ukraine – 72%, the conditions for cooperation between the two countries in international trade may be characterized as favourable.

According to calculations of the Ministry of Economic Development and Trade of Ukraine, abolition of import tariffs will lead to an additional 3.5% increase in exports to Canada due to expansion of the existing flow of the Ukrainian exporters.

FTA will contribute to deepening of the investment cooperation; as of today, the main sectors of FDI from Canada are mining and processing industry, motor vehicles trade, transportation and warehousing, real estate, administrative and supporting services.

Apart from the positive aspects of the free trade agreement, some risks emerge:

• high competition in Canada’s markets may lead to the Ukrainian exporters’ inability to compete and will require additional resources to improve the goods’ competitiveness;

• risk of a growth of commodities export with low added value, which in terms of significant fluctuations in commodity prices may lead to a drop in price indices of net exports, and in its turn it will affect the balance of payments and the exchange rate.

Risk mitigation and avoidance is possible by creation of:

• Ukrainian products’ promotion system to the Canadian market in the form of trade and economic missions;

• expert credit agency, which will help reduce foreign trade risks of and cost of resources for the exporting companies.

Thus, the analysis of trade cooperation between Ukraine and Canada has shown that foreign trade turnover is relatively small, and we can say that this agreement is a “helping hand” of the Ukrainian diaspora. Such help, if used properly, will boost Ukrainian exports.