Report No. 29684-UA Ukraine Trade Policy Study (In Two Volumes) Volume II: Main Report November 16, 2004 Poverty Reduction and Economic Management Unit Europe and Central Asia Region Document of the World Bank IIPA International Intellectual Property Alliance ILAC International Laboratory Accreditation Center IMF International Monetary Fund IMU Investment Metallurgy Union IP Intellectualproperty I S 0 International Standards Organization LDC Least Developed Country LRMC Long-runmarginal costs M E C Multilateral Economic Cooperation MFN Most FavoredNation treatment MEEI MinistryofEconomy andEconomic Integration MRA Mutual recognition agreement NAAU National Accreditation Agency o f Ukraine NBU NationalBank o f Ukraine NTB Non-tariffbarrier OECD Organization for Economic Cooperation and Development OPT OutwardProcessingTrade PCA Partnership and Cooperation Agreement ROW Rest o f the world RCA Revealed Comparative Advantage index scs State Customs Service SES Single Economic Space SITC Standard International Trade Classification SPS Sanitary and phyto-sanitary measures ssc State Statistics Committee o f Ukraine TACIS Technical Assistance for the Commonwealth o f Independent States TBT Technical barriers to trade TOT Terms o f trade TRIPS Trade-Related Aspects of Intellectual Property Rights Agreement, which i s part o f the WTO TRQ Tariffrate quota UAH UkrainianHryvnia UEPLAC Ukrainian-European Policy and Legal Advice Centre UNCTAD UnitedNations Conference on Trade and Development USA United States o f America USAID U.S.Agency for International Development USSR Union of Soviet Socialist Republics VAT Value AddedTax WDI World Development Indicators WITS World IntegratedTrade Solution database by the World Bank WTO World Trade Organization WTO MTN The Multilateral Trade Negotiation classification o f the WTO TABLE OF CONTENTS PART I1 . MAINREPORT CHAPTER 1 TRADE PERFORMANCE SINCETHE EARLY 90s: LOOKINGFORITS . ................................................................................................. 1 NEWROLEINGLOBAL TRADE 1 A. ............................................................................................. Main Trends in Trade Performance ................................................................................ 1 B MerchandiseTrade Dynamicsin 1996-2003 ................................................................... 8 C CommodityStructureof Trade 11 Geographic Structureof Trade ...................................................................................... ...................................................................................... D 13 E ExportConcentrationand Specialization ...................................................................... 22 F Foreign Trade DataQuality ....................................................................................................................... ............................................................................................ 30 G .... .. Conclusions 35 CHAPTER2 TARIFF AND TRADE REGIME . 39 A Import Tariff Structure ................................................................................................... ...................................................................... 40 B Import Non-TariffBarriers ............................................................................................ 47 C 51 D ExportRegime 52 E FiscalAspects of Trade Regime ...................................................................................... 57 F Trade Regime: Perceptionsby the PrivateSector ....................................................... 57 G .... ... QuantitativeImport RestrictionsandContingencyMeasures .................................................................................................................. .................................... Conclusions ....................................................................................................................... 66 CHAPTER3.UKRAINU.N EXPORTSAND ACCESS TO THE EUMARKET A Overview 69 B.. ........................................................................................................................... ...............69 PoliciesAffecting Ukraine's Access to the EUMarket: The GeneralizedSystemof Preferences (GSP) ............................................................................................................ ~3 C EUProtectionandthe Structureof Ukraine's Exports ............................................... 85 D The Impactof EUEnlargement ....................................................................................................................... ...................................................................................... 89 E.. . Conclusions 91 CHAPTER4 UKRAINIANSTEELEXPORT: PERFORMANCE, SUSTAINABILITY . AND MEDIUM-TERMPROSPECTS 95 A ExportPerformance ........................................................................................................ ...................................................................................... 95 B Assets, Investmentsand Capacity Constraints ........................................................... C 104 D Comparativeadvantages of Ukrainianferrous metallurgy 111 E Medium-TermProspects 113 F ... ... GovernmentPolicies: MainInstrumentsof Supportto LocalSteel Producers ....................................... .......102 Conclusions ..................................................................................................................... ............................................................................................... 115 CHAPTER5 UKRAINE'S ACCESSIONTO THE WTO: COMPLETINGTHE . NEGOTIATIONSAND MAXIMIZINGTHE BENEFITS OFMEMBERSHIP A WTO Accession Negotiations 118 B RemainingRoadblocksto Accession ............................................................................ 122 C... ........................................................................................ ...............117 133 D Reapingthe Benefitsof WTO Membership ................................................................ 138 E.. Reachingthe Endof Negotiations ................................................................................ Conclusions ..................................................................................................................... 148 CHAPTER6 MEDIUM-TERM PRIORITIESFORTRADE INTEGRATION . STRATEGY ............................................................................................................................... 151 A . Trade integration with the EU: follow pragmatic approach toward attaining B Trade integration with the CIS: expand cooperation based on WTO principles ....152 157 C Strengthening institutionalframework for trade policy formulation ....................... 164 D... realistic goals .................................................................................................................. Conclusions 167 References ................................................................................................................................... ..................................................................................................................... 169 Statistical Annex ......................................................................................................................... 175 L I S T OF FIGURES Figure 1.1: The Value o f ExportedandImported Goods and Balance o f Trade inGoods .......................... 4 Figure 1.3: Dynamics o f Terms-of-Trade (TOT) Index. 1996-2003 ............................................................ 9 Figure 1.2: The Value o f Exportedand Imported Services and Balance o f Trade inServices .................... 5 Figure 1.4: Commodity structure o fUkraine's exports in2003. percent ................................................... 11 Figure 1.6: Geographic structure o f exports. percent ................................................................................. Figure 1.5: Commodity structure o f Ukraine's imports in2003. percent .................................................. 12 13 Figure 1.7: Indices o fphysical volumes andprices o f exports to the CIS and ROW ................................ 14 Figure 1.8: Growth Rates for Russia's Imports from Selected Countries in 1996-99 ................................ Figure 1. 9: Growth Rates for Russia's Imports from Selected Countries in 1999-2003 ............................ 16 16 Figure 1.10: The seasonally adjusted indices o f GDP inthe CIS and ROW.............................................. 19 Figure 1.11: Real Effective Exchange Rate................................................................................................ 20 21 Figure 1.13: Geographic structure o f imports,percent............................................................................... Figure 1.12. Reorientationo f exports inUkraine and Poland.................................................................... 21 Figure 1.14: Ukraine's export concentration.............................................................................................. 23 Figure 1.15: Concordances of the ESIs inUkraine's trade with the CIS and the EU................................ 27 Figure 1.16: Indices o f trade complementarityo f Ukraine......................................................................... 28 Figure 1.17: Discrepancybetweenreportedtrade flows fromNBUand SSC ........................................... 32 Figure 1.18: Annual VAT refund claims as a share o f merchandise exports, 1999-2003.......................... 34 Figure 2.1: Import Procedures Perceived as Problematic........................................................................... 59 Figure 2.2: Import Procedures Perceived as Problematic........................................................................... 60 Figure 2.3. Assessment o f different components ofthe export regime...................................................... 62 Figure 2.4. Evaluationo f domestic and foreign barriers for export........................................................... 64 Figure 3.1: Ukraine's Exports to the EUand Russia .................................................................................. 69 Figure 3.2: Evolution o f Exports to the EU................................................................................................ Figure 3.3: Ukraine's Exports to EU........................................................................................................... 70 72 83 Figure 3.4b: EUQuota on Imports o f Long Steel Products from Ukraine 1997-2004................................ Figure 3.4a: EUQuota on Imports o fFlat-Rolled Steel Products from Ukraine 1997-2004 ...................... 83 Figure 3.5a: Quota UtilizationRates for Long Steel Products, 1997-2003 ................................................. 84 Figure 3.5b: Quota UtilizationRates for Flat-Rolled Steel Products, 1997-2003 ....................................... 84 Figure 4.1: Exports volumes and average export price for the ferrous metal sector in 1999-2003............97 Figure4.2: Export structure of Ukrainian ferrous metallurgy in 1994by type o fproduct ........................ 99 Figure4.3: Export structure o f Ukrainian ferrous metallurgy in2003 by type o fproduct ........................ 99 Figure 4.4: Geographic structure o f ferrous metal exports in2003.......................................................... 100 Figure 4.5: Evolution o f scrap metal prices, 1999-2003 .......................................................................... 106 L I S T OF BOXES Box 1.1: Determinantso f Ukraine's MerchandiseTrade and Trade-Growth Links.................................. 10 Box 1.2: Comparative Dynamics o f Exports to Russia from Ukraine and Belarus.................................... 14 Box 1.3: Methodology o f the Ukrainian foreign trade statistics ................................................................ 31 Box 2.1: Primary Non-Tariff Measures Applied inUkraine from 1993-2004 .......................................... 48 Box 3.1: Rules o f Ongin ............................................................................................................................ 77 Box 2.2: 2004 Survey o fUkrainian exporters............................................................................................ 61 Box 4.1: EUquotas for Ukraine's Steel Imports........................................................................................ 98 Box 4.2: Kryvorizhstal Privatization: InsidersWon, Who Lost?............................................................. 105 B o x 5.1: Technical Regulations versus Standards.................................................................................... 128 Box 5.2: Some pending policy issues related to WTO accession............................................................. Box 6.1: EUCommon strategy toward Ukraine....................................................................................... 136 154 Box 6.2: Acknowledgement and aspirations: EUand Ukraine positions on strategic perspectives o f mutual cooperation .................................................................................................................................... 155 B o x 6.3: Russo-UkrainianReciprocalTrade ProtectionMeasures.......................................................... 159 Box 6.4: Adoption o f the EUtechnical regulations.................................................................................. 165 LISTOFTABLES Table 1.1: Merchandise trade balance. exports and imports o f Ukraine in 1990-2003 ............................. 3 Table 1.2: Trade Performance of Ukraine: Comparative Perspective.......................................................... 6 Table 1.3: CIS Actual versus Theoretical Trade Openness.......................................................................... 7 Belarus., ....................................................................................................................................................... Table 1.4: Comparative Dynamics o f Machinery and Equipment Exports to Russia fromUkraine and 17 Table 1.5: Export Concentration Indicators: Ukraine and Poland.............................................................. 23 Table 1.6: Export Specialization Indices.................................................................................................... 25 25 Table 1.8: Grubel-Lloyd Index: Ukraine and Poland................................................................................. Table 1.7: Export Specialization by export market: ................................................................................... 29 33 Table 2.1: Import-WeightedAverage Tariff Rates inUkraine .................................................................. Table 1.9: Mirror Statistics......................................................................................................................... 41 Table 2.2: Import-WeightedAverage MFNTariffs on Non-Agricultural Goods inUkraine for Major Commodity Groups .................................................................................................................................... Table 2.3: Import-WeightedAverage MFNTariff Equivalentson Agricultural Goods inWTO MTN...42 Table 2.4: Tariff Escalation inthe Non-Agricultural MFNTariff Schedule.............................................. 42 44 Table 2.5: Tariff Escalation inthe Agricultural MFNTariff Schedule ...................................................... 44 Table 2.6: Basic Characteristics o f Tariff Schedules inUkraine and Selected Countries.......................... 46 Table 2.7: Ukraine's Non-Tariff Measure Intensity Indices, 1993-2004 .................................................... 48 Table 2.8: Frequency and Import Coverage Indices for Core Barriers, 1993-2004 .................................. 49 Table 2.9: Frequency Indices o f Core NTBs inDeveloping Countries...................................................... 50 Table 2.10: Ukraine's Market Share inGoods Subject to Export Taxes, 2001-02 .................................... 53 Table 2.1 1: Main Privileges Granted to Investorsinthe Territory o f Special (Free) Economic Zones, 55 Table 2.12: Taxation o f Trade, 1998-2002 ................................................................................................ 2004 ............................................................................................................................................................. 57 58 Table 2.14: Selected Indicators for the Quality o fthe Business Environment, 2004................................. Table 2.13: Major Document Requirements for International Trade Operations inUkraine..................... 65 Table A2.1: Budget Revenues from Foreign Economic Activities inUkraine .......................................... 68 Table 3.1: Structural characteristics o f Ukrainian and Polish trade with the EU....................................... 71 Table 3.2: Ukraine GSP Scheme, 2001 ...................................................................................................... 76 78 Table 3.4: Key Sectors inUkraine's Exports to the EUand Tariff Preferences ........................................ Table 3.3: Weighted Average Tariffs on Ukraine's Exports to the EU...................................................... 80 Table 3.5: Export to the EUo f HS 10019099 Spelt in 1992-2002 ........................................................... 81 Table 3.6: Unit Value and Tariffs on H S 10019099 Spelt ......................................................................... 82 Table 3.7: Application o f EUTariffs to Products that Ukraine Exported to Russia in2002 .................... 85 Table 3.8: UkrainianProducts Subject to Anti-Dumping Measuresinthe EU.......................................... 88 Table 4.1: Contribution of the steel sector to Ukraine's economic performance in2000-03..................... 97 101 Table 4.3: Output and Investments inthe Cast Iron& Steel Sector, 1985-2003...................................... Table 4.2: Structure o f 1999-2003 UkrainianRolled-Stock Exportsin 1999 prices................................ Table 4.4: Comparativecost structure inferrous metallurgies of Ukraine and Germany in2001 ...........102 111 Table 4.5: Financial indicators of Ukraine's ferrous metallurgy ............................................................. 113 Table 4.6: Ukraine's projectedoutput, domestic consumption, exports and imports o frolled steel in 2004-10...................................................................................................................................................... 114 Table 4.7: Medium-termprojections for output and employment inUkraine's ferrous metallurgy sector114 Table 5.1: Bilateral Market Access Protocols Signed.............................................................................. 121 Table 5.2: PlannedReductions inAgriculture Tariffs.............................................................................. 122 Table 5.3: AgricultureCommitmentsby New WTO Members, 1995-2003 ........................................... 132 141 Table 5.5: Technical StandardsProjects................................................................................................... Table 5.4: IntellectualProperty Projects .................................................................................................. 145 Table 6.1: Bilateral free trade arrangements signed and ratifiedby Ukraine ........................................... 158 175 Table A2: Balance ofpayments in 1997-2002 ...................................................................................... Table Al: Foreign trade statistics' sources: a comparison........................................................................ 176 Table A3: Merchandise trade balance, exports and imports of Ula-ainein 1990- 1994 ......................... 177 Table A4: Geographic structure of merchandise exports in 1996-2003 ................................................ 178 Table A5: Geographic structure of merchandise imports in 1996-2003................................................ 180 Table A6: Geographic structure of net merchandise exports in 1996-2003 .......................................... 181 Table A7: Commodity structure ofmerchandise exports in 1996-2003................................................ 182 Table A8: Growthrates ofmerchandise exports by commodity groups in 1997-2003 ......................... 182 Table A9: Contributions to exports growth by commodity groups in 1997-2003 ................................. 183 Table A10: Contributions to exports growth by commodity groups in 1997- 2003 ............................... 183 Table All: Commodity structure of merchandise imports in 1996-2003 ............................................. 184 Table A12: Growthrates of merchandise importsby commodity groups in 1997-2003....................... 184 Table A13: Contributions to imports growthby commodity groups in 1997 -2003 .............................. 185 Table A14: Contributions to imports growthby commodity groups in 1997 -2003 .............................. 185 Table A15: Commodity structure of net merchandise exports in 1996-2003 ........................................ 186 Table A16: Merchandise exports analyticalrepresentation, 1996-2002................................................ 186 Table A17: Commodity structure ofmerchandise exports in 1996-2002.............................................. 187 Table A18: Growthrates of merchandise exports by commodity groups in 1997 -2002 ....................... 187 Table A19: Contributions to exports growth by commodity groups in 1997-2002 ............................... 188 Table A20: Contributions to exports growth by commodity groups in 1997-2002 ............................... 188 Table A21: Merchandise imports analyticalrepresentation, 1996-2002.................................................. 189 Table A22: Commodity structure of merchandise imports in 1996-2002 ............................................. 189 Table A23: Growth rates of merchandise importsby commodity groups in 1997 -2002....................... 190 Table A24: Contributions to imports growth by commodity groups in 1997-2002 .............................. 190 Table A25: Contributions to imports growth by commodity groups in 1997-2002 .............................. 191 Table A26: Commodity structure of merchandise exports in 1996-2002.............................................. 191 Table A27: Growthrates of merchandise exports by commodity groups in 1997-2002....................... 192 Table A28: Contributionsto exports growth by commodity groups in 1997 - 2002............................... 192 193 Table A30: Commodity structure of merchandise imports in 1996-2002 ............................................. Table A29: Contributionsto exports growth by commodity groups in 1997 - 2002............................... 193 Table A31: Growth rates o f merchandise importsby commodity groups in 1997-2002....................... 194 Table A32: Contributions to imports growth by commodity groups in 1997 - 2002 .............................. 194 Table A33: Contributionsto imports growth by commodity groups in 1997- 2002 .............................. 195 Table A34: Export Specialization Indices in 1996-2002 ....................................................................... 196 Table A35: Export Specialization Indices in 1996-2002, Exports to CIS ............................................. 198 Table A36: Export Specialization Indices in 1996-2002, Exports to the EU........................................ 200 Table A37: Export SpecializationIndicesin 1996. ....................................................................... 2002 202 Table A38: Export SpecializationIndicesin 1996. Exports to CIS ............................................. 2002, 207 Table A39: Export Specialization Indicesin 1996. Exportsto the EU........................................ 2002, 212 Table A40: Contributionof commoditygroups to the Grubel-Lloydindex in 1996. ...................217 2002 Table A41: Contributionof commoditygroups to the Grubel-Lloydindex for trade with the CIS in 1996 -2002 ..................................................................................................................................... 218 Table A42: Contributionof commoditygroups to the Grubel-Lloydindex for trade with the ROW in 1996-2002 ..................................................................................................................................... 219 Table A43: Complementarityof Ukraine's exports structure with its tradingpartners' imports structures in 1996-2002 ..................................................................................................................................... 220 ACKNOWLEDGMENTS The study was prepared by the joint ECSPE-PRMTR team lead by Lev Freinkman in close cooperation with the Ministry o f Economy and Economic Integration o f Ukraine and in partnership with several Ukrainian think tanks. The primary authors o f the study are Ruslan Piontkivsky and Olga Pindyuk (Chapter l), Evgeny Polyakov (Chapter 2), Paul Brenton and Takako Ikezuki (Chapter 3), Lev Freinkman (Chapter 4), Philip Schuler (Chapter 5), and Lev Freinkman and Evgeny Polyakov (Chapter 6). Mr. Valeriy Pyatnisky, First Deputy Minister for Economy and Economic Integration, led the government team that helpedto prepare the study. The background papers for the study were prepared by Ihor Burakovsky, Veronika Movchan, Ferdinand Pave1 and Natalia Selitska (Institute for Economic Research and Policy Consulting), Andrii Polianytsia, and by the team from the Kiev Center for Economic Development, led by Alexander Paskhaver and Lidia Virkhovodova. Major contributions were also provided by Mark Davis, Vladimir Drebentsov, Larisa Leschenko, and Rostislav Zhuk. Harry Broadman, Yuri Mirochnichenko, Dejan Ostojic, and DusanVujovic provided helpful comments and suggestions. The staff ofthe Kiev Center for Institutional Development undertook a survey o f exporters. Usha Rani Khanna assisted with editing the paper, while Anna Musakova, Irina Partola, and Virginia Sapinoso provided support duringthe entire preparation process for the study. The team i s also grateful for the comments and suggestions received from the staff o f the Ukrainian Agency for Humanitarian Technologies (AHT), Ukrainian Center for International Integration, as well as from Farhat Farhat, Timo Hammaren, Irina Kobuta, EvgeniaKorniyanko, Roger Lawrence, Oksana Popmga, and Bemard Spinoit. The study also benefited from discussions with the staff of the Ukrainian Customs Committee, Standardization Committee, State Statistical Committee, National Accreditation Agency, and State Department for IntellectualProperty, as well as other officials. Femando Hemandez Cosquet, Bartlomiej Kaminski, and David Tarr were the peer reviewers for the study. Deborah Wetzel and Asad Alam were the Sector Managers supervising the preparation o f the study. Cheryl Gray was the Department Director, and Luca Barbone and Paul G. Bermingham were the Country Directors for Ukraine. The preparation of the study also benefited from generous co-funding provided by the governments o fUnitedKingdom and Italy. PART 11. MAINREPORT CHAPTER 1. TRADEPERFORMANCE SINCE THE EARLY 90s: LOOKINGFORITS NEWROLEINGLOBAL TRADE A. MAINTRENDSTRADEIN PERFORMANCE 1.1 This Chapter describes Ukraine's merchandise foreign trade developments, focusing on the recent (since 1996) changes inthe geographic and commodity structure o f foreign trade, and looks into various indicators of trade performance, such as export specialization, similarity and complementarity o f trade with different regions, and degree o f intra-industry trade. It highlights such features as significant reorientation of trade flows, low level o f trade diversification, and links between export expansion andmacroeconomic growth. 1.2 Ukraine is a relatively open economy with foreign trade turnover exceeding GDP. It i s not surprising then that Ukraine's merchandise trade played a significant role in the recent growth episode. Indeed, recent trends in the foreign trade indicators show a significant correlation with major macroeconomic developments. First, both exports and imports, likewise GDP, hit a low point in 1999. Second, a dramatic improvement inthe trade balance following the 1998 financial crisis reveals the major direct role o f net exports in the economic growth that followed. 1.3 On the eve o f independence in 1990, Ukraine's foreign trade was concentrated mainly in the USSR republics. The share o f inter-republic exports intotal exports was 83 percent, while in imports this indicator equaled 81 percent. Commodity structures o f trade flows with the USSR republics and the rest o f the world (ROW) were quite different. Ukraine's exports to the ROW were comprised o f hard coal (32 percent o f total exports to the ROW), machinery and equipment (28 percent), metal products (18 percent), and chemicals (8 percent). Imports from the ROW included machinery and equipment (50 percent), textile and apparel (14 percent), and chemicals (10 percent).' Ukraine did not export food products to the ROW and did not import energy products from the ROW as these products were almost exclusively part o f the inter-republican trade. 1.4 Ukraine's exports to the other USSR republics were comprised o f machinery and equipment (39 percent o f total exports to the USSR), food (16 percent), iron and steel (15 'PlanEconreport of March 13, 1992. percent). The structure o f imports from the other USSR republics was dominatedby machinery and equipment (36 percent o f total im orts), light industrial products (14 percent), chemicals (12 percent), and oil and gas (11percent). P 1.5 In short, four turning points can be distinguished in foreign trade developments since 1990 (Table 1.1): e In 1991, the collapse of the USSRandthe ruble zone and destructionofpolitical and economic relations with the socialist countries o f Central and Eastern Europe produced a shock for Ukrainian foreign trade that led to its drastic adjustment: by 1993, and Ukraine's exports and imports decreased by about 85 percent in U S dollar terms. Due to a sharper decrease o f imports than that o f exports, merchandise trade balance over 1990-93 increased by US$1.7 billion. The geographic structure o f foreign trade had changed significantly, as the reduction o f trade with the CIS was much more dramatic than that o f trade with the ROW. As a result, over that period, the share o f exports to the ROW rose to 54 percent, and the share of imports from the ROW increased by 36 percent. There had also been changes in the commodity structure o f foreign trade with the ROW - Ukraine started to export new products like food and textiles. A slower decrease inthe share of the CIS inimports apparently indicatedUkraine's dependency on fuel imported mainly from Russia. e In 1993, bothexports and imports resumedtheir growth, while the trend o ftrade reorientation discontinued. The share o f the ROW in imports almost did not change through 1996 (36.5 percent in 1996 versus 35.9 percent in 1993), while the share of the ROW inexports even decreased by 5 p.p. to 49 percent. After the initial shock-induced drop in trade, especially with the CIS, enterprises started to adjust to new realities. While the generalpace o f structural reforms hadbeenslow over the period, this pick-up intrade most likely reflected the correction of major "undershooting" in the first years o f independence. Ukrainian producers found new schemes of cooperation with their former counter-agents in the CIS. Additionally, the terms-of-trade shock o f higher energy prices contributed to the highvalue ofimports. 8 In 1996, the trend had changed again: both imports and exports declined, while shares o f the ROW in exports and imports noticeably increased through 1999 (by 24 p.p. and 6 p.p. respectively). e Since 2000, exports and imports have been growing rapidly. In 1999-2003, total merchandise exports increased by about 100 percent. The CIS' share has further declinedinimports, while it has remained almost unchanged inexports. * SeeVoprosy Statistiki, 1990, Issue 3. These estimates are affected by well-known distortions inthe USSR pricing, which would underestimatethe share of energy and overestimate the share of consumer goods and machinery (Tarr, 1994). 2 Table 1.1: Merchandise trade balance,exportsand imports of Ukrainein 1990-2003, US$ million if not otherwisestated 1990-2003 1993-2003 US$ million 1990 1993 1996 1999 2003 change change Exports 78,336 11,969 14,401 11,582 23,080 -55,256 11,111 Exports index, 1 9 9 0 400 100 15.3 18.4 14,8 29.5 -71 93 Imports 81,991 13,885 17,603 11,846 23,021 -58,970 9,136 Imports index, 1990=100 100 16.9 21.5 14.4 28.1 -72 66 Trade balance -3,655 -1,916 -3,203 -265 59 3,714 1,975 Trade balance, percent of GDP -5.9 -7.2 -0.4 0.1 6.0 Trade Structure, percent Exports 100 100 100 100 100 CIS 81.2 46.3 51.4 27.7 26.2 -55 -20 Russia 54.6 34.8 38.7 20.4 18.7 -36 -16 ROW 18.8 53.7 48.6 72.3 73.8 55 20 Baltics 1.7 1.1 1.8 1.5 3.8 2 3 EU 5.6 6.4 11.1 20.5 19.8 14 13 Imports 100 100 100 100 100 CIS 78.3 64.1 63.5 57.8 50.0 -28 -14 Russia 58.0 45.1 50.1 48.0 37.6 -20 -8 ROW 21.7 35.9 36.5 42.2 50.0 28 14 Baltics 2.3 2.1 1.6 1.6 1.1 -1 -1 EU 5.3 8.2 15.4 23.1 25.2 20 17 * Inter-republican trade in 1990 and 1993 i s estimated at the official/commercial exchange rate. Source: Belkindas and Ivanova (1995); World Integrated TradeSolution (WITS), COMTRADE; State Statistics Committee of Ukraine (SSC). 1.6 As a result, in 2003, merchandise exports and imports were still about 70 percent lower than in 1990. However, comparisons to 1990 may be misleading, as 1990 trade estimates are likely to be highly inflated.3 Compared to 1993, 2003 exports increased by 93 percent and imports grew by 66 percent. Over 1990 - 2003, the share o f the CIS declined by 55 p.p. in exports and by 28 p.p. in imports. The more moderate decline o f the CIS share in imports still indicates a high dependency on CIS energy supplies. In the rest o f this Chapter, we look into foreign trade developments since 1996 inmore detail. 1.7 Overall, the recent export expansion in Ukraine was quite impressive (Figure 1.1). This export growth could not be attributed only to improved external factors such as market prices and access. It reflects considerable positive changes that took place in the Ukrainian economy, first o f all in the area o f enterprise restructuring. It i s worth noting that in the mid-90s world prices for Ukraine's main exports were rather high; however, the country's export performance was muchweaker that it i s today. A considerableportion of trade flows in the USSR was due to uneconomicalmovements of goods across the countryandwas directed by Gosplan and sectoral ministries and driven in many cases by non-economical considerations. Additionally, it is believedthat USdollar equivalentsofpricesfor Soviet machineryequipment were upwardbiased. 3 1.8 Ukraine's strong trade performance has been a factor that made a major contribution to recent economic recovery and growth acceleration inthe country. About 40 percent o f total GDP growth in 1999-2002 could be attributed to the increase in net exports. Indirect effects o f trade performance on growth were also significant (see also Box 1.1). 1.9 Since independence, the trade balance has been a major determinant o f Ukraine's macroeconomic developments. Through the first half o f the 1990s merchandise trade balance hadbeenindeficit that widened to 7.2 percent o f GDP in 1996. The deficits hadbeena source o f the macroeconomic instability o f the early 1990s and had been financed mainlyby rapid growth o f the external debt and accumulation o f energy arrears to Russia. After high inflation in 1993- 94, Ukraine started an exchange rate-based stabilization in 1995. As a result of the real appreciation o f the national currency, the merchandise trade deficit further widened in 1996-97. By that time, an emerging T-bills market became an important source o f deficit financing. The Asian crisis o f 1997 and the Russia crisis o f 1998 led to both a decline in trade flows and the major real depreciation o f the hryvnia that eventually turned the trade balance into surpluses and facilitated macroeconomic stability. 1.10 Starting from 1999, Ukraine has been running trade and current balance surpluses, while in 1997 its current account deficit exceeded 3 percent o f GDP. The balance in trade in goods and services improved from a deficit of US$1.5 billion in 1997 to the average surplus o f about US$1.2 billion for 1999-2003. The initial improvement in trade balance was driven by a major import contraction in 1999. Thereafter, export growth was higher than growth inimports, whichhad an additional positive impact on trade balances. Figure 1.1: The Value of Exported and Imported Goods and Balance of Trade in Goods U S dollar billion 25 titport of goods, FOB 20 0 kqmrtof goods,aF Balanceof trade ingoods 15 10 5 0 -5 1997 1998 1999 2000 2001 2002 2003 Source: National Bank of Ukraine (NBU). 4 1.11 Trade in services has constituted a relatively small share in foreign trade tumover, not exceeding 20 percent over 1996-2003. Similar to merchandise export dynamics, exports o f services decreased over 1996 and tumed to growth in 2000 (Figure 1.2). In 2003, exports o f services for the first time exceeded the 1997 level. Import o f services over 1996 was fluctuating around US$2.5 billion, but starting 2000 it began to grow dramatically and in 2003 imports o f services was 60 percent higherthan in 1999. 1.12 Transportation services make up about 75 percent o f the total exports o f services, two- thirds o f which are pipeline services. Thus export o f services is largely determined by bilateral agreements with Russia regarding the amounts and tariffs of transit gas, which did not change significantly in recent years. In addition, Ukrainian ports and railways generate considerable export proceeds from participating in Russian and other CIS trade. The structure o f imported services is more diversified. Figure 1.2: The Value of Exported and Imported Services and Balance of Trade in Services US dollar billion ' 1 n Export of services Import of services ioftradein a 1997 1998 1999 2000 2001 2002 2003 Source:NationalBank of Ukraine(NBU). 1.13 Table 1.2 compares Ukraine with Russia, other CIS countries, Poland and the EUon a number o f foreign trade performance indicators. The following observations are worth mentioning: 0 Ukraine is a relatively open country in terms o f merchandise foreign trade. Trade tumover exceeds the GDP, while for Russia, Poland and the EUthis ratio i s close to 60 per~ent.~ Only relatively small CIS countries have openness that is higher than in Ukraine. Analysis o f the trade openness models for the CIS countries, done by Freinkman et al. (2004), suggests Ukraine is over-trading, compared to the model predictions, and in this sense it is amongthe best performers inthe CIS (Table 1.3). f i i s may also be an indication that GDP in Ukraine remains much more seriously underestimated than in any o f its neighbors. IMF (2003) provides additional evidence in support of the hypothesis that Ukrainian GDP is "more than average" underestimated. 5 Merchandise exportsper capita are still low. They are of the same magnitude as in the other CIS countries but times lower than inRussia, almost 4 times lower than inPoland, and 20 times lower than inthe EU. Ukraine has a share of manufacturing trade twice that of its CISpeers, but it lags well behind Poland and Germany. While two-thirds o f Ukraine's exports are manufacturing (of which half i s iron and steel), in Poland this share exceeds 80 percent. One of the likely reasons is the magnitude o f the FDI. During 1996-2002, Ukraine managed to attract only 1.6 percent GDP o f FDI per annum. At the same time, the average annual FDIinflow to Polandover the periodequaled 36 percent o fGDP. Table 1.2: Trade Performance of Ukraine: Comparative Perspective All data for 2002 inUS$ millionifnot CIS-10 (excl. otherwise stated Ukraine Russia Ukraine and Russia) Poland Germany Export o f goods per capita 368.0 746.9 329.7 1210.1 7481.6 Export o f goods, ratio to GDP, percent 43.2 31.1 58.3 24.7 31.1 Import o f goods per capita 348.5 423.2 311.9 1397.8 5928.2 Import o f goods, ratio to GDP, percent 40.9 17.6 55.2 28.6 24.7 Trade balance, ratio to GDP, percent 4.3 10.4 -3.1 -3.7 6.5 Openness, percent 103.6 59.6 139.8 59.5 55.8 Export o f goods growth, percent, average for 1996- 2002 3.7 3.1 5.8 9.2 2.8 Import o f goods growth, percent, average for 1996- 2002 -0.6 -1.8 2.1 7.6 1.3 Share o f manufacturing (groups 5-8 excluding68, usingthe SITC revision2) exports inexport o f goods, percent 67.3 21.6 27.1 82.1 85.9 Share o f CIS inexport o f goods, percent 24.4 8.7 18.1 6.3 2.5 Net FDIper capita, cumulative for 1996 -2002 90.4 39.0 217.8 1088.7 -407.3 Net FDI, ratio to GDP, percent, average for 1996- 2002 1.6 0.3 5.2 3.6 -0.1 Source: DOTS, IFS, WDI,SSC, NBU. 6 Table 1.3: CIS Actualversus TheoreticalTrade Openness Exportsplus importsto GDP incurrentUS$ Exportsto GDP in currentUS$ Actual Actual Openness Openness 2001 realization ratio (9w (actualipredicted) (%) (actualipredicted) 1995 2001 1995 2001 Armenia 86 72 0.57 24 26 0.39 Azerbaijan 86 81 0.70 32 42 0.74 Belarus 104 139 1.12 50 68 0.65 Georgia 68 60 0.50 26 22 0.38 Kazakhstan 83 95 0.90 39 46 0.96 Kyrgyz Republic 72 73 0.61 29 37 0.64 Moldova 130 124 1.03 60 50 0.91 Russian Federation 52 61 0.70 28 37 0.80 Tajikistan .. 140 1.31 ._ 64 1.31 Turkmenistan 71 94 0.74 35 47 0.77 Ukraine 97 111 1.19 47 56 1.22 Uzbekistan 74 56 0.59 31 28 0.95 CIS -7 86 87 0.76 35 38 0.76 Central CIS 84 101 0.98 41 52 0.91 Source: Freinkman et al. (2004). Note: Realization ratios were estimated as ratios of actual tradeiexport volumes to their values, predicted on the basis of the gravity model suggested by Frankel (1997). 1.14 While Ukraine's trade performance has been weaker than that of its CEE neighbors, such as Poland, when it i s compared to smaller economies in the CIS (CIS-7), recent trade developments in Ukraine were more successful, despite the fact that four CIS-7 countries are already WTO members. This stronger export and trade, as shown in Table 1.3, performance i s also reflected in: (i) growth rates o f overall merchandise exports in Ukraine; (ii) higher higher shares o f manufacturing export; (iii) advanced re-orientation o f trade flows out o f the CIS more to global markets; and (iv) higher incidence o f intra-industry trade. But the reasons for such a comparative success relate more to the following historical factors and post-Soviet endowments, and less to the trade policy (Freinkman et al., 2004): 0 Ukraine inherited a stronger industrial base and managed to preserve a larger share o f it, including through various subsidies during the initial years o f transition. A dominant share o f Ukrainian exports is heavily concentrated in a handfulo f traditional post-Soviet producers e.g., inmetallurgy, oil products and chemicals. 0 Ukraine inherited much stronger (but less than Russia) marketing capabilities, which helped it to preserve some traditional high-value market niches (e.g., arms, nuclear and space technologies). For various political reasons, Ukraine was much more successful in preservingcooperationwith Russia inthese sectors than the CIS-7 countries. 0 Ukraine also benefited from its location (especially proximity o f the European markets), which provided it considerable advantages relative to the smaller CIS economies in the Caucasus and Central Asia. 7 B. MERCHANDISE TRADEDYNAMICSIN1996-2003 1.15 Over the period 1996 - 2003, the total value o f merchandise exports increased by 60 percent. Ofthis increase, 31percent was attributedto the growth o f volumes, and 69 percent was explained by unit value gr~wth.~ sub-periods in export dynamics should be distinguished Two since 1996: exports were falling from 1996 through 1999 (cumulatively, export value decreased by 20 percent over the three years), and exports have been growing thereafter (over 2000-03, export value increased by 100percent). 1.16 The factors o f an export decline in 1996-99 included: 0 Declining exportsprices. Ingeneral, the unit value o f merchandise exports, according to our estimates, diminished by 11percent over 1996-99. 0 Decline of demand in the CIS (major trade partners o f Ukraine during that period) due to continuation o f their economic decline. This drop in demand for Ukrainian export in the CIS was not offset by export reorientation, as exports to the rest o f the world (ROW) increased only by 9 percent over 1997-99. 0 Real exchange rate appreciation. An exchange rate-based stabilization o f the new Ukrainian currency - hryvnia - resulted in a real effective appreciation o f 41 percent in just two years (between December 1995 and December 1997).6 Strengthening o f the currency underminedthe price competitiveness o f exports from Ukraine, as there was a limited capacity to withstand the exchange rate fluctuations with products differentiation. Traditional supply-sidefactors, such as poor quality o f enterprise management, slow restructuring, poor propertyrights, undeveloped and monopolized infrastructure, etc. 1.17 Then a surge o f 26 percent inmerchandise exports in2000 compensated for the decline duringthree previous years. Berengaut et al. (2002, p.9) and CASE (2002, p.12) consider this to be the primary factor o f Ukraine's economic recovery since 2000. The likely determinants of this rapidincrease inexports in2000 were the following: 0 Growing exports prices. According to our estimates, the unit value o f merchandise exports increasedby 14 percent. 0 Real depreciation of the hryvnia relative to western currencies. The 1998 regional financial crisis led to a boost in competitiveness o f Ukraine's exports in non-CIS markets. 0 Rapid economic growth of Ukraine's trade partners in 2000, especially o f Russia, brought about an increase in demand for key Ukrainian exports. The fastest export growth in 2000 was observed in the traditional export sectors (metals, chemicals, The relativecontributionof volumes and unit values was calculatedthrough 200342. Accordingto the IMF' International Financial Statistics. 8 machinery and equipment), though exports o f all other commodity groups apart from agricultural commodities also expanded. 1.18 In2001-02, export growth significantly slowed down to 12 percent and 10 percent respectively, but it remained quite high and on average it was higher than that o f imports. Partially such dynamics can be explained by slower economic growth o f Ukraine's trade partners, stabilization o f world prices for traditional exports/metals, increased trade barriers in major trading partners (Russia, US, EU), and some real appreciation o f the hryvnia. Over this period, agricultural produce and mineral products made the biggest contribution to total export growth, while export o f chemicals, metals, machinery and equipment grew slowly or declined. 1.19 In2003, exports again accelerated to 29 percent, inmany respects repeating the 2000 surge. They were driven by higher world prices for main exports, by large contributions from the traditional sectors such as iron and steel and chemicals, and by a pick up o f machinery and equipment exports to the CIS. 1.20 Overall, for the period 1996-2003, the statistical analysis suggests that important determinants o f export dynamics were external demand, real exchange rate dynamics, unit value of exports and to some extent changes in the policies o f trade partners (see also Box 1.1). The impact o f real depreciation has been much stronger on import than on exports so far, but it i s expected, based on international experience, that eventually it will help exports as well. In addition, the supply factors, related to major improvements in capacity utilization, were also significant. Figure 1.3. Dynamics ofUkraine'sTerms-of-Trade(TOT) Index, 1996-2003 - 1 2 - Export Unit Value index -Import UnitValue index 115 1 1 1 05 1 a95 0 9 0 85 0 8 1996 1997 1998 1999 2000 2001 2002 2003 Source: Own estimates based on datafrom the State Statistical Committee. 9 1.21 Despite the dramatic strong export expansion since 1999, the analysis suggests that the medium-termsustainability o f current export trends remains o f concern. The primary drivers o f the recent export expansion relate to such factors as major growth inexport unit value (especially for metals and oil products) and the one-time effect o f recovery in traditional manufacturing (metallurgy, oil processing, and chemicals), which was largely driven by privatization, management change, and dramatically improved capacity utilization. About half o f the total export growth in 1999-2003 could be attributed to favorable price dynamics. Ukraine cannot consider these factors to be permanent engines o f export expansion. As is shown below, the contribution to recent export growth from new export products and new exporters was small. In particular, in the 2004 survey o f 500 Ukrainian exporters, less than 9 percent of respondents were new exporters that started to sell abroad after 2000. And investments by large traditional exporters, such as in the steel sector, while increasing relative to the mid-90s, remained low by international standards (see also Chapter 4). Box 1.1: Determinantsof Ukraine's Merchandise Trade and Trade-Growth Links One o f the backgroundpapers for Ukraine's Country Economic Memorandum (2004)' analyzes the main determinants o f the trade dynamics for the period 1996-2003. The paper also explores the links between trade and growth performance. The mainfindings o f the paper, supported by the econometric estimation o f the structural trade equations, are the following: Ukrainian foreign trade flows are sensitive to market signals, such as changes in relative prices and incomes, as well as changes in policies. More generally, Ukraine is very sensitive to external shocks through trade, While the real depreciation o f the hryvnia improves the merchandise trade balance (without gas imports), the economy's response to the real depreciation, however, has been more through import substitution than through export expansion. The trade flows with the CIS countries are more responsive to market signals, probably reflecting more substitutability between products inthe region. The direct positive link between trade performance and recent growth inUkraine can be seen through the dramatic improvement in the trade balance and respective expansion in net exports. During 1996-2002, the merchandise trade balance improved by US$4.2 billion. Export volumes grew by 19 percent over 1996-2002, andnon-gas import volumes contracted by 20 percent over the period. Trade improvements also influenced Ukraine's growth performance positively through a number o f indirect channels. First, the real devaluation o f 1998-99 helped domestic producers to benefit from price competitiveness and to use this window o f opportunity to expand their export markets. Second, the resulting trade and current account surpluses have been among the key elements o f macroeconomic stability that boosted confidence, allowed for a longer-term planning horizon for the private sector, and stimulated an increase in money demand. Third, increased profits allowed exporters to expand investments. Fourth, spillover effects from exporters were noticeable, and they worked through an increase indemand for domestic inputs and transfer o f new knowledge and technologies, etc. The major concern is that the long-run growth elasticity o f exports to the ROW'Sincomes has been less than one (0.Q implying that Ukrainian exports to the ROW (a proxy to the world economy)are growing slower, other things being equal, than the world economy itself. L o w export elasticity o n foreign incomes implies that the existing export structure, if not improved, will limit opportunities for fiuther growth expansion. The underlying reason might be that the commodity structure o f exports is heavy with primary goods and metals. The fact that the export sector has played a significant role inthe recent growth episode has more to do with growth in export unit values and real exchange rate depreciation, and less with increased productivity o f exporters. However, as world prices are difficult to predict, and the real exchange rate for the hryvnia might well appreciate in the medium term, the export structure should improve dramatically before it could become a determinant o f sustainable growth. 'SeePindyukand Piontkivsky(2004). 10 1.22 Ukraine's terms o f trade have been relatively stable (Fig. 1.3). This i s because, despite significant fluctuations in both import (driven primarily by energy) and export (metals) unit prices, these fluctuations have shown a strong correlation since 1996.Since the lowest point in 2001, there has been an improvement in the terms o f trade index in 2002-03 by 8 pp., which made a further contribution to strengthening the country's balance o fpayments. 1.23 Over 1996-2003, total merchandise imports had grown by 31percent. However, similar to exports, imports first declined by 33 percent in 1996-99 and then surged by 94 percent since 1999. c. COMMODITY STRUCTURE OF TRADE 1.24 Figure 1.4 shows the commodity structure o f Ukraine's exports in 2003. Iron and steel made up one-third of exports. Together with mineral products and chemicals it accounted for almost 60 percent o f the total. Machinery and equipment and vehicles accounted for about 15 percent o f merchandise exports. The share o f the agro-food sector's exports barely exceeded 10 percent. 1.25 Export growth has been highly concentrated. Over 1996 - 2003, two sectors - iron and steel and mineral products -- contributed three-quarters (72 percent) o f total exports growth.* However, the importance o f these commodity groups has declined since 1999 and export growth has become somewhat more inclusive: over 1999-2003, iron and steel and mineral products contributed only 45 percent o f total export growth. Another important change occurred with the agro-food sector. While its contribution was negative for the whole period (-5 percent), more recently it revivedwith an 11percent contribution to the 1999-2003 growth. Figure 1.4: Commoditystructure of Ukraine'sexportsin 2003, percent Other- - Agricultural produce 10 1% 7.9% Vehicles Food Machinery and equipment Mineral products 10 1% 15 2% Non-ferrous metals 3 0% Chemicals 8 4% Textile and apparel Ferrous metals and ' "." a 201. ,(1 ferroproducts 33.8% Source: SSC, authors' calculations. Another 11percentcame fromgrowth inmachineryand equipment exports 11 1.26 Overall, the Ukrainian export structure is heavily biased toward so-called "sensitive" commodities (such as metals and chemicals) that are particularly exposed to protectionism in OECD markets (Aslund, 2003). Such goods compete primarily by price, which makes them highly sensitive to changes inworld market conditions; moreover, they often compete inhighly protected markets. Thus, the position o f Ukrainian exporters in external markets has been vulnerable due to a large number o f antidumping investigations initiated recently.' Various implicit subsidization schemes, used by the Ukrainian government inthis period, at least inpart provided a reason for such proliferation o f anti-dumping investigations. 1.27 Figure 1.5 presents the commodity structure o f Ukraine's imports in 2003. Mineral products constituted more than one-third (37 percent) o f total imports. Machinery and equipment and vehicles accounted for 23 percent o f the total. The ago-food sector's imports made up almost 10 percent, while chemicals accounted for 8 percent. It is worth noting, however, that in 2003 agricultural imports were higher than usual because of the poor harvest. In more typical years (e.g., 2000-Ol), the share o f the agro-food sector inimports did not exceed 6 percent. 1.28 There hadbeen noticeable changes inthe commodity structure o f imports. The share o f mineral products declined by 13 p.p. from one-half o f total imports in 1996. There hadbeen even more dramatic changes inside the group: while the share o f gas droppedby 22 percent, the share o f oil and oil products had increased by 9 percent. Duringthis period the share o f oil products had declined and the share o f crude oil increased, as privatization o f Ukraine's refineries facilitated an emergence o f the new major export sector. Another important change was that the share o f vehicles intotal imports more than doubled from 3 percent to 8 percent over 1996-2003. Figure 1.5: Commoditystructureof Ukraine's importsin2003, percent Agricultural produce Other 4.7% Food Gas 13.9% Vehicles 8.1% Machinery and equipment Oil and oil products - 15.1% 18.3% Ferrous metals and ferroproducts - A 9% 7." I" Textile and apparel-,,' Wood and Chemicals 3.7% pulp&paper 4.1% 7.7% Source: SSC, authors' calculations. Accordingto the dataprovidedinthe IMF (2003, p.50), over 1995 - first half of 2002 Ukrainewas subject to 37 anti-dumping measures, with the share of the country in the global number of antidumpingmeasures (3.2 percent) significantly exceeding its share inworld exports(0.3 percent). 12 D. GEOGRAPHIC STRUCTURE OFTRADE 1.29 Since the mid-l990s, the geographic structure o f Ukraine's merchandise exports has significantly changed. The dynamics o f the structure is depicted inFigure 1.6. Over 1996-2003, the CIS share in Ukraine's exports almost halved (decreased by 25 p.p.) to 26 percent. The steepest decline o f the CIS share in exports was during 1996-99, when the share decreased by 23.7 p.p. In absolute terms, exports to the CIS decreased by 57 percent over 1996-99 (Figure 1.7). Since then, the share o fthe CIS fluctuated with increases in2000 and 2003, and a decline in 2001-02. 1.30 It is noteworthy that the CIS remains the principal export market for the following merchandise groups with a high degree o f processing: food (about 80 percent o f total exports in 2002), vehicles (70 percent), and machinery and equipment (55 percent). 1.31 The driving force behind the trend inCIS trade has been the RussianFederation. Russia traditionally has been Ukraine's primary export market. In 1996, the share o f Russia in merchandise exports was 39 percent. The high level o f mutual trade is primarily due to close links between the two countries established during the Soviet era: Ukraine and Russia have had "highly integrated production and consumption chains, infrastructure for trade and business networks" (Djankov, Freund, 2000, p. 18). The fact that many producers inboth countries have been closely related under the framework o f vertical integration allowed for development o f intra-industry trade, which has been substantially higherthan inUkraine's trade with the ROW. Figure 1.6: Geographic structure of Ukraine's exports, percent -- ----CIS 50 -k.,. EU-15 `.'. `. -New EU members (EU-IO) `, -.o..Africa 40 - `. h... ...... -. ..)(..Americas -Asia =.. .._ 30 - -. -_-. *.-.-._._. -.-.- .-__._. .-- _ _ -4-e -.- - 10 -!- - - _ - - e . / - - ................ ...... .... .... ....... z..: ___.e .x.. ... ....... ............. :: ... .x- ....... ........ ... ...*. ............ ............... :: 0 .I.:....... --:a:...........,........ 1996 1997 1998 1999 2000 2001 2002 2003 Source:State Statistics Committee, authors' calculations. 13 Figure 1.7: Indicesof physicalvolumes and pricesof Ukraine's exportsto the CIS and ROW Q1'1996 100 2 0 0 - - + *- 1 8 0 - - E x p o r t v o l u m e to R O W *- E x p o r t v o l u m e t o C I S `+ * 1 6 0 - P r i c e s o f e x p o r t t o R O W 1 4 0 - 1 2 0 - 1 0 0 - 8 0 - 6 0 - 4 0 - 2 o i Source: State Statistics Committee, authors 'calculations. Box 1.2: ComparativeDynamicsof Exportsto Russiafrom Ukraineand Belarus Table 1.4 presents the evolution o f export flows from Belarus and Ukraine to the Russian Federation starting from Soviet times to 2002". Both countries had relied o n machinery and equipment exports to Russia to the same degree in Soviet times - about one-fifth o f their total exports. However, while Belarus' share o f machinery and equipment exports to Russia intotal exports declined to date by only one-fourth to 15 percent, Ukrainian exports dropped almost 4 times to 5.6 percent. In Soviet times, Ukraine's machinery exports to Russia were 2.7 times larger than those by Belarus. In 1999, Belarusian exports were double those o f Ukraine. The gap has been closing gradually since 2000. At the same time, this also means that Belarus' exports remain sensitive to economic developments in Russia, while Ukraine has significantly diversified its trade by now and i s less vulnerable to changes o f demand in Russia. In 1990, the share o f Russia in Belarus' exports accounted for 41.5 percent o f the total. After the collapse of the Soviet Union, the share o f exports to Russia actually increased and peaked in 1998 -65.2percent.ThoughtheimportanceoftheRussianmarketdeclinedrecently,itstillaccountsforhalfof total merchandise exports. The share o f machinery and equipment inexports to Russia remained quite stable over 1998-2002 and accounted for some 30 percent. In contrast with Belarus, the share o f Ukraine's exports to Russia declined from more than half o f the total exports in 1990 to less than one-fifth in 2002. At the same time, the relative importance o f machinery and equipments intrade with Russia has increased since the mid-90s: from one-fifth intotal exports to Russia in 1996, to one-third in2002. Still, in-Ukraine the exports o f machinery and equipment to Russia equal less than 6 percent o f its total exports. By 2000, the employment inthe machinery and equipment sector inUkraine dropped to about 35 percent o f the 1990 level. Belarus so far managed to avoid a major breach o f trade links in this labor intensive sector with considerable backward linkages to domestic economies. loThe data for 1990 shouldbe treated with caution, as it depends a lot on prevailing pricesandthe exchangeratesused for the conversionof inter-republicantrade. 14 1.32 Over 1996-2003, the share o f Russia in exports decreased by 20 pap.to 18.7 percent, and it hit the lowest point in 2002 with only 17.8 percent (Box 1.2). Though the other CIS countries account for relatively small shares o f Ukraine's exports, the following changes are worth mentioning: (i) shares o f both Belarus (1.5 percent o f total exports in 2002) and export Uzbekistan (0.4 percent) declined by a factor three, while the share o f Turkmenistan (0.8 percent) by a factor of two (for all these countries, which retained substantial elements o f a planned economy, the decline occurred primarily before 1999); and (ii) the export share to Kazakhstan (1.3 percent) increased by a factor o ftwo, mostly after 2000. 1.33 At the same time, it is worth noting that there is no sign that since 1999 Ukraine has been losing its share o f the Russian market to other competitors. Despite the continuation of the steady trade diversification process, in 1999-2003 Ukraine's exports to Russia grew faster than Russia's overall imports (Figures 1.8 and 1.9). Accordingly, Ukraine's share inRussia's imports increased to about 7 percent in 2003." Inthis respect, Ukraine has performed much stronger than most other CIS members, who have been losing their shares of Russia's market rather quickly. It i s believed that the real depreciation o f the hryvnia relative to the Russianruble was supportive o f preserving Ukraine's competitiveness. Maintaining its competitiveness inRussia i s quite important for Ukraine, especially from the medium-term perspective: for the next several years Russia i s likely to grow faster than the EU. This share amounted to 13 percent in 1996, but it declined to 6 percent in 1999 (see also Figure 1.8). 15 - Figure1.8: Growth Ratesfor Russia's Importsfrom SelectedCountriesin 1996-99, % I 20% ~ 10% 0Yo I II 2~ Food and food related products EMachinery,equipment 2 OTotal Figure 1.9: Growth Ratesfor Russia'sImports from Selected Countries in 1999-2003, % 140% I 120% 100% 80% I 60% 40% 20% 0% I Total 1 EU15 I Restof the CIS Ukraine 1 Belarus 1 Food, food related Machinery,equipment nTotal 16 Table 1.4: ComparativeDynamics of Machineryand EquipmentExportsto RussiafromUkraine and Belarus,US$ million Change, 1990- 1990 1996 1999 2000 2001 2002 2002,percent Ukraine Total exports 78335.9 14400.8 10332.7 14572.6 16264.7 17957.1 -77.1 Exports to Russia 42794.6 5577.4 2113.0 3515.6 3679.5 3189.1 -92.5 Share intotal exports, percent 54.6 38.7 20.4 24.1 22.6 17.8 -36.9 Exports o f machines, transport equipment to Russia (SITC 7) 16766.9* 1091.3 467.1 696.9 889.3 998.3 Share inexports to Russia, percent 39.2* 19.6 22.1 19.8 24.2 31.3 -20.1 Share intotal exports, percent 21.4* 7.6 4.5 4.8 5.5 5.6 -15.8 Belarus Total exports 32631.0 5652.0 5908.9 7331.1 7450.6 8020.9 -75.4 Exports to Russia 13557.9 3024.4 3222.0 3715.7 3962.7 3977.1 -70.7 Share intotal exports, percent 41.5 53.5 54.5 50.7 53.2 49.6 8.0 Exports o f machines, transport equipment to Russia (SITC 7) 6303.1* 1033.3 972.2 1183.9 1240.4 1186.7 Share inexports to Russia, percent 46.5* 34.2 30.2 31.9 31.3 29.8 -35.8 Share intotal exports, percent 19.3* 18.3 16.5 16.1 16.6 14.8 -4.5 * Estimates, based o n inter-republican trade in 1988. Note: Inter-republican trade in 1990 is estimated at the officiaYcommercia1exchange rate. Source: Belkindas and Ivanova (1995); Voprosy Statistiki, 1990, Issue 3. Ministry of Statistics and Analysis of the Republic of Belarus, WITS, COMTRADE. 1.34 The decline in the share o f CIS exports was not related to price dynamics. While price dynamics were more favorable for Ukrainian exports at non-CIS markets, the difference in respective price indices was modest (Figure 1.7). 1.35 The following non-CIS regions o fUkraine's exports destination can be recognized: the European Union (EU-15), the new EUmembers (EU-10)12, the US, Asia and Africa. The main export commodities to the ROW are textiles and apparel (97 percent of total exports in 2002), mineralproducts (92 percent), ferrous (88 percent) andnon-ferrous metals (88 percent). 1.36 Exports to the EU and U S are comprised mainly o f semi-finished goods. The main export items to the EU are scrap metals, semi-finished iron or steel products, and agricultural commodities, inparticular sunflower seeds and wheat (together these account for more than half o f Ukraine's exports to the EU). Ferrous metals make up the biggest share o f Ukrainian exports to the U S (about 60 percent in 2002). Over 1996 - 2003, the share o f the EU in Ukrainian exports increased by 8.7 p.p. (to 19.8 percent), the share o f the U S - by 0.5 p.p. (to 3.1 percent). l2By the new EUmembers we denote the following 10 countries: Estonia, Cyprus, Czech Republic, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Republic, and Slovenia. 17 Notably, the highest share o f the U S inUkraine's export was in2000, when it reached 5 percent, but after that it has been decreasing steadily. The sharpest increase in the share o f the EU occurred through 1999, when it reached 20.5 percent. Among the EU members, Ukraine's exports were most successful on markets o f Germany and Italy: the combined share o f these two countries increased by 6.3 p.p. over 1996-2003, and equaled 11.7 percent o f total exports in 2003.13 1.37 Exports to the new EU members have also been on a growing trend. Their share in Ukrainian exports increased by 4.4 p. p. to 14.3 percent over 1996 - 2003, with a major increase since 1999. The main exports to this region have been mineral products and metals. Asia and Africa (their shares in 2003 were 23.4 and 5.4 percent respectively) have become increasingly important directions for Ukrainian exports: during 1996-2003, their shares in total exports increased by 5.4 p.p. and by 4.0 p.p. respectively. Main export commodities to these regions have been metals and chemicals. 1.38 Overall, the main changes described above in the geographical composition o f Ukraine's exports during 1996-2003 (for more detailed information see Statistical Annex) were drivenprimarilybythe following factors: e Relative changes in the size of export markets. Figure 1.10 depicts quarterly indices o f CIS GDP (proxied by Russian GDP), and ROW GDP (proxied by the weighted GDP o f EU, USA, Turkey, China, Poland and the Slovak Republic). Over the period 1996 - 41'2003, GDP o f the CIS grew on average slower than that of the ROW mostly because o f the economic decline during the 1998 crisis. As mentioned above, during these years, the share o f the CIS inexports shrank most noticeably. 0 Movemertts ofthe real exchange rates (RER). Overall, during 1998-2003, the hryvnia has depreciated by more than 25 percent in real terms (Figure 1.11). Relative to its peak in early 1999, the hryvnia lost about 40 percent of its real value. This cumulative real depreciation supported the price competitiveness o f Ukrainian exports. Two mainperiods o f real depreciation included 1999 and 2002-03. The post-1999 cumulative depreciation was unevenly distributed, however, as the hryvnia depreciated mostly to CIS currencies. During 1998-2000, the real exchange rate o f the hryvnia had been moving in opposite directions against the Russianruble and non-CIS currencies (most notably the EURO and the US dollar). This relative dynamics became muchcloser re~ent1y.l~ l3Germany and Italy accounted for 72 percent o f EU export share growth over 1996-2003, and they consume 60 percent o f Ukraine's exports to the EU. l4There has beende-facto targeting o f nominal UAH/US$rate in Ukraine since early 2000. 18 Figure 1.10: The seasonally adjusted indices of GDP inthe CIS and ROW Q1'96=100 140 - 130 -cIS -- - c a' c. A- ROW 0-- -4 x -/ 120 - c - .- 0- c -e0 -*- 80 I Source: International Financial Statistics, authors 'calculations. 0 Policies of tradingpartners. Higher trade barriers to exports o f metals and chemicals in the form o f antidumping duties in the US, EU, Russia and other countries, especially in 2001-02, made Ukrainian exporters diversify their sales, expanding to Southeast Asian and African countries. Moreover, starting from 2001, Russia launched antidumping and special measures aimed at Ukraine's food exports. 0 Temporary externalfactors, such as unfavorable weather conditions in Europe in 2002, led to an increase in its demand for grain and consequently triggered the rise of the European countries' share in Ukraine's exports. Likewise, the poor harvest in 2003 in Ukraine severely limited the supply of agricultural exports. 19 Figure 1.11: Real Effective ExchangeRate, 1995=100 180 - UAHlUSD Real Exchange Rate UAHlEUR Real Exchange Rate 160 UAHlRUR Real Exchange Rate 140 120 100 80 _____ Source:IFS, staff estimates. 1.39 Though Ukraine has underdone significant reorientation o f its exports away from the CIS and toward the EU, the extent of trade with Europe is still lagging if compared to the new EUmembers. Figure 1.12 shows the comparative dynamics o f exports to the CIS and the EUfor both Ukraine and its western neighbor, Poland. While Ukraine's exports to the EU-15 have performed quite strongly since 1992, this share in total exports is still three times lower than in Poland. 20 80 - 70 - , x - - - - n - - - - x. - - x - -- - .x 60 ->< ' - - - - -. x - . . - .x -. * % - $(- . x - - 50 - - 0 & - .\- - --\. , & * ', 4 0 - .Share of the CIS in merchandise exports of Ukraine k.. Share of the EU in merchandise \ 30 - exports of Ukraine - . * -__.-.-.- - -* /-&-- -Share of the CIS in merchandise %++ -&. 20 - - exports of Poland X- Share of the EU in merchandise exports of Poland .-.-_-.-.- ---_-.___.__--.-.-~ 10 - _-_-.- I t - - - - 0 Source: DOTS, WITS. 1.40 The largest sources o f Ukraine's imports are the CIS (mainly Russia and Turkmenistan) and Europe. The shares in imports from these regions equaled 50 percent and 35 percent respectively in 2003 (Figure 1.13). Ukraine imports from the CIS primarily oil and gas, which made up for 81 percent of imports from the CIS in 2002. From the ROW Ukraine gets mostly high-processed technological goods, which include machinery and equipment (where the share of ROW imports was about 85 percent in 2002), vehicles (70 percent), food (88 percent), chemicals (82 percent), and t e ~ t i l e s(85 percent). ' ~ Figure1.13: GeographicstructureofUkraine'simports,percent ----c I S -E U - 1 5 --EU - 1 0 -.- - A s i a 2 0 t- h Source: State Statistics Committee. Textilesare importedprimarily under the OutwardProcessingTrade (OPT) schemes. 21 1.41 The geographical structure o f imports has undergone similar changes to exports during 1996-2003. The share of the CIS has declined (by 13.5 percentage points to 50 percent), while the share o f the EU-15 has increased (by 9.8 p. p. to 25.2 percent), the share o f Asia increased by 4.8 p.p. to 8.6 percent.16However, the decrease of the CIS share inimports was smaller than that of exports mainly due to the fact that Ukraine did not manage to diversify its energy imports (which constituted about 40 percent o f total merchandise imports in2002). The CIS continues to dominate imports o f mineral products and its share inthis group remains close to 100percent. 1.42 The change in the geographical structure of imports over 1996-2002 follows the changes in the commodity import structure. Shares o f higher-quality and hi-tech goods (machinery and equipment, and vehicles) have been growing inresponse to the recent growth in both household incomes and investment. The CIS'S share inimport o f these groups decreased by about 16 p. p. (to 14percent) and 24 p. p. (to 30 percent) respectively. E. EXPORT CONCENTRATIONAND SPECIALIZATION Export Concentration 1.43 Highexport concentration is characteristic for many developing countries, and this is a significant factor o f their vulnerability to external shocks. In order to measure Ukraine's merchandise exports concentration, we usedthree indices: 1) the Hirschmann index, values o f which range from zero to unity, with higher numbers corresponding to greater concentration; 2) exports diversification index (DX), which is defined as DX=(sum([hi-hiW])/2, where hi is the share o f commodity iintotal Ukraine exports and hi, is the share o f the commodity in world exports (the DX values are normalized to be between 0 and 1); and 3) number o f commodity positions inthe 3-digit SITC breakdown for which export exceeds US$lO million (by definition, it should be negatively correlated with the Hirschmann and DXindices). 1.44 As Table 1.5 and Figure 1.14 illustrate, Ukraine's exports concentration followed an "inverse-V" curve over 1996-2002. The Hirschmann index value increased from 0.10 in 1996 to 0.14 in 1997, remained stable through 2000, and then decreased to 0.11 over 2001-02. The DX index value was more stable, but demonstrated a similar dynamics to the Hirschmann index in 1996 - 2001. It increased from 0.248 in 1996 to 0.254 in 1997, remained nearly stable through 2000, and then decreased to 0.248 in 2001. The only difference in the indexes dynamics was in 2002, when the DX index value increased (to 0.257) contrary to the Hirschmann index value. The number o f commodity positions in exports follows the dynamics o f the Hirschmann index. In1996-2000 exports were becoming more concentrated, thenin2001-02 concentrationbeganto l6Other regions' shares changed insignificantly: the share of EU-10 increasedby 1.5 p.p.to 8.1 percent. The share of the US decreased by 0.4 p.p. to 2.8 percent, while the share of Africa remainedpracticallyunchangedand low (1 percent). A factor of the US share decrease was a ban on import of chicken, imposed by Ukraineduring 2002 due to a high content of forbidden antibiotics. 22 decrease, but it was still higher at the end of the period than in 1996 (152 commodity positions in 2002 versus 164 in 1996). 1.45 The likely interpretation of this dynamics i s the following. During the period o f economic decline exports were becoming more concentrated, as some items became non- competitive and dropped from exporting activity. In 2000, the first year o f economic growth, higher concentration persisted as the growth was led by exports o f key traditional items, such as iron and steel and chemicals. Since 2001, economic growth has been more inclusive which has beenreflected in somewhat higher exports diversity. 1.46 Compared to Poland, Ukraine has more concentrated merchandise exports (Table 1.5). This statement i s confirmed by all three indicators we employed. In Poland, compared to Ukraine, the number of commodity positions in exports has been at least 10 percent higher, the Hirschmann index has been twice lower, and the export diversification index has been lower by a quarter, It i s worth noting that the gap has not beenclosing since the mid-90s. Table 1.5: Export Concentration Indicators: Ukraine and Poland 1996 1997 1998 1999 2000 2001 2002 Ukraine Numberofcommodity positions* for which export exceeds $10 million 164 159 150 145 142 150 152 HirschmannIndex** 0.103 0.144 0.142 0.134 0.144 0.119 0.114 Diversification Index DX* 0.248 0.254 0.257 0.256 0.257 0.248 0.257 Poland Numberofcommoditypositions* for which export exceeds $10 million 173 176 177 179 175 177 175 Hirschmann Index** 0.045 0.044 0.046 0.048 0.047 0.047 0.048 Diversification Index DX* 0.197 0.192 0.185 0.183 0.187 0.185 0.186 *According to 3-digit SITC classification, out of 239 positions. **For 65 items exported, accordingto 2-digit SITC classification. Source: WITS, COMTRADE; authors' calculations. Figure 1.14: Ukraine's export concentration . - c _ _ _ _ _m -- - - - - - - - c - - - - - - L . 4.DX' 0220 -- - +- HirschmannIndex" 0200 -- -Numberwhich of mmmodiwwsitions' for exwrt exceeds$10mln 0180 ~- 0160 -- 0140 -- - - --e - - - --145 e - - - - - - - - - 0100 ' r 140 1996 1997 1998 1999 2000 2001 2002 23 Export Specialization 1.47 We used the Revealed Comparative Advantage index17(RCA) to determine what goods Ukraine specializes in trading, whether Ukraine exhibits similar or different comparative advantages on the world market and two main regional markets -CIS and EU-and how the specialization patterns changed over time in 1996-2002. Following the conventional notation, we will further call the RCA indices for specific markets export specialization indices (ESIs). We analyzedthe ESIs on different levels o f aggregation. Table 1.6: Export Specialization Indices, 1-digit SITC level On the basis of 1-digit exports data SITC code 1996 1999 2002 World CIS EUWorld CIS EU World CIS EU Food and live animals 0 2.05 4.06 2.03 1.49 3.47 1.45 1.77 2.97 1.68 Beverages and tobacco 1 1.15 2.03 0.79 0.64 1.52 0.40 0.60 1.19 0.38 Crude materials, inedibles, except fuels 2 2.42 1.50 3.75 3.79 1.74 5.90 2.59 1.54 3.80 Fuels, lubricants, etc. 3 0.59 0.12 1.44 0.84 0.17 2.31 1.12 0.20 2.69 Animaland vegetable oils, fats, wax 4 2.65 6.19 3.16 2.19 6.72 2.81 4.48 5.93 5.67 Chemicals, relatedproducts 5 1.37 1.82 1.08 0.88 1.37 0.69 0.70 1.40 0.51 Manufactured goods 6 2.00 1.65 2.22 2.54 1.90 2.78 2.56 2.17 2.77 Machines, transport equipment 7 0.36 1.78 0.34 0.27 1.37 0.26 0.34 1.69 0.33 Miscellaneousmanufacturedarticles 8 0.30 2.06 0.29 0.38 1.54 0.38 0.41 1.91 0.42 Goods not classifiedby kind 9 0.48 0.09 0.51 1.36 0.28 1.19 0.41 0.15 0.46 Source: WITS, COMTRADE. , 1.48 The SITC 1-digit level ESIs for Ukraine presented in Table 1.6 are concentrated inthe following groups (in order o f importance): animal and vegetable oils, crude materials, manufactured goods, and food and live animals. Over 1996 - 2002, Ukraine's global ESIs decreased for chemicals, beverages and tobacco, and food and live animals; while for manufactured goods and animal and vegetable oils the ESIs increased. The analysis o f the 2-digit SITC breakdown reveals that inthe manufactured goods group Ukraine highly specializes iniron and steel (67 2-digit SITC code), non-ferrous metals (68) and manufactures o f metal (69). Not surprisingly, these goods made the biggest contribution to Ukraine's export growth over this period. Though in2002 the ESI incrude materials was almost the same as in 1996, inthe middle o f the period and the export low point o f 1999, ESIin this commodity group increased by about 50 percent. Ukraine appears to have no revealed comparative advantages in trade o f machines, transport equipment and miscellaneous manufactured articles. 1.49 Ukraine's ESIs differ significantly for its two largest export markets -the CIS and the EU. The difference is the most evident for beverages and tobacco, chemicals, and machines and transport equipment - Ukraine does not have revealed comparative advantages intrade o f these "Theindexforcountryigoodj isRCA,= (Tj/Kr)/( /Xwr),where Fworld and f=total for all goods.RCA doesnot determine Xw the true comparative advantages, but simply compares the composition of exports of one country to a certain market with the compositionoftotal exports that are absorbedby the market 24 commodity groups with the EU, but exhibits strong ESIs in trade with the CIS. On the contrary, the revealed comparative advantage o f Ukraine in trade of crude materials is noticeably stronger with the EUthan with the CIS. 1SO Over 1996-2002, Ukraine hadbeen losing its revealed comparative advantages with the CIS in the following commodity groups: food and live animals, beverages and tobacco, chemicals, and animal and vegetable oil. The ESI increased noticeably only for manufactured goods (again, iron and steel (67), non-ferrous metals (68) and manufactures o f metal (69)). The same trends had been taking place in comparison with the EU, apart from animal and vegetable oil, where the ESIincreased over 1996-2002 by 3.6 p. 1.51 A more detailed, 2-digit SITC trade composition (see Table 1.7) reveals that there are only 14 product groups (out o f 94) in which Ukraine has a strong revealed comparative advantage in trade with the world (the ESIs exceed 2). These are (in order o f decreasing ESIs) fertilizers, metalliferous ores and metal scrap (mainly iron ore and concentrates (281 3-digit SITC code") and waste and scrap metal o f iron and steel (282)), iron and steel (mainly pig iron (671), ingots and other primary forms o f iron (672), and iron and steel bars, rods, angles (673)), cereals and cereal preparation (mainly rice (042) and barley (034)), fixed vegetable oils and fats, crude fertilizers and crude materials, hides, skins and fur skins (mainly row fur skins (212)), inorganic chemicals, explosives and pyrotechnic products, sugar, cork and wood, coal, coke and briquettes, and manufactures of metals (mainly tools for use in hand or inmachine (695)). The same groups, apart from manufactures o f metals, are o f strong export specialization intrade with the EU. Table 1.7: Export Specialization by export market: Number of product groups with a strong revealed comparative advantage (ESI>2 at 2-digit SITC level) 1996 1999 2002 World 14 14 14 CIS 30 22 24 EU 14 13 15 Source: Staff estimates. 1.52 For the CIS the specialization pattern is rather different. There are more commodity groups (24) that indicate strong export specialization: 7 o f them are the same commodity groups the same as intrade with the world and EU (metalliferous ores and metal scrap, iron and steel, cereals and cereal preparation, fixed vegetable oils and fats, crude fertilizers and crude materials, hides, skins and f i r skins, sugar, and manufactures o f metals), plus food products (such as meat and meat preparations, animal feed, coffee, tea, cocoa (mainly chocolate (073)), machinery and equipment (metalworking machinery, general industrial machinery), and light industry products (articles o f apparel and clothing accessories, footwear). '' SITC 2-digit level ESIs are presentedinthe StatisticalAnnex, Tables A34-A36, and SITC 3-digit level- inTables A37-A39. 25 1.53 Over 1996-2002, Ukraine's export specialization intrade with the world increased the most in cereals and cereal preparations (mainly rice (042) andbarley (043)), fixed vegetable oils and fats, and cork and wood (mainly fuel wood (245)), and decreased the most in sugar, oil seeds, and electric power. Intrade with the EU, export specialization increased the most incoal, coke and briquettes, explosives and pyrotechnic products, and fixed vegetable oils and fats. It decreased the most inoil seeds, sugar and fertilizers. Intrade with the CIS, export specialization increased the most in coffee, tea, cocoa, spices (mainly chocolate (073), manufactures o f metal (mainly tools (695)), and explosives and pyrotechnic products, and it decreased the most in sugar, live animals and animal-vegetable oil-fats. 1.54 To confirm the statement regardingdifferent export specialization pattems on CIS and EUmarkets on 3-digit SITC level, we divided ESIs intrade with each trading partner into three groups: e ESIs>2 (strong export specialization), e ESIs<0.75 (no export specialization), e 0.752, EU E S k 2 0CIS ESk2, EUESb2 0Othernoncomordances 30 20 10 0 1996 1999 2002 Complementarityof Trade 1.57 Inorder to identify a trade partner with an import structure that is closer to Ukraine's export structure, we estimated two indices of trade complementarity. The first index is calculated as a coefficient o f correlation (in percent) between ranks o f commodities' shares in Ukrainian exports and o f commodities' shares in imports o f a respective partner in the 3-digit SITC breakdown (In Figure 1.16, we denote this index as RC-EU or RC-CIS for complementarity o f trade with the EUand CIS respectively). The second index i s calculated according to the formula TCj=lOO-sum ([mij-~i]/2), where j = EU or CIS, Xi i sthe share o f good iin global exports o f Ukraine inthe 3-digit SITC breakdown, and miji s the share o f good iin all imports o fj inthe 3- digit SITC breakdown. The index is zero when no goods are exported byUkraine or importedby the trading partner and 100 when the export and import shares exactly match (In Figure 1.16 we denote this index as TC-EU or TC-CIS for complementarity o f trade with the EU and CIS respectively). 1.58 The calculated indices differ in two respects. First, the RC index shows that trade complementarity with the CIS was nearly double that with the EU in 2002; while the TC index shows that trade complementarities of Ukraine with the CIS and EU almost did not differ that year. Second, for the EU both indices show different dynamics. RC-EU increased over 1996- 2002 by 7.8 p.p., while TC-EU decreased over the period by 1.5 p.p. mainly due to differences inthe years of 1996 and2002. 27 Figure 1.16: Indices of trade complementarity of Ukraine 70 - (D m b co m m 0 N m .- m m !? 0 N 0 0 N 0 1.59 However, bothindices illustrate the following: a Trade complementarity with the CIS decreased during 1996-2002. The decline amounted to 4 p.p. according to RC-CIS and to 9 p.p. according to TC-CIS. This dynamics i s by large explained by changes in CIS imports and Ukraine's export structure - there has been a growing demand for high-quality machinery and equipment and consumer demand goods in the CIS, while Ukraine increased specialization (measured as export shares o f goods) in metals and mineral products (these products are exported primarily to the ROW) and decreased in food products. Thus, Ukraine's exports to the CIS were less complementary over time to the structure of CIS imports. 0 Trade complementarity with the EU is lower compared to the CIS, but it increased somewhat over 1997-2001 (before some decline in 2002). TC-EU grew by 2 p.p., while RC-EU increased by 9 p.p. Overall the remaining considerable differences in trade complementarity help explain why Ukraine overtrades with the CIS and undertrades with the EU. 1.60 Ukrainian exports complementarity with imports o f two major partners i s quite different from those o f Poland. For Poland, both TC and R C are higher for exports to the EU, compared to exports to the CIS. The difference i s striking in the comparisons o f R C indices. Poland's RC with the EU exceeds 60, while for Ukraine it i s twice lower. And vice versa, Poland's RC with the CIS i s 20, while for Ukraine it i s three times higher. Intra-Industry Trade 1.61 Intra-industry trade is believed to create additional benefits for trading countries compared to inter-industry trade in the form o f increasing returns to scale leading to faster economic growth and income conversion for all participants (Krugman and Helpman, 1985). The 28 degree o f intra-industry manufacturing trade can be measured by the Grubel-Lloyd (G-L) index." We calculated four G-L indices for Ukraine (for total trade, trade with the CIS, ROW and EU) using 3-digit and 2-digit SITC data in order to assess the degree o f integration o f the country with the different groups of its trading partners (see Table 1.S). Table 1.8: Grubel-LloydIndex:Ukraine and Poland, basedon 3-digit SITC data Change, 1996 1997 1998 1999 2000 2001 2002 2002-1996 Ukraine Total trade 40.7 36.7 34.5 35.6 37.9 40.1 38.4 -2.2 CIS 47.7 49.5 52.9 54.5 52.4 55.7 53.9 6.1 ROW 36.9 33.6 30.5 31.8 34.9 36.7 35.6 -1.4 olw: EU 18.7 18.1 20.0 19.9 21.8 23.6 22.5 3.9 Poland Total trade 46.4 48.3 48.4 50.5 55.5 55.8 57.5 11.1 CIS 20.9 19.5 17.7 21.8 19.7 17.0 16.7 -4.2 ROW 47.2 49.0 49.4 50.8 56.4 56.4 58.2 11.1 olw : EU 41.7 42.5 44.1 47.7 52.5 52.7 54.6 12.9 Note: The index i s calculated for merchandise trade only (groups 5-8 excluding 68), using the SITC revision 2, Source: WITS, COMTRADE; authors' calculations. 1.62 The results suggest the following conclusions. First, the share of intra-industry trade in Ukraine's total trade has been in the range o f 35 - 41 percent and it declined over 1996-2002, excluding the period of gradual pick up in 1999-2001. Overall, the G-L index value for total trade declined during 1996-2002 by 2.2 p.p. 1.63 Second, the share of intra-industry trade with the CIS has been on average 1.5 times higher than that of trade with the ROW: 54 percent versus 36 percent as o f 2002. This fact indicates the continuing importance of the former USSR links between CIS economies and their recent recovery, as the G-L value increased by 6.1 p.p. over 1996-2002. The degree o f Ukraine's intra-industry trade with the CIS i s quite high on cross-country comparisons and it i s very close to the level o f OECD countries*'. 1.64 Third, the value o f the G-L index for Ukraine's trade with the EU is even lower than that for trade with the whole ROW, though it has been slowly increasing (by 3.9 p.p. over 1996- 2002). The low degree of intra-industry trade with the EUi s linked to the fact that (i) Ukraine's export structure to the EU is dominated by low-processed goods, and (ii) the level o f FDI from the EU i s low by international standards. The decrease in the G-L value for total trade has been caused by the declining trend of the G-L for non-EU ROW countries. Over the period, Ukraine's foreign trade flows were shifted away from the CIS (with a high share o f intra-industry trade) and toward the ROW regions with a low share o f intra-industry exchange (primarily Asian countries). l9 The G-L index, I = [(Xi @,+Mi)- Ci Cyr Mi 1)/Xi (&,+MJ]*lOO, whereX, andMi are, respectively,exports andimportsin sector i (Grubel and Lloyd, 1975). The higher the index the larger the portion of intra-industry trade. The index ranges from 0, meaning completelack of intra-industrytrade, to 100, indicatinga fully integratedmanufacturingtrade. *'Accordingto Greenawayand Hine(1991), the averageGruber-Lloyd index for OECD countriesin 1985was 64.5. 29 1.65 Intra-industry trade has been highly concentrated in several sectors, mostly in machinery and steel. The following commodity groups made the largest contribution to the G-L index for total trade (calculated using 2-digit SITC data): general industrial machinery and equipment (SITC 74), electrical machinery, apparatus and appliances (77), power generating machinery and equipment (71), iron and steel (67), paper, paperboard (64), manufactures o f metal (69) and machinery specialized for particular industries (72). Together these 7 (out o f 65) commodity groups accounted for 53.5 percent o f the G-L in 2002. Over the period, the intra- industry trade grew noticeably in general industrial machinery and equipment, power generating machinery and equipment, paper and paperboard, while it declined inmachinery specialized for particular industries. 1.66 Intrade with the CIS, the level of integration has substantially increased in iron and steel (that strongly rebounded since the low point o f 1999); power generating machinery and equipment, paper and paperboard. At the same time, Ukraine has lessened its involvement in intra-industry flows with the CIS in general industrial machinery and equipment. For the latter commodity, there definitely has been a shift to a higher integration with the ROW, especially since 1998. Intrade with the EU, the level o f integration has recently increased inmanufactures o f metal (by a factor of 3 compared to 1996), and in electrical machinery, apparatus and appliances (by a factor o f 2 compared to 1996). Meanwhile, the share o f intra-industry trade with the EU in chemical materials and products, that used to be important through 2000, has dropped recently. Contrary to that with the CIS, intra-industry trade in iron and steel with the EU has been declining since 2000. 1.67 Compared to Ukraine, Poland has been engaged in intra-industry trade on a much higher scale. G-L value o f 57 for total trade is very close to the level o f OECD countries. Poland's degree o f intra-industry trade with the EU i s almost three times higher, compared to Ukraine, while the opposite is true in trade with the CIS. The intra-industry trade i s much less concentrated in Poland. Trade in parts and accessories makes an important and growing contribution to Poland's G-L, while it i s still negligible inUkraine's trade. F. FOREIGN TRADEDATAQUALITY 1.68 Duringthe period o f economic transformation from the plannedto themarket economy, the statistical system i s also undergoing a fundamental change. Box 1.3 discuses the Ukrainian sources o f foreign trade data. To shed some light on the quality o f Ukrainian trade statistics, Table 1.9 shows mirror statistics for Ukrainian exports and imports with its main trading partners, including the CIS, EU, and 10 new EU-15 members. The upper part o f Table 1.9 presents the ratio of merchandise exports, as reported by Ukraine, divided by merchandise imports, as reported by the corresponding importing countries. As exports are recorded in FOB prices, while imports are recorded in CIF prices, the "undistorted" ratio should be a little less than 1. The higher the index, the more inflated are Ukraine's exports data, and/or Ukraine's trading partners' data underestimate their imports from Ukraine. 30 Box 1.3: Methodology of the Ukrainian foreign trade statistics The State Statistics Committee (SSC) and the National Bank o f Ukraine (NBU)provide the foreign trade statistics (foreign trade balance and balance o f payments correspondingly) based o n different methodologies. The SSC uses methodological recommendations on merchandise foreign trade of the UN (1998) as a guide, while the NBUprepares the balance o f payment statistics according to the Balance o f Payment Manual by the IMF(5" edition). The mainmethodological differences are the following: 0 The SSC presents data on imports in CIF prices, while o n exports - in FOB prices. The NBU shows both flows inFOB prices (the proportion o f insurance and freight inimports i s estimated o n the basis o f results o f the survey conducted by the SSC once intwo years). 0 The NBU foreign trade statistics, contrary to the SSC one, includes data o n informal trade (imports and exports o f goods by individuals, including trade o f cars, and by mail), and on those goods that were imported through tolling (Outward-Processing Trade) schemes and left to be sold in Ukraine. The NBU makes expert estimates o f informal trade volumes. In addition, the NBU makes expert estimates o f the volume o f trade in tourism services, which are not carried out by the SSC. Due to these methodological differences, the SSC data tend to underestimate the volume o f trade. Table A1 of the Statistical Annex shows Ukraine's foreign trade data for the period 1996-2003 according to 4 sources: SSC, NBU, IMF's Directions o f Trade Statistics (DOTS), and World Bank's World Integrated Trade Solution (WITS). It reveals that the major difference among all sources i s the difference between SSC and NBU data. For merchandise imports, the discrepancy could arise due to different prices used (CIF versus FOB). However, this methodological difference implies the SSC' flows should be higher than NBU's flows, while actual data show just the opposite. It turns out that adjustments made by the NBU for smuggling are higher than the value o f transportation and insurance services. The informal trade adjustments also explain the difference in export values. A s Figure 1.17 shows, the discrepancy lies in the range o f 1.3-2.9 percent o f GDP for export flows, and 2-5 percent o f GDP for import flows. The magnitude and volatility o f the discrepancy i s large enough to make the implied growth rates significantly different. On the positive side, the discrepancy seems to be declining as a share o f GDP. As i s evident from Table Al, DOTS and WITS use the SSC data. Inthis report, if not stated otherwise, we also use SSC data, but we admit that they are somewhat downward biased. 31 Figure 1.17: Discrepancybetweenreportedtrade flows fromNBUand SSC, percentGDP 6 - 5 - 4 - 3 - 2 - I I - - . -Discrepancy betweenreportedexportsvalues(NBU SSC), % GDP - -Discrepancy betweenreportedimportsvalues (NBU- SSC), %GDP I 0 Source: State Statistics Committee, National Bank of Ukraine. 1.69 It is clear from Table 1.9 that Ukrainian export statistics are distorted. The index has been volatile though exports are often over-reported. For instance, in absolute terms, Ukraine's exports to selected countries, covering 72 percent o f total exports, exceeded imports from Ukraine by US$790 million in2002. At the other extreme, in 1996 exports were under-reported by US$700 million.21The under-reporting inthe mid-1990s mightbe relatedto the capital flight duringthe periodofeconomic decline.22 1.70 A primary explanation for inflated export values in recent years relates to the VAT refund issue -Ukrainian exporters inflate their export bills (or provide false bills) to claim budget compensation. Figure 1.18 shows a major expansion in the relative amount o f VAT refund claims that occurred in 2001. Overall, while the total value o f merchandise exports doubledbetween 1999 and 2003, the value o f VAT refund claims increased three-folds. The ratio o f total annual VAT refundclaims and annual exports was close to 17percent in2001-03, which i s quite highgiven the prevailing VAT rate o f 20 percent. Taking into account the definition of the index, cited over-reporting in 2002 shows the lower bound of the discrepancy,while citedunder-reportingin 1996 shows the upper bound. 22 Before 1998, barter trade was another source of potential distortion in the trade data. However, the role of barter declined considerablyafter the 1998 crisis. The share of barter intotal trade was less than 3.5 percent in 1999,while in 1997 it was about 10percent (Burakovsky,2001). 32 1.71 Distortions for total exports are lower than for individual countries or regions, suggesting that a trade deflectionmight take place. The most consistent statistics appear to be in trade with other CIS countries, where the index exceeded unity by a tiny margin. Exports to the EU-15 were significantly over-reported only in 1999. On the contrary, exports to the new EU membersseem to be significantly over-reported after 1999. Trade data for Cyprus andLatvia are illustrative: both destinations appear to be a favorite for Ukrainian exporters that manipulate their trade reports. Since 2000, exports to Latvia have been overestimated by a factor o f 4 to 5. The most likely explanation for this phenomenon is a trade deflection, whereby Ukrainian exporters try to circumvent various barriers introduced by the EU. Ukrainian exports to Asia were over- reported through 1999, but the phenomenon has ceased recently for the region as a whole. Still, there are country-specific variations. For instance, while trade with China used to be a source o f major distortions through 2000, especially in 1997-98, the bias has shifted to Hong Kong in 2001-02 (after China regainedsovereignty over the island). Table 1.9: M i r r o r Statistics 1996 1997 1998 1999 2000 2001 2002 Ratio o f exports reported by Ukraine to imports from Ukraine reported by its partners CIS 0.88 0.94 0.87 0.93 0.95 0.98 1.01 Olw :Russia 0.88 0.93 0.88 0.94 0.96 0.96 0.99 EU-15 0.93 1.01 1.05 1.18 1.02 1.03 0.93 New EUMembers (EU-10) 1.05 1.03 1.02 1.07 1.22 1.33 1.29 Cyprus 1.42 1.41 3.79 1.39 3.84 1.86 3.40 Latvia 1.31 1.42 1.30 1.49 3.88 5.07 4.26 Asia* 1.39 1.59 1.34 1.19 0.97 0.82 1.01 China 1.51 3.29 3.98 2.14 1.29 0.79 0.94 Hong Kong 1.31 0.64 0.10 0.46 0.06 4.48 2.04 Total for the selected countries** - - 0.94 1.02 - - - - 0.96 1.03 0.99 0.99 - 1.03 Share of the countries in Ukraine's exports 85.6 77.1 75.8 69.9 74.8 69.6 71.7 Ratio o f imports reportedby Ukraine to exports to Ukraine reportedby its partners CIS 1.17 1.22 1.06 1.19 1.29 0.88 0.93 Russia 1.16 1.08 1.27 1.16 1.16 0.84 0.99 EU-15 0.88 0.92 0.86 0.95 0.95 0.83 0.82 New EUmembers 0.70 0.64 0.67 0.68 0.68 0.65 0.63 Cyprus 4.59 4.34 5.71 85.71 56.82 2.17 17.81 Latvia 1.04 1.27 0.88 1.12 0.98 1.08 0.84 Asia* 1.22 0.95 0.36 1.38 0.97 0.71 0.51 China 1.53 1.24 1.36 1.36 0.97 0.79 0.49 Hong Kong 8.59 2.71 1.54 7.65 4.99 6.48 3.18 Total for the selected countries** - - - - - - - 1.03 1.05 1.oo 1.05 1.09 0.84 0.85 Share of the countries in Ukraine's imports 91.6 92.9 91.9 93.I 90.5 88.9 90.0 *"Asia" includesthe following Asian countries: China, Hong Kong, Singapore,Thailand, Taiwan, Viet Nam ** Includesalso Bulgaria, RomaniaandUSA. Source: WITS, COMTRADE. 33 Figure 1.18: Annual VAT refund claimsas a share of merchandiseexports, 1999-2003 0.18 7 1 0.14 0.13 0.12 0.08 1 1999 2000 2001 2002 2003 Source: Own estimates based on NBUand IMF data. 1.72 The lower part o f Table 1.9 presents the ratio of imports as reported by Ukraine, divided by exports, as reported by the corresponding exporting countries. Due to the differences between FOB and CIF prices, the "undistorted" ratio should somewhat exceed unity, ranging between 1.05 and 1.2. Ukrainian total import flows seem to be underestimated in 2001-02. In absolute terms, Ukraine's imports from selected countries, covering 90 percent o f total imports, fell short o f exports to Ukraine by US$2.3 billion in each o f these years.23Imports from the CIS were underreported in 2001, which could be explained by Russia's switch to the destination principle in VAT.24Though in 1999 imports from Asia were over-reported by at least a quarter, by 2002 they were under-reported by a factor o f two. The dynamics o f import flows from China is clearly behindthis regional trend. Over the whole period, imports from the new EUmembers were under-reported on average by one-third. The most likely explanation for import under- reporting i s optimization of import taxes and levies. 1.73 A joint analysis o f the export and import mirror statistics strongly suggests that there has been an under-reported trade-related net transfer o f capital to Ukraine since 2001. The data suggest that exports were lower and imports were higher than officially reported in this period, which assumes an inflow o f unreported financing available for the Ukrainian commercial sector. In2002, such atransfer could amount to US$3 billion(or 7percent ofGDP). Geographically, the main part o f this transfer derived from trade with the new EU members, though other regions contributedtoo. This finding leads to a number of conclusions, such as: 0 Actual net capital flight from Ukraine has been smaller recently than is officially reported inthe balance o fpayments. 0 Economic growth that started in 2000 and intensified in 2001 has in fact attracted capital inflows from abroad to Ukraine that exceed the unimpressive official FDI 23Takinginto accountthe definition of the index, citedover-reportingin2001-02 shows the lower boundof the discrepancy. 24Until2001, RussialeviedVAT on the "origin" basis, so that Russian exporters had potential incentivesto under-reporttheir shipmentsto economizeon tax payments, while Ukrainian importersdid not have these incentives.When Russiaswitchedto the "destination" principle for most trade in July 2001, Ukrainian importers started to pay VAT on imports from Russia, which createdincentivesto under-report. 34 data. It helps to explain recent high rates o f domestic investment growth. Given the geographical structure o f existing trade data discrepancies, it appears that a substantial portion o f the unaccounted capital inflow may relate to a partial return o f the flight capital that took place inthe 90s. 0 Trade statistics distortions have fiscal implications on both exports and imports. To illustrate it, ifwe take Ukraine's weighted average import tariff o f 5 percent in 2002 andmultiplyit by the value o f underreported imports o fUS$2.3 billion, the foregone fiscal revenues are estimated at US$lSO millions (1.3 percent o f total annual fiscal revenues). 25 General problems exist with Ukraine's merchandise foreign trade statistics that could be lessened by closer international cooperation. There has been a great deal o f cooperation among the CIS statistical agencies, and it i s reflected in a better consistency o f trade data for these countries. At the same time, a greater level o f cooperation with Eurostat might further improve the accuracy o f trade data, facilitate improvements in custom administrations, and thus support strengthening of the government's revenue performance. G. CONCLUSIONS 1.74 The discussion above leads to the following conclusions: 0 After independence in 1991, Ukraine's foreign trade has dropped dramatically, but it has been gradually recovering since 1993. In 1993-2003, exports and imports increased by about 125 percent. Strong export growth led to major improvements in both the trade and current balance. Improvements in trade performance had a beneficial impact on overall economic growth in Ukraine through a number o findirect channels. 0 There was a merchandise trade reorientationaway from the CIS intwo waves: the first started immediately after the breakup o f the USSR in 1991,and the second in 1996. Overall, in 1990 - 2003, the share of the CIS declined by 55 p.p. in exports and by 28 p.p. inimports. Though Ukraine has underdone significant reorientation o f its exports away from CIS and toward the EU especially, the extent o f trade with Europeis still laggingbehindthe newEUmembers. 0 Ukrainian foreign trade flows are sensitive to market signals. However, the trade adjustment to the changes in the exchange rates has worked so far primarily through import. Low exports elasticity on foreign incomes implies that within the present structure o f exports, there are limitations for further high and sustainable export growth rates. The fact that the export sector has played a significant role in the recent growth episode has more to do with growth in export unit value and 25This is a lower bound o f the foregone fiscal revenues because: (i) we use the conservative estimates for underreporting; and (ii) there are more incentivesto under-report imports value with higher than averagerates ofprotection. 35 real exchange rate depreciation, and less with expansion inphysical volumes of exports. a Export growth has been highly concentrated. During 1996-2003, two sectors - iron and steel and mineral products -contributed three-quarters (72 percent) o f total export growth. However, the importance of these commodity groups declined recently and export growth has become more inclusive. During 1999- 2003, iron and steel and mineral products contributed only 45 percent o f total export growth. a Ukraine's export structure i s insufficiently diversified. During the period o f economic decline exports were becoming less diversified, as some items became non-competitive and ceased from being exported. Since 2001, economic growth has been more broad-based and has been reflected in somewhat higher exports diversity. a Overall, the analysis revealed considerable weaknesses in current export growth patterns. High concentration o f exports, as well as a significant contribution to recent growth from temporary and one time factors (such as export price growth and improved capacity utilization) suggest that sustaining high export growth rates in the medium term would be difficult without fundamental changes in its structure. a Ukraine's export specialization differs significantly for its two largest export destinations - the CIS and the EU. Ukraine has more revealed comparative advantages in trade with the CIS than with the EUor the world as a whole. Only 13 percent o f commodity groups show strong export specialization on both regional markets. a The share of intra-industry trade with the CIS has been on average 1.5 times higher than that intrade with the ROW: 54 percent versus 36 percent as o f 2002. This fact indicates the continuing importance o f the former USSR links between the economies o f CIS countries. The degree o f Ukraine's intra-industry trade with the CIS is quite highon cross-country comparisons andit is very close to the level o f OECD countries. a Despite the recent progress in the area o f foreign trade, Ukraine lags behind its CEE neighbors, which recently became new EU members, on a number o f indicators o f trade restructuring. Poland has much more diversified exports, substantially higher complementarity o f its exports with non-CIS markets and a higher degree o f intra-industry trade. The gap did not narrow much since the mid- 90s. These findings suggest a long road ahead for Ukraine in the process o f integration to the world economy. a Joint analysis o f the export and import mirror statistics suggests that foreign trade has facilitated an unregistered trade-related net transfer o f capital to Ukraine since 2001. Ithelpsto explain recent highrates o f domestic investmentsgrowth. 36 0 Ukrainian export and import statistics are distorted. Trade statistic distortions have fiscal implications on both exports and imports. A greater level of cooperation between SSC and statistical agencies, particularly with Eurostat, might improve the accuracy oftrade data and contribute to a better fiscal position for Ukraine. 37 CHAPTER 2. TARIFF AND TRADE REGIME*^ 2.1 This Chapter explores in detail various aspects o f the trade regime inUkraine, primarily tariff and non-tariff import barriers. We arrive at the conclusion that, despite a gradual buildup in non-tariff import restrictions inthe past decade, Ukraine's current statutory trade regime i s quite liberal. However, the real picture i s much less favorable. The real barriers for trade remain considerable and they relate to the behindthe border administrative regulations and enforcement mechanisms, which are not reflected in the standard measures o f protection such as import tariffs. The Chapter further investigates other restrictions traders are facing, most o f which are informal. 2.2 Duringthe decade since independence, Ukraine has moved from a very restrictive to a fairly statutory liberal trade regime. In 1993, exports and imports in Ukraine were severely restricted by non-tariff measures, such as pervasive licensing, quotas, and state trading. In addition, there were wide-ranging price controls in the domestic market and foreign-exchange restrictions. Most o f these measures have been lifted since then. Ukraine drastically liberalized its trade regime andmade considerable progress on the path to joining the WTO. 2.3 The formation o f the current trade regime in Ukraine can be divided in three stages (Burakovsky, 2001). At the initial stage of the early 1990s, the foreign economic regime largely reflectedthe legacy o fthe planned economy and was characterized by extensive use o f restrictive measures. 2.4 The second stage (1994-99) was initiated by the 1994 reform package that included a number of advanced steps in the areas o f macroeconomic stabilization, liberalization and privatization. But the implementation o f the package, including trade policy measures, was quite inconsistent, with considerable fluctuations between liberalization, especially with respect to exports, and interventionism, aimed primarily at additional import protection for selective sectors and companies. 2.5 Duringthe ongoing third stage, the Government has initiated a major effort to liberalize foreign trade and expand opportunities for integration with world markets. This new stage o f liberalization started in 1999, when President Kuchma began his second term and he appointed Mr. Yushchenko as Prime Minister. The new government program called for broad economic liberalization, identified Ukraine's integration with the EU as a strategic priority, and emphasized a need for accelerating WTO accession. In early 2000, the Government adopted a reduction inpreferential import tariffs for about 200 commodity groups by 5-15 percent. 26This Chapter i s partlybasedon the backgroundpaperpreparedby VeronikaMovchan (IER). 39 A. IMPORT TARIFFSTRUCTURE 2.6 Ukraine applies MFN and full tariffs.27 However, in 2001-02, over a half o f Ukraine's merchandise imports came from countries with which Ukraine has free trade agreements (FTAs). These are all former Soviet republics, which include eleven CIS members and three Baltic states. However, FTAs with the Baltics expired on May 1, 2004, on their EU accession. Imports from free trade areas are duty-free except for specified exemptions from the free trade regime. Out o f eleven effective FTAs, six include exemptions from the free trade regime - with Russia, Kazakhstan, Belarus, Uzbekistan, Moldova, and Georgia. The core exemptions from free trade with Russia are sugar, confectionary, candies, and bakery. However, there is also a list o f conditional exemptions from free trade arrangements, based on the existence o f export duty on these commodities imposed by the partner. These exemptions are conditional on the existence o f export tariffs inthe country o f origin. IfRussia applies export tariff on these products, Ukraine is supposed to apply the MFNtariffs andvise versa. As o f 2004, Russia maintains export tariffs on oil, selected petroleum products, and organic chemicals. Ukraine collects export tax on livestock, oilseeds, sugar, alcohol, tobacco products, and animal skins. Furthermore, Russo-Ukrainiantrade relations are plagued with liberal application by both sides o f safeguards and anti-dumping measures (see also Chapter 6). 2.7 There are also just a few exemptions from the free trade regime with Kazakhstan, such as livestock and animal skins (for exports from Ukraine), and alcohol and tobacco products (for imports to Ukraine). Exemptions in trade with Belarus are the same on both sides and include livestock, skins, and sugar. The detailed exposition o f the CIS trade bloc arrangements i s given inChapter 6. 2.8 Almost all other imports come from countries that are subject to MFN tariff rates (45 percent in 2002). The rest o f the partners, who do not enjoy MFNtreatment, are subject to full tariff rates that tendto doublethe MFNrate, with a few exceptions. Imports under fulltariff rates constitute only a small portion (3 percent o f total) o f imports. 2.9 Table 2.1 presents import-weighted average tariffs. Agricultural specific and mixed tariffs were converted into their ad valorem equivalents. As seen from the table, the average tariff was quite low during the period from 1993-2003 staying in the range between 2.5 and 5.0 percent. Agricultural tariffs were higher than non-agricultural tariffs by an order o f magnitude- 31.4 versus 2.7 percent in2002.28 2.10 Non-agricultural tariffs stayed at or below 3 percent. Such low rates should be attributed to a large share o f imports under the FTAs, especially from Russia. Import-weighted rates o f the MFNregime are higher, although still quite benign. The import-weighted average MFNtariff rates for non-agricultural goods varied between the lowest 3.7 percent in 1995 to the highest 6.7 percent in 1999. In the mid-l990s, there was a trend toward reduction o f import tariffs, which discontinued in 1997-99. The rates stabilized inthe 2000s near the 6.0 percent level. *'The Law on Common Import Tariff (1992) envisions a third type o f tariff - preferential. It should be applied to goods from countries that are part of a customs union with Ukraine or have shared with Ukraine special customs zones. However, no such arrangements are in existence today. 28Excessive protection of agriculture remains rather common. See the next chapter, for instance, for a review o f the EU's tariff structure. 40 2.11 Agro-food tariffs have significantly increased during the last decade. While in 1993 the import-weighted average tariff on agricultural products was 10 percent, it more than tripled by 2002' reaching 32 percent. As seen from Table 2.1, high agro-food tariffs drive up tariff on all products inUkraine, although agro-food imports constitute only 8 percent o f total imports. Table 2.1: Import-WeightedAverage Tariff RatesinUkraine (in percent) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 All goods - All partners - MFNpartners 4.2 2.7 2.5 3.1 4.6 5.0 4.9 4.4 4.7 5.0 n.a. 7.0 5.1 4.6 6.0 9.3 9.7 10.2 8.9 9.1 9.7 n.a. Non-agricultural goods -- All partners 3.7 2.0 1.8 2.1 2.6 3.0 3.0 2.8 2.7 2.7 2.7 MFNpartners 6.4 4.2 3.7 4.4 5.5 6.5 6.7 6.0 5.8 5.9 5.9 Agricultural goods -- All partners 10.2 10.4 10.3 14.9 28.1 27.9 26.7 22.9 27.6 31.4 n.a. MFNpartners 11.6 11.3 11.1 17.6 37.0 33.4 35.5 30.2 33.3 37.6 n.a. - For ImDlicit tariff rates all imports n.a. n.a. n.a. n.a. n.a. 2.5 1.7 1.8 2.1 2.4 2.2 -ForMFNimports n.a. n.a. n.a. n.a. n.a. 5.6 4.2 4.5 4.9 5.2 4.6 Notes: 1. The 2002 import weights for each commodity category were appliedthroughout the period. 2. The import-weighted average tariff on agricultural goods is estimated on the basis of ad valorem tariffs and ad valorem equivalents o f specific and mixed tariff rates. The ad valorem equivalents were estimated for each year on the basis of annual average import unit value at the 6-digit H S level. The formula used to calculate ad valorem equivalent for specific tariffs was the following: Tariff equivalent = (specific ratehnit value)* 100 percent. The mixed rates were estimated likewise; with the only exception that the maximum value between ad valorem and specific parts o f the mixed tariff was chosen. Thus, the formula was: Tariff equivalent = M a x {(specific r a t e h i t value)*100 percent, ad valorem tarifq. 3. Implicit tariff rates were estimated as the ratio o f collected import duties o f the value of imports. Source: IER and WorldBank estimates. 2.12 Import-weighted non-agricultural MFN tariffs consolidated into 11 commodity groups are presented inTable 2.2 and detailed agricultural tariffs - inTable 2.3. The most protected non- agricultural goods appeared to be leather, rubber, footwear, and travel goods, with a 12.3 percent rate in 2003, and with a rate increase o f 1.3 percentage points since 1993. The second highest protected group was manufactured products n.e.s. (9.6 percent). Mineral products, precious stones, and precious metals followed with an 8.7 percent rate, and the next was transport equipment with an 8.5 percent rate. Other groups exhibit milder tariff rates. The major drop in average tariffbetween 1993 and 2003 was registered for transport equipment, which fell by 13.2 percentage points. 2.13 The implicit average tariff rate has been low: between 1.7 and 2.5 percent in the period fi-om 1998 to 2003 (Table 2.1). The implicit rate stood at less than a half o f the average import- weighted applied rate for respective years. Such a large discrepancy can be explained primarily by a proliferation o f import duty exemptions and weak enforcement. This could indicate fiscal losses o f US$ 400-500 million a year. The implicit rate for imports that was not covered by free trade arrangements was about 5 percent. 41 Table 2.2: Import-WeightedAverageMFNTariffs onNon-AgriculturalGoodsinUkrainefor Major CommodityGroups(inpercent) 1993 2003 Change Wood, pulp, paper, and fiuniture 2.8 6.9 4.1 Textile and clothing 9.3 6.8 -2.5 Leather, rubber, footwear, and travel goods 11.0 12.3 1.3 Metals 4.7 5.3 0.6 Chemicals and photographic supplies 4.4 6.1 1.7 Transport equipment 21.7 8.5 -13.2 Non-electric machinery 4.7 4.5 -0.2 Electric machinery 5.6 7.7 2.1 Mineral products, precious stones, and precious metals 7.7 8.7 1.o Manufactureditems n.e.s. 9.5 9.6 0.1 Petroleum 2.0 0.0 -2.0 Source:IER estimates based on Ukrainian tariff schedule and import structure. Table 2.3: Import-WeightedAverageMFNTariff Equivalentson Agricultural GoodsinWTO MTN (in percent) 1993 2002 Change Fishand fish products 6.4 15.9 9.5 Fruits and vegetables 10.0 65.5 55.5 Coffee, tea, cocoa, and preparations 6.2 17.0 10.8 Sugar and sugar confectionary 10.0 145.8 135.8 Spices, cereals, and other food preparations 9.0 32.1 23.0 Grains 10.0 30.1 20.1 Animals and products thereof 5.2 37.7 32.5 Oil seeds, fats and oils and their products 8.1 30.3 22.2 Cut flowers, plants, vegetable materials, etc. 9.7 1.3 -8.4 Beverages and spirits 13.3 84.3 70.9 Dairy products 5.0 34.1 29.1 Tobacco 30.0 3.3a -26.7a Other agricultural products 6.6 6.8 0.1 a This estimate couldbe biased since specific tariffs, expressed inunits, were not taken into account. Source: IER estimates. 2.14 At the same time, the tariff structure features international tariff peaks over 25 percent that represent 5.6 percent o f the total tariff schedule and peaks over 50 percent that represent 3.1 percent o f tariff lines. These tariffpeaks are mostly related to agriculture. 2.15 The most protected agricultural commodity is sugar and sugar confectionery, for which the estimated ad valorem equivalent in 2002 reached the 146 percent tariff equivalent rate, compared to a very moderate rate o f 10 percent in 1993. Sugar is also extensively protected via non-tariff measures. It is the only product for which the import quota is established not as a result of anti-dumpingor safeguard investigations but as part o f the domestic protection policy. The 42 second most protected category i s beverages, with a 71 percent tariff-equivalent rate, and the third is fruits and vegetables. Alcoholic beverages are also subject to core non-tariff measures, such as licensing. Thus, agriculture inUkraine seems to be highly protected with tariff and non- tariff measures. The only agricultural sectors with a liberal import regime are cut flowers, plants and vegetable materials, and unprocessed tobacco products. 2.16 There is evidence that high import tariffs on agriculture products provoke smuggling. It also shifts legal imports to the free economic zones, where they enter duty-free thus undermining the collection o f import duties. It i s estimated that, in 2001, over a half o f poultry imports were unrecorded. 2.17 The tariff structure for ago-food products has changed during the period under review. While in 1993 all import tariffs were ad valorem, in 1998-2003, however, specific and mixed rates became dominant constituting 80 percent o f all tariff rates. It i s well known that the burden of specific rates is sensitive to price levels: a higher price means a relatively lower tariff rate in terms o f ad valorem equivalent. The extensive use o f specific rates, thus, could cause a bias in imports toward more expensive goods. Tariff Escalation 2.18 Tariff escalation occurs when import tariffs on finished products exceed those on semi- finished products, which inturn exceed those o f raw materials. The result is higher protection o f finished products than that based on import tariff for finished products alone. The mainstream view is that a significant tariff escalation does a disservice to the economy by overly shielding domestic producers from international competition and dampening incentives for improvement in efficiency and in technological advances (World Bank, 2002). Tariff escalation also discourages exports since it gives domestic producers larger incentives to sell on the domestic market than to export. 2.19 Tables 2.4 and 2.5 present the distribution o f simple-average import tariffs by stage o f production (as defined in the WTO MTN) and by sector for the last decade. The tables clearly show tariff escalation both on aggregate and for almost every sector in each year.29The overall average tariff for finished goods was almost three times that for raw materials and this ratio was constant during the decade under consideration. At the same time, the gap between tariffs for semi-processed and fully-processed goods widened for some sectors, such as textile and clothing; leather, rubber, and footwear; and manufactured items. Therefore, the effective rate o f protection o f semi-finishedand finished goods inUkraine was, in fact, higher than their statutory tariffrates. 29Only two sectors (metals and chemicals) did not exhibit tariff escalation in 1993. All sectors in two other years exhibited this phenomenon. 43 Table 2.4: Tariff Escalation in the Non-Agricultural MFNTariff Schedule - 1993 1998 2003 - v1 V a Yv1 V .-m - -.- p v 1 v1 51 v1 51 3 L enB Xg m L eP : c, u s a 0) m E ( z B c) 5 '5! `6 .-a Q : .-I izC Wood, pulp, paper, and furniture d2.1 m3.6 5.6 1.1 2.2 10.5 a1.6 12.9 Textile and clothing 3.9 5.5 13.4 5.4 5.3 24.4 1.3 2.6 10.7 Leather, rubber, footwear, and travel 5.0 9.6 12.1 0.6 9.2 16.6 2.1 7.6 17.2 accessories Metals 2.0 4.8 4.7 1.7 4.2 6.8 1.8 4.8 6.8 Chemicals and photographic materials n.a. 7.2 7.2 n.a. 5.1 8.4 n.a. 5.4 8.3 Manufactured items 2.4 4.5 5.8 5.0 8.2 10.9 3.9 8.4 11.8 Machinery and transport equipment n.a. n.a. 6.2 n.a. n.a. 3.0 n.a. n.a. 6.1 Total 2.6 5.8 7.8 3.5 4.7 9.7 2.9 4.4 8.5 Note: Petroleum and manufactured items, not elsewhere specified, are excluded (inaccordance with WTO MTN). Source:IERestimates based on Ukraine's tariff schedules. Table 2.5: Tariff Escalation in the Agricultural MFN Tariff Schedule 1993 1998 2002 Fish 5.2 5.0 15.3 20.2 57.7 34.4 13.1 109.7 114.2 Fruits & vegetables 10.0 10.0 10.0 41.2 26.7 74.8 66.8 98.7 119.8 Coffee, tea, etc. 5.0 5.0 7.2 4.9 25.9 30.2 10.4 18.5 29.1 Sugar and sugar confectionary n.a. 10.0 10.0 n.a. 58.5 46.8 n.a. 57.3 51.0 Spices, cereals, etc. 5.0 10.0 9.9 7.0 35.0 48.9 9.3 33.9 55.6 Grains 10.0 n.a. n.a. 22.6 n.a. n.a. 23.9 n.a. n.a. Animals and meat 5.0 n.a. 5.9 13.2 n.a. 50.4 1.8 n.a. 46.4 Oil seeds, oils and fats 2.5 n.a. 8.7 24.9 n.a. 46.5 18.8 n.a. 50.0 Flowers, plants, etc. 9.1 n.a. n.a. 17.6 n.a. n.a. 1.3 n.a. n.a. Beverages & spirits n.a. n.a. 15.2 ma. n.a. 84.2 n.a. n.a. 157.2 Dairyproducts 5.0 n.a. 5.0 20.0 n.a. 42.6 15.8 n.a. 40.0 Tobacco 30.0 n.a. 30.0 0.0 n.a. 30.0 0.9 n.a. 89.9 Other agricultural products 5.6 5.0 5.0 12.8 5.0 18.5 15.0 5.0 5.9 Total for agricultural products 7.0 8.6 9.4 21.6 41.3 52.6 24.7 57.8 75.8 Source: IER estimates based on Ukraine's tariffschedules. 44 2.20 Tariff escalation in2003 has beenhigher than in 1993, but it declined somewhat from its peak in 1998-99. Overall, tariff escalation appears to be mild by international standards due to low tariff rate levels inall product categories. 2.21 It is worth noting that while tariff protection o f raw materials and fully processed goods had increased between 1993 and 2003, the average tariff for semi-processed goods had actually gone down. The largest reduction occurred in textile and clothing, but most other sectors also registered this phenomenon (with the exception o f metals, manufactured items and machinery). This ledto additional support for domestic producers through cheaper intermediate inputs. 2.22 Although tariff escalation is rather mild on average economy-wide, there are important sectors where escalation i s quite high. Inparticular, agricultural commodities exhibit a higher degree o f tariff escalation. Moreover, the gap among tariff rates for unprocessed, semi-processed and processed products has widened during the last decade. While in 1993 the difference between tariffs for unprocessed and processed products was 2.4 percentage points, it reached 51.1percentage points by 2002. Thus, the effective rate o fprotection inagriculture is higher than the nominal protection, and this burdenis placed on households (who are the mainconsumers o f agro-food products). Urban poor without access to land sustain disproportionably heavy welfare losses. 2.23 The geographic composition o f imports strengthened this effect, since imports from the CIS free trade area (including Russia) consist mostly o f raw materials and enter duty-free (with some insignificant exemptions). Finished goods come primarily from outside the free trade area and pay MFN tariff rates. Hence, the actual difference between trade-weighted tariff rates for raw materials and finished goods is higherthan the gap between simple average rates. Tariff Dispersion 2.24 Although quite modest in magnitude, Ukraine's tariff schedule exhibits high variation. The coefficient o f variation calculated for tariff lines equals 1.0 (or 100 percent), which by international standards i s quite high(see Table 2.6 for international comparison). Another sign o f an over-complicated tariff structure i s the high number o f tariff bands in the schedule. The number of differentMFNad valorem tariff rates inUkraine's schedule went up from 7 (ranging from 0 to 25 percent) in 1993 to 50 (ranging from 0 to 50 percent) in 2003. Fifty different tariff bands clearly overburden the tariff structure, and frequent changes in these bands create a high degree o f uncertainty for conducting trade. 2.25 In general, there is little economic justification for and many dangers from providing differentiated tariff protection to various sectors o f industry and agriculture (World Bank, 2002, Chapter 52). A wider range o f tariff rates increases the administrative burden in customs administration and collecting tariff revenue and is less effective in preventing commodity misclassification, smuggling, and corruption. The tariff revenues will be more efficiently collected through a small number o f tariff bands. Economic theory and practical evidence favor simple uniform tariff structures, which minimize economic distortions and misallocation of resources. 45 2.26 Table 2.6 compares the basic characteristics o f Ukraine's tariff schedule with a wide range of transition economies, as well as with the EU. Table 2.6: Basic Characteristics of Tariff SchedulesinUkraineand SelectedCountries (for Non-AgriculturalCommodities) Duty-free Domestic No. o f tariff Simple Coefficient o f lines Intemational peaks Year lines average variation M a x (percent o fpeaks (percent (percent o f tariff lines)o f tariff lines)tariff lines) Ukraine 2003 8258 6.9 1.0 50.0 19.6 8.5 5.4 EU-15 2002 8305 4.2 0.9 26.0 17.1 0.9 1.5 Armenia 2001 4450 2.3 1.8 10.0 76.8 0.0 23.2 Belarus 2001 8595 10.1 0.5 25.0 0.6 10.5 0.0 Czechoslovak Customs Union 2001 8201 4.2 0.8 30.1 16.2 0.8 1.8 Hungary 2001 10368 7.0 0.6 78.0 10.3 2.3 1.6 Latvia 1999 8608 2.9 1.8 30.0 21.5 0.0 16.4 Lithuania 2001 8488 2.5 2.2 33.8 79.8 1.4 15.8 Poland 2001 8394 10.1 0.6 119.2 5.0 13.4 1.2 Russia 2001 8716 10.1 0.5 20.0 0.6 10.4 0.0 Notes: 1. Coefficient o f variation is a measure o f relative variation and is calculated as the ratio o f the standard deviation over the mean. 2. Domestic tariff peaks are defined as exceeding three times the overall simple average appliedrate. 3. International tariffpeaks are defined as exceeding 15 percent. Source: WTO (2003), IER estimates. 2.27 According to WTO (2002), the EU simple-average applied MFN tariff rate on non- agricultural products (excluding petroleum) in 2002 was 4.2 percent, down from 4.5 percent in 1999, while Ukraine's 2003 simple average statutory MFN tariff rate on non-agricultural products was higher-6.9 percent. Further, the EU grants duty-free (under FTAs) or reduced (under GSP) tariff treatment to the majority o f its trading partners (with the exception o f only nine countries). Taking this into account, the aggregate applied tariff rate in the EU was below the simple average statutory rate o f 4.1 percent. Ukraine also offers large preferences to some partners inthe form o f FTAs, reducing its aggregate rate to 2.7 percent, which is below the EU benchmark. Also, Ukraine has a larger number of international tariff peaks than the EU-8.5 versus 0.9 percent o ftariff lines. 2.28 Sector-wise, the MFN average tariff rates in Ukraine are higher than in the EU for the majority o f product categories. The exemptions are petroleum products, inorganic chemicals, aluminum, lead, zinc, tin, and other non-precious metals, locomotives, and some textiles. Sensitive products, such as petroleum products and textiles, are protected more strongly in the EUthan inUkraine. Insum, Ukrainian MFNrates are generally higher than the EU's. However, the preferences offered both by Ukraine and the EUreduce this gap and the Ukrainian aggregate applied rates are enpar with the EU's. 46 2.29 When compared to neighboring transition countries, Ukraine'had a lower simple average MFN tariff rate than Poland3', Russia, and Belarus, all three of which have a 10.1 percent average rate. However, Ukraine's rate is significantly higher than inthe Baltic countries, as well as inthe Czech and Slovak Republics (before EUaccession). The same is true ifwe compare the number o f international peaks among these countries, as well as the number of zero tariff rates. Nevertheless, on aggregate, the Ukrainian tariff structure appears to be in line with the comparator countries, all o fwhich have quite liberal tariff regimes, but not the most liberal. B. IMPORT BARRIERS NON-TARIFF 2.30 Ukraine has been developing a system o f non-tariff barriers (NTBs). The list o f NTB measures applied in Ukraine from 1994-2004 i s presented inBox 2.1. Following the framework laid out by Laird and Yeats (1990), we will further define the intensity index o f NTBs as the percentage o f cases when non-tariff measures have been actually applied to imports. The index i s calculated by tariff line. The index could be either simple-average or import-weighted. In the latter case it reflects the composition o f imports and i s alternatively called import-coverage index3*. Table 2.7 presents both the simple-average and import-weighted NTB indices. By design, these measures are simply the counts o fNTBs. A tariff line i s counted as subject to NTB if any of the measures cited in Box 2.1 apply. The indices, however, do not measure how severely the NTB impinges on trade. While Ukraine is using these NTBs on fewer tariff lines 30 Iti s worth mentioning, however, that, in the case o f Poland, 85 percent o f industrial imports come in under preferential trade agreements. See WTO (2000) for trade policy reviews for Poland (before itjoined the EU). 3' Formally, the simple-average NTB intensityindex equals: where NTM, i s a dummyvariable that takes a value o f unity ifthe j type o f the NTMs i s applied to the tariff line i and zero otherwise.; N is a total number o f considered tariff lines, i = I,..., N ;and Jis a total numbers of considered types of the NTMs, j = 1, ...,J . The index equals 100if each type o f non-tariff measures i s applied to each tariff line. The import-weighted index equals: where Di,r-m i s a dummy variable that takes a value o f unity if one or more NTMs i s applied to the tariff line i in the year (t-m)and zero otherwise; IMi,,-n represents the value o f imports in tariff line i in the year (t -n) If M and m are . zero, the index is based on current trade values, otherwise it is expressed in a base year trade weights. The IC shows the percentage of imports covered by at least one non-tariff measure. The index equals 100 if each tariff line, for which import value i s non-zero, i s subject at least to one non-tariff measure. See Movchan (2004). 47 than many other countries, it i s more severely restricting trade where they are used. The evidence from Chapter 5 suggests that, for instance, sanitary and phyto-sanitary controls may be less restrictively applied inother countries. Box 2.1: Primary Non-TariffMeasuresApplied inUkrainein 1993-2004 Compulsory certification of conformity to standards Licensing o f selected export and import activities Minimumvalue requirement (ineffect from 1996-2000) Preliminary customs declaration Ecological control Sanitary control Phytosanitary control Veterinary control Permits for medicine imports State procurement regulations with regardto imports Customs value calculation inquiry (checking declared value for the purpose o f tax and tariff calculations, in effect from 1996-2000) Customs controls Verification of contract price and origin for selected commodities Control over selected types o f technology and equipment, such as energy-saving equipment, meteorological equipment, nuclear materials, weapons materials, materials that could be used to produce chemical and bacteriological weapons, and equipment for clandestine informationgathering. Table 2.7: Ukraine's Non-TariffMeasureIntensityIndices,1993-2004 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Simple-average index 7.2 9.1 9.4 16.8 17.0 17.6 19.0 19.2 13.5 13.6 15.6 17.5 Import-weightedindex 1.0 1.3 1.7 10.5 10.7 11.2 14.1 14.2 8.8 8.7 11.8 10.0 Note: These indices include 17 non-tariffmeasures. Source:IER estimates. 2.31 As seen from the table, the simple-average index more then doubled from 1993 to 2004-from 7.2 to 17.5 percent, with the peak in 1999-2000. The import-weighted index, which takes into account the importance o f NTBs with respect to the import structure, increased ten times from 1993 to 2004. Inaddition, the import-weighted index in each year was below the non- weighted index. This can be partly explained by Ukraine's import composition dominated by energy products (see Chapter 1 o f this report) that are not subject to non-tariff measures. In addition, more restrictive non-tariff measures tend to dampen the imports o f the respective commodities. 2.32 While in 1993 there were only few types o f phytosanitary and veterinary controls in place, by 1998 the number o f applied measures increased six-fold. New measures introduced include compulsory certification, minimum customs value regulations, ecological control, and others. The NTB index dipped in 2001-02 due to the elimination o f minimum customs value regulations, relaxation o f state procurement regulations (allowing foreign companies to bid for government procurement contracts), and the shortening o f the list o f commodities subject to 48 licensing. However, in 2002-04 the index went up due to both the expansion o f existing measures (extending the list o f compulsory certification) and to the introduction of new risk- control measures by the Customs over commodities that are perceived to be prone to non-diligent practices. 2.33 The leading component o f the index is safety standards, such as sanitary and phytosanitary, veterinary, and ecology controls; compulsory standards certification; and permits for medicine imports. These regulations can be classified as technical measures. There was a steady growth in non-tariff barriers related to safety standards between 1993 and 2004. The growth occurs mainly due to an increase in the number o f commodities subject to these regulations. For instance, while in 1995 less than 6 percent o f tariff lines were subject to compulsory testing, by 2004 the share more than quadrupled to 28 percent. The most extensive certification procedures applied to food products, where more than 80 percent o f tariffs lines were subject to it. The least certified were pulp and paper products, where some certification was introduced only recently (in 2003), and the coverage i s currently below one percent o f tariff lines. (There is no compulsory certification for pearls, precious stones and metals, as well as for works o f art and antiques.) 2.34 About 31 percent o f tariff lines currently are subject to sanitary control, while phytosanitary and veterinary controls each cover approximately 11 percent o f tariff lines. Sanitary controls cover all products o f plant origin as well as animal and vegetable fats and oils, and food industry products. Some chemical products are also subject to sanitary control. Veterinary controls cover all imports o f live animals and animal husbandry products as well as meat products, fats, and leather and leather products. Phytosanitary controls cover plant products, and wood and wood products. 2.35 In order to compare the intensity of the NTBs in Ukraine with other countries, we calculated the core NTB index (see Table 2.8). This index conforms to the UNCTAD system o f trade control measures and i s compatible across countries. It includes a narrower range of NTBs aimed at quantity and price controls, such as licensing, quotas, minimum customs value requirements, anti-dumping and safeguards, and weapons control measures. Table 2.8: Frequency and Import Coverage Indices for Core Non-tariff Barriers, 1993-2004 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Frequency index, percentoftarifflines 0.0 1.8 1.7 1.7 2.8 10.0 12.2 9.7 5.2 5.8 5.9 6.1 Importcoverageindex, Dercentof imports 0.0 4.8 4.8 4.5 8.3 12.3 11.1 11.1 5.7 6.3 6.7 9.0 Source:IER estimates. 2.36 The core barrier frequency index has increased between 1993 and 2004 from zero to 6.1 percent of tariff lines. The peak in NTB protection was attained in 1998-2000 due to the extensive use o f the minimum customs value requirements. The abolishment o f this regulation caused an immediate reduction o f the core barrier index. However, the index steadily increased later due to the expansion o f licensing andweapons controls. 49 2.37 The share o f imports subject to at least one core barrier has been higher than the frequency index for most o f the period. This can be explained by a higher level o f protection for sectors which account for larger shares intotal imports. This index peaked in 1998-2000 at 11-12 percent and then declined to 5-7 percent in 2001-03. There was some rebounding in early 2004, caused by the increase in licensingrequirements for chemicals. 2.38 To conclude, the number o f non-tariff measures faced by imports into Ukraine has significantly increased duringthe period o f review. While at the beginningo f 1995 the only core measure applied was licensing, by 1999 Ukraine has also started to conduct anti-dumping and safeguard infestations, established weapon control, and introduced the minimum custom value regulations (removed later). Most o f the technical measures related to protection o f health and the environment were in place in 1992-94 and have not significantly changed since then (including sanitary, phytosanitary, and veterinary controls, and controls over pharmaceuticals and medical equipment) except for tightened regulations for compliance with technical standards (compulsory certification). 2.39 Ukraine's NTBs do not look excessive if compared with OECD countries. According to Laird and Yeats (1990), the average frequency ratio o f core tariffs in OECD countries in 1986 stood at 12.0 percent and the average import coverage was 17.7 percent. Among individual OECD members, the share o f imports subject to non-tariff measures was 15.4 percent in Germany, 17.3 percent in the U.S., 18.6 percent in France, 20.1 percent in Greece, 21.4 percent in the Netherlands, and 32.4 percent in New Zealand. The smallest import coverage was registered inDenmark and Finland -8.0 percent. 2.40 According to WTO (1998), in Hungary the frequency ratio o f core non-tariff measures stood at 19.9 percent in 1991, and 7.8 percent in 1997, covering 19.5 and 12.8 percent o f imports respectively. Thus, the Hungarian level o f protection was similar to that observed inUkraine in 2001-04, although the import coverage ratio inUkraine was lower. 2.41 Core NTBs in Ukraine are also mild if compared with most developing countries (see Table 2.9). However, Sub-Saharan Africa and Europe and Central Asia regions exhibit even lower NTB frequencies than Ukraine. Table 2.9: FrequencyIndicesof Core NTBsinDevelopingCountries (Percentof tariff lines affected) Region 1989-94 2000 Latin America and Caribbean 18.3 15.3 Europe and Central Asia N.A. 3.4 East Asia and Pacific 30.1 5.5 Sub-Saharan Africa 26.0 2.3 Middle East and NorthAfrica 43.8 8.5 South Asia 57.0 13.3 Source: The World Bank. GlobalMonitoring Report 2004. 50 2.42 Insum, Ukraine seems to be quite liberal interms of official non-tariff core protection, compared to OECD countries. Inparticular, Ukrainian agricultural imports look more liberalized in comparison with the EU. For instance, during the 80s in the EEC-10, dairy products and cereals and preparations had a 90 percent frequency index, meat - 78 percent, and live animals - 60 percent. A gradual strengthening o f safety standards in Ukraine looks quite natural and i s likely to continue. Safety measures, if correctly formulated and properly enforced, are fully consistent with WTO rules. 2.43 However, the level o f the informal NTBs i s not taken into account in the above index. Available surveys o f the business environment point to implementation problems o f NTBs that raise effective trade barriers and sour the business climate. A higher level o f informal non-tariff restrictions undermines the benefits o f a statutory liberal trade regime. According to the International Finance Corporation survey o f the business climate in Ukraine for 2002 (IFC, 2003), sanitary inspections, as a part o f import procedures, were considered a barrier by approximately 25 percent o f respondents, while veterinary inspections were mentioned by 8 percent o f entrepreneurs. However, the frequency o f legal violations during veterinary inspections was almost twice as highas during sanitary inspections - 15 versus 8 percent. 2.44 Despite the rise in compulsory certification coverage, the share o f respondents that claim certification to be a major obstacle to their business development dropped between 2000 and 2002 from 42 to 30 percent, although still remaining quite high. The three most severe problems faced by entrepreneurs when obtaining certificates o f conformity were: a large number o f documents requested, longwaiting period, and complexity and non-transparency o f procedures. 2.45 Custom control itself i s also viewed by businesses as a barrier to trade. According to the IER survey o f manufacturing, 47 percent o f respondents reported it as an impediment and 13 percent named it as a significant impediment.According to the 2002 IFC business survey, border customs inspections were considered a barrier to business and development by more than 30 percent o f firms. 2.46 In the transit country, such as Ukraine, another important aspect of the trade regime relates to rationality and predictability o f government tariff policy in the transportation sector, especially in railways and pipelines. The GOU should avoid using transportation tariffs either as a tool o fmarket protection or implicit subsidization o f exporters. c. QUANTITATIVE IMPORT RESTRICTIONS AND CONTINGENCY MEASURES 2.47 Ukraine applies import licensing and quotas on a variety o f products. These restrictions are of two principal types: (i) licensing o f potentially dangerous and environmentally unfriendly products (such as pharmaceuticals, agricultural chemicals, ozone-depleting substances, and armaments), stamps and excise labels, and (ii) products subject to quantitative limitations due to contingency measures, adopted by Ukrainian Interdepartmental Commission on International Trade. Ukraine tends to apply liberally safeguards and anti-dumping measures. The list o f quantitative restrictions in effect is quite long. CIS countries (especially, Russia) and EU membersso far have beenthe maintargets o fcontingency measures. 51 2.48 Although Ukraine's Law on Safeguards and Anti-DumpingMeasures i s generally WTO- compliant (albeit with some minor inconsistencies), Ukraine's application o f anti-dumpingand safeguard measures i s often arbitrary and non-compliant with WTO rules (see Chapter 5 on WTO). Since Ukraine i s not a member o f the WTO, it i s not subject to W T O trade remedy disciplines. Nevertheless, non-compliance with WTO rules i s clearly trade-restrictive. Also, since Ukraine i s in the process o f accession negotiations, members' complaints on this issue provide a stumblingbloc inthe negotiations. There are no clear procedures for the application o f the contingency measures in the CIS free-trade area either, which also restricts trade in the CIS. In general, external curbs on domestic protectionist pressures in Ukraine are weak at the moment. 2.49 Some o f the trade disputes between Ukraine and its partners clearly create a vicious circle o f mutual sanctions. On the one hand, since Ukraine does not have market-economy status with its major OECD partners and hence does not have a clear recourse against contingency measures introduced by its counterparts, it has an inclination to respond in-kind. Effective conflict resolution procedures inthe CIS are not available either. Onthe other hand, there i s a virtual lack o f recourse by the partners against contingency measures introduced by Ukraine save for introducing their reciprocal measures. This approach was widely used by Ukraine's partners leading to the unproductive situations o f trade wars. However, since the economic size o f Ukraine's main partners (EU and Russia) i s much larger than Ukraine's, their measures tend to inflict greater losses on Ukraine than vice versa. 2.50 Ukraine would be best served if it seriously restrains its application o f contingency measures. Contingency protection should be considered as an extraordinary measure and should bepreceded by bilateral negotiations, with all pros and cons carefully weighted. And in any case Ukraine should adhere to the WTO rules governing the application o f such measures. Ukraine and its CIS partners (who are also outside the WTO) should introduce WTO-style disciplines in the CIS free trade area independentlyand inadvance o fjoining the WTO. D. EXPORT REGIME 2.5 1 Ukraine upholds export licensing for usual safety, security, and environmental reasons. It maintains export duties on a variety o f agricultural products, such as young live cattle, heifers, cows, bulls, sheep, cattle hides, sheep-, lamb-, and pigskins, flax seeds, and sunflower seeds. Ferrous scrap metals are also subject to export duty (which causes great tension intrade relations with the EU). 2.52 As argued in Chapter 5 o f this report, export duties per se are not prohibited by WTO agreements and, from the economic standpoint, are equivalent to import tariffs. Therefore, some memberso fthe Working Party on Ukraine's accession are trying to make a case that these duties contradict the spirit o f WTO agreements and are in contradiction with some articles. Russia, for example, reportedly has negotiatedwith WTO members to maintain an export tax on natural gas, o f which it i s a major world supplier. Notwithstanding this argument, it i s worth re-assessing potential benefits o f these taxes for the Ukrainian economy. The standard argument made by Ukraine that export duties help to increase capacity utilization in downstream industries should be more thoroughly weighted against losses made in the upstream industries affected by such measures. Export taxes, and trade taxes generally, are a poor policy instrument to address 52 domestic capacity utilization problems. The Ukrainian authorities have never presented a convincing cost-benefit analysis o f export taxes. 2.53 The standard economic arguments in favor o f export taxes are that they may increase economic welfare when other taxes are costly to collect or when the exporter i s such a large supplier to world markets that an export tax shifts terms o f trade in its favor, z.e., the tax raises the world price o f its exports relative to its imports. As will be discussed inthe following section o f this study, export tax revenue is less than 0.1 percent o f total tax revenue (see Table 2.12), so export taxes cannot be defended on fiscal grounds. What about the market power argument? Table 2.10 below shows that Ukraine's exports o f goods it subjects to exports taxes make up very small shares o f their respective world markets. The only products in which Ukraine has a market share o f more than one percent are sunflower seeds and scrap metal. The share of sunflower seeds is sizeable-in 2001 Ukraine was the world's third largest exporter, after France and the United States-but perhaps not enough for an export tax to produce large terms o f trade gains. By way of comparison, Russia's share o f the world natural gas market in 2001-02 was almost 40 percent. Ukraine ranks much lower inworld scrap markets. Table 2.10: Ukraine's Market Share in Goods Subject to Export Taxes, 2001-02 Ukraine's share of Product subject to export taxes world market Live bovine animals (HS010290) 0.08% Linseed, whether or not broken. (HS120400) 0.01% Sunflower seeds (HS120600) 7.59% Other oil seeds (flax) (HS120799) 0.97% Raw hides and skins o f cattle and horses (HS4101) 0.97% Raw skins of sheep or lambs (HS4102) 0.01% Other skins (pigskins) (HS410390) 0.09% Ferrous waste and scrap; remelting (HS7204) 3.64% Source: WorldBank staffcalculations using UN Comtrade datafor 2001 and 2002. 2.54 Although the Hryvnia i s convertible in current account operations, there exist requirements for exporters to repatriate export earnings within the 90-day period (180-days for pharmaceuticals), which can be very burdensome, which i s confirmed by the exporter survey conducted for the purposes o f this study. There i s also a requirement for selling 50 percent o f foreign currency from export proceeds on the domestic currency market. 2.55 Ukraine works on a destinationprinciple o f value-added taxation: that is, it collects taxes on imports not exports. VAT paid on both domestic and imported inputs is subject to reimbursement upon the exportation o f finished goods. However, anecdotal evidence and the survey results indicate that exporters without highpolitical connections incur significant costs o f refunddelays. The existing VAT refundmechanismcreates considerable hurdles for exporters. Sectoral Subsidies and Free Trade Zones 2.56 Ukraine maintains extensive sectoral subsidies and has a multitude o f free trade zones and priority development areas. The following industries have been receiving subsidies of different magnitude during the last five years: shipbuilding, coal mining, steel, motorcars, 53 aircraft, space, chemicals, pharmaceutical, and construction. It i s a tricky issue if some o f these subsidies amount to export subsidies inthe definition o f the WTO Agreement on Subsidies and Countervailing Measures, since these subsidies target all production, both for domestic sale and for exports. Although these issues have not so far caused major problems in Ukraine's WTO accession negotiations (see Chapter 5), sector studies reveal the export dimension o f the subsidies, in economic rather than legalistic WTO terms. See, for instance, Chapter 4 for the analysis o f steel subsidies. 2.57 There are eleven free economic zones in Ukraine today: Azov, Donetsk, Zakarpattya, Interport Kovel, Kurortopolis Truskavets, Mikolaiiv, Port0 Franco Odessa, Port Crimea, Reni, Slavutich, and Yavoriv. There are also nine special priority areas granting privileges comparable to those o f free economic zones. Free economic zones and priority development areas are a comparatively new phenomenon in Ukraine. The first free economic zones were established in 1999. The main goal o f zone formation was regional development through establishing business- friendly enclaves in an overall hostile business climate. Export facilitation was o f secondary importance. Zones and territories export about one-third o f their output, which constituted only four percent o f total Ukraine exports in 2003. Table 2.11 lists privileges granted in each special economic zone. 2.58 The privileges are granted not to all activities inthe zones but only to a list o f investment projects specified by government resolutions. In order to qualify, a project should meet the following criteria: 0 the project belongs to the list o fpriority types o f economic activity; 0 minimal investment is in an amount from US$O.2-3.0 million, depending on the type of the activity; 0 the project is approvedby the zone authorities; and 0 there is a contract with relevant Central Government bodies. 2.59 As seen from the table, some (but not all) zones enjoy special customs regime (customs territory). Imports that are consumed inthe free economic zones are exempt from import duties. Goods originating in the free economic zones and shipped either abroad or to the customs territory o f Ukraine outside o f the zone are also exempt from customs duties. According to the MEEI, duty-free importation o f raw materials is the main channel of tax subsidies, which contradicts the primary goal o f such zones as a vehicle for facilitating technology and foreign investment. 2.60 There are two controversial topics in WTO accession negotiations concerning free economic zones. One, import duties from some zones and priority development areas are not collected when goods made in free economic zones are sold inside the customs territory o f Ukraine but outside o f the zones, in violation o f WTO rules. Two, preference to investment projects that promise to procure Ukrainian-made goods contradicts TRIMS (see Chapter 5). 54 Table 2.11: M a i n Privileges Granted to Investors inthe Territory of Special (Free) Economic Zones, 2004 Exemption Exemption Exemption from from from Special Exemption Exemption payment mandatory Exemption duties to Zone customs from from of customs sale of from land some regime enterprise investment profit tax taxation duties and foreign tax other VAT on currency budgetary imports earnings fund Azov Yes 20 percent rate Yes No Yes Zero rate Yes during development Donetsk Yes 20 percent rate Yes No Yes Zero rate Yes during development Zakarpattia Yes 20 percent rate No No Yes No Yes Yavoriv No Zero rate for 5 No For 5 years No Zero rate for Yes years; half o f 3 years; half standard rate o f standard afterwards rate afterwards Slavutich No Zero rate for 3 Yes For 5 years Yes Zero rate for Yes years; half o f 3 years; half standard rate o f standard from year 4-6 rate from year 4-6 Kurortopolis N o Zero rate for 3 Yes Yes Yes Zero rate No Truskavets years; half o f during standard rate development; from year 4-6 halfo f standard rate for another 10years Port0 Yes Zero rate for 3 Yes No Yes No No Franco years; half o f Odessa standard rate from year 4-6 Reni Yes 20 percent rate Yes No Yes No Yes Port Crimea Yes 20 percent rate Yes No Yes Zero rate for Yes 5 years Interport Yes 20 percent rate No No Yes Zero rate for Yes Kovel 5 years Mikolaiiv Yes Zero rate for 3 Yes Yes Zero rate for No years; half o f For 5 years 5 years standard rate from year 4-6; free reinvestment from Year 4-10 Source: Ministry of Economy and European Integration. 55 2.61 Table 2.11 illustrates well the ad hoc nature of special economic zone regulations. Each zone offers a unique set of privileges to investors. Not surprisingly, legal arrangements for zones and territories are extremely complicated. Besides a few umbrella laws on free economic zones, each zone has to be created according to a separate law passed by Parliament, in accordance with the Constitution of Ukraine. 2.62 Free economidtrade zones can play a significant role in economic development, although the overall international experience with free trade zones is mixed. Zones could succeed only if they are properly set-up, well managed, WTO-compatible, and integrated ina national economic reform program (Madani, 1999). Ukrainian arrangements do not meet these criteria. Moreover, Ukrainian regulations create strong incentives and opportunities for tax dodging and rent- seeking, andbreed corruption. 2.63 It is clear that these regulations should be completely revamped. There is a tacit admission o f problems with the special zones by the GOU since it has introduced a moratorium on new zone creation. At the same time, a drastic change o f special zone regulations may lead to moral hazard issues. In theory, firms that have already set up their operation need to be grandfathered from the changes in regulations. This creates a sticky situation, however, since privileges in some zones are granted for a period of up to 60 years. Nevertheless, in a country like Ukraine, with its manageable size and poorly-controlled administrative system, a better strategy o f export development would be an emphasis on across-the-board improvements in the national business environment rather then creation o f tiny enclaves with better conditions than in the rest inthe country. 2.64 Government capabilities to support export and investment facilitation in Ukraine have been quite weak. A specialized government export and investment promotion agency does not exist today, although it used to exist inthe past.32Some functions o f such an agency are formally assigned to other ministries, most importantly, to the MEEI, but the performance o f such functions remains o f low viability and are insufficiently coordinated with the needs o f the private sector. The (primarily Government-owned) Ukrainian Export-Import Bank does some work in this area, partially helped by the credit line extended by the World Bank, but these activities are on a rather low-scale. 32See Morisset and Kelly (2003) for a review o f the best practices in investment promotion. 56 E. FISCAL ASPECTS TRADE OF REGIME 2.65 Table 2.12 presents aggregated data on the taxation o f imports from 1998-2002. Fulldata are reported inAnnex Table A2.1. Table 2.12: Taxation of Trade inUkraine, 1998-2002 1998 1999 2000 2001 2002 Total foreign trade revenues (UAHMill) 3,783 4,187 5,313 6,156 9,656 as percent o f total tax revenues 11.2 11.1 11.4 10.9 13.8 Composition o ftaxes ontrade (as percent o ftotal foreign trade revenues) - Customs duties 23.4 20.3 26.3 28.7 22.3 Import tariff 23.4 20.3 26.2 28.5 22.2 Export tax 0.0 0.0 0.1 0.1 0.1 --- Excise tax on imports 5.3 5.0 8.3 7.2 5.1 VAT on imports 69.0 70.2 62.2 61.1 70.3 Other taxes 2.3 4.5 3.2 3.0 2.3 Memo: Total tax revenue (UAHMill) 33,729 37,819 46,540 56,539 69,726 Note: For 1998-2000it was assumedthat value-added receipts on imported goods accounted for 35 percent o f total value-added receipts. Source:State Treasuly of Ukraine and WorldBank staff estimates. 2.66 The table shows that the share o f revenue from foreign trade activities in tax receipts stood in a range that can be assessed as moderate but significant. If broken down by tax, trade revenue consists mainly of VAT on imports - this share spiked at 70 percent in 2002. A full half of VAT collected in that year came from imports. Customs duties accounted for about a quarter o f trade revenues, and excises for only 5-8 percent. 2.67 Taxation of imports i s the primary vehicle of collecting VAT, reflecting in part an increase in imports, but basically highlighting the weak capacity for taxation o f domestic activities. Customs duties play rather a minor role in import taxation, accounting from 0.7 to 1.O percent o f GDP during the period under consideration. In 2002, customs duties were less than one-third o f VAT collected on imports and the amount o f export tax was trivial. From the taxation viewpoint, a modest collection o f customs duties does not justify the administrative complexity o f a highly detailed and variable import tariff schedule, which creates incentives for commodity misclassification at customs fuelling the scope for corruption. These given revenues from import dutieswould be collected more efficiently with a simpler and more uniform tariff. F. TRADE REGIME: PERCEPTIONSBY THE PRIVATESECTOR 2.68 Exporters and importers in Ukraine are subject to a vast regulatory framework. In addition to clearing Customs they have to deal with at least eight other state agencies for only the main permits and registrations. In special cases, this number i s even higher. Also, since the necessary documentationmust be cleared inthese agencies frequently, the traders are required to pay multiple visits to state agencies, notaries, etc. Table 2.13 presents the major requirements and agencies that enforce them. 57 Table 2.13: Major DocumentRequirementsfor International Trade OperationsinUkraine Currency import or export license Ministryo fEconomy Import License Export License Registration o f contract Individual License Certificate of compliance with technical regulations Document on recognition Expert conclusion on export o f scrap metals State Agency on Copy Rights Permit for import o f media for recording Ministryo fInterior Permit for import o f hunting, pneumatic, gas weapons Ministryo fHealth Sanitary Permit Permit for new medical equipment Permit for narcotics State Committee on Medical Permit for import o f cosmetics and hygiene products and Biological Industry Permit for import o f pharmaceuticalproducts MinistryofAgriculture Phyto-Sanitary certificate Permit for import o fplants protection chemicals Permit for import o f veterinary medicine Veterinary certificate Ministryo fEcology Permit for import o f trash Permit for destruction o f goods Permit for import o f agricultural goods Permit for import or export o f controlled goods Source: Dubinina and Sorokina (2004). 2.69 Many (but not all) trade contracts must be registered. Those that mustbe registered relate to the exportation of goods subject to voluntary limitation in order to avoid dumping, anti- dumping procedures, quotas and licenses at the destination country, barter arrangements, and special regulations introduced by the Order of the MEEI from July 11, 2002 "On the List of Exports subject to the Registration o f the Trade Contract." Re-exportation o f goods regulated by national laws or international treaties should also be registered. 2.70 International trade operations require licensing by the MEEI. Licenses are o f the following types: general export-import license; open export-import license that regulates time o f operation and amount of goods; individual or one-time license; import anti-dumping license; import compensatory license; import special license - issued in the cases of investigation or special conditions. 2.71 Businesses that conduct international trade have been required to register with the Customs; however, the status of this regulation today i s unclear. The State Customs Service (SCS) received the right to register businesses in 1996. This right was however revoked in2000. There are no references to such registration inLaws or Decrees o f the President today. However, according to the official letters of the SCS, such registration was conducted at least until 2003. There i s no evidence that it has stopped even now, after the new Customs Code was implemented in January 2004. The only difference i s that the SCS does not send formal letters explainingregistrationprocedures and requirements anymore. 2.72 Businesses that violate the above, rather complex, regulations can be subjected to fines, administrative and criminal sanctions, the imposition o f individual licensing regime, and a 58 temporary ban on all international trade activities. The major problem related to sanctions i s non- transparency o f associated arbitration and appeal procedures. As a result, exporters feel that a decision on the removal o f special sanctions i s often arbitrary and is linked to demands for informal payments. Inorder for a firm to prove that it corrected a violation, it has to apply to the MEEI with a letter that (i)explains both reasons for violation and corrective measures undertaken, and (ii) provides documented proof from the state controlling agencies that these measures were indeedimplemented. 2.73 Two major studies conducted in Ukraine assess quantitative indicators related to international trade barriers. These are Cost o f Doing Business Survey, conducted by the World Bank, and Business Environment Survey, conducted by the IFC. Both studies were conducted at the end of 2002-beginning o f 2003 andpublished in2003. Both studies assessedperceptions by the traders o f trade regulations inUkraine. 2.74 The IFC study assessed the perception o f businesses on what import procedures present the greatest obstacle for international trade. Filling customs declarations and customs clearance received the greatest percentage o f answers that these procedures are very problematic (see Figure 2.1). The World Bank study measured the perception on the five-point scale, ranging from 0 - less problematic to 5 -most problematic (see Figure2.2). Figure2.1: Import ProceduresPerceivedas Problematic,IFC Study (share of respondentswho consider them to be problematic,percent) Filling declarations Clearing Customs Regional customs Certification of import Payment of Custom Duties Sanitary Control Licensing Quotas Veterinary control 0% 5% 10% 15% 20% 25% 30% 35% 40% 59 Figure2.2: Import ProceduresPerceivedas Problematic,World Bank Study Assessment on 0 (lessproblematic)-5 (mostproblematic) scale Unpredictability Custom clearanceproblems Corruption Problems with permits Problems with certification Prohibitionof import of some goods 0 0.5 1 1.5 2 2.5 3 3.5 4 2.75 Both studies point to custom clearance as the major problem area while quotas, permits, and certification lag behind. The IBRD study also clearly shows that unpredictability is considered the greatest problem in the process o f dealing with government officials during international trade operations. This unpredictability most probably relates to the above-noted practice o f usingindicative prices and in general various methods o f price definition inUkraine. The IFC study also pointed to the certification of imported goods as one o f the most corrupt practices that are followed by related sanitary control, licensing, and customs control. Exporters' views of the trade regime: the results of the 2004 survey 2.76 Inorder to deepen the understanding of the main existing obstacles for export expansion inUkraine, a special surveyof 500 exporters was commissioned as part ofthe preparationofthis study (Box 2.2). The survey, which was primarily focused on export-related issues, has essential informational advantages relative to the more conventional surveys o f costs o f doing business (CODB), some o f which have been referred to earlier in this Chapter. Such advantages derive, for instance, from the fact that in most CODB surveys exporters are a significant minority o f respondent^,^^ which limits informational depth on the results as they relate to the quality o f the export regime. 2.77 According to the surveys and interviews, Ukrainian exporters consider that certain components o f the country's trade regime represent a major obstacle for their export activities. In addition, private sector representatives believe strongly that there were no improvements in the export regime during the last 12 months. Both qualitative and quantitative responses from the participants indicate that the greatest problems faced by Ukrainian exporters relate to the issues o f V A T refundand customs clearance (Figure 2.3). 33In the 2002 CODB only 12percentof respondentsadmittedto beingengaged in export operations. 60 Box 2.2: 2004 Survey of Ukrainianexporters. The survey o f 500 Ukrainian exporters was undertaken by the Ukrainian Civic Center for Institutional Development (CID) in May-June 2004. The survey was conducted in six regions o f Ukraine (Lviv, Khmelnycky, Kharkiv, Ivano-Frankivsk, Odesa, and Kherson) and it is based on the nationally representative sample. In addition to the survey, in four o f these regions the CID conducted structured Focus Groups (FG) meetings with exporters (one per region) and 20 in-depth qualitative interviews with managers o f larger exporting companies. Both the interviews and FGmeetings were conducted according to the standard pre-designed templates. The FG meetings were essential in assessing prevailing perceptions and attitudes o fbusinesses, while the interviews helpedto advance understanding o f causality inthe obtained survey data. The participants in the CID exporter survey represent a broad spectrum o f Ukrainian exporters. Eighty- five percent o f the participants are fully private businesses, out which 20 percent are hlly or partially foreign-owned. About half o f the survey participants are SMEs with less than 50 employees. The average exporter participated in the survey conducts 26 export transactions a year with average annual export sales o f about US$227,000. 61 Figure 2.3: Assessment of different components of the export regime CustomclearanceinUkraine (documents) h c e for Customsmites Otherpermitsfom Customs Permit fiom Customs for processingoutsideUkraine Temporarystorage at Customs Licensing of export operations Transportationin Ukraine Contrzctregistration Obligatory insurance Custom clearanceabroad(documents) I Certifims of ongin _-I - 4 -2 0 2 4 6 a 10 ElEvaluation I 1 Dynamics Assessment on 0-10 scale where 0 i s no problems and 10-very significant problems. 62 2.78 When asked to name the main reasons for such a negative evaluation o f the trade regime, the FGparticipants listed the following inter-relatedreasons: 0 Highincidence ofinformalpayments; 0 Arbitrary interpretationo frules by government officials; 0 Frequent changes inrequirements; 0 Contradictory and unclear rules; 0 Decision making i s too time consuming; 0 Highcosts ofcompliance. 2.79 Relative to these two leading administrative barriers (VAT refund and customs administration) most other administrative instruments o f export regulation appear to be much less o f a problem for exporters. These less problematic areas include administration o f export permits and licenses, registration o f export contracts, and obtaining certificates o f origin. In addition, the exporters consider the available payment systemto operate quite satisfactorily. 2.80 Only a third o f survey respondents reported that they applied for VAT refund. Moreover, the effective rate of reimbursement for those who applied for VAT refund on average was less then 50 percent of the claim. Sixty-two percent o f respondents named the overall difficulties of the refund process, including relatively highcosts o f such a process, as their motif for abstaining from application. Corrupt state officials were almost unanimously identified in interviews as a primary reason for delays with VAT refund. 2.81 Interactions with the Customs are viewed quite negatively by Ukrainian exporters. FG participants pointed to unjustified processing requirements, expensive and slow procedures, and significant corruption at the Customs as main reasons for such negative perceptions. They also pointed to subjectivity in definition o f prices o f goods, as well as arbitrary selection o f commodity codes for registering export transactions. In addition, the participants frequently complained o f being arbitrarily forced to use unnecessary customs services, for which they are later charged excessively high prices. According to the survey, in 2004 it took on average 3.2 days per one customs clearance. The clearance process is relatively expensive. Average administrative costs o f exporters per customs clearance amounted to US$156.6 (net o f customs duties and export taxes). Ninetypercent o f respondents reported that had to make at least some payments to facilitate customs c~earance.~~ 2.82 The current export regime is also characterized by numerous requirements for mandatory preliminary registration and permits for companies that plan to engage in export activities. Apparently these administrative requirements are somewhat selective, and a considerable share o f respondents managed to avoid them. Registration o f exporters has the greatest coverage inthe sample, with 74 percent o f respondents claiming to have such registration. This i s followed by the frequency o f registration o f export contracts (24 percent) and by export licenses (21 percent). Inaddition, 41 percent of respondents cumulatively had to obtain various other types of export permits (although individually each of such permits was required from a relatively small share o f 34One should keep inmind that often inbusiness surveys respondents group together all agenciesinvolved with goods clearance as "customs". 63 the sample). These registration requirements bringabout quite a significant regulatory burden for exporters with the average cost o f a single permit or license amounting to US$144. 2.83 The results o f FG meetings show clearly that Ukrainian exporters face by far more problems at home then abroad (Figure 2.4). The only serious concern that exporters have about the trade regime abroadrelates to a difficulty to protect their rights inforeign courts. Figure 2.4. Evaluation of domestic and foreign barriers for export. Assessment o n 0-10 scale, where 0 i s no problems and 10- very significant problems Necessity to pay informally Contradictory and difficult rules Custom clearance Preferencesfor some Licensing or quotas Transportation Impossible to protect rights in courts Average 0 2 4 6 a 10 nDomestic UForeign 2.84 From the perspective o f Ukrainian exporters, the recent EU enlargement should not create significant new problems for exports to new EUmembers. The markets o f these countries have already been perceived as quite similar to those in the EU in terms o f difficulty of market access. 2.85 Overall, the results o f the 2004 survey are consistent with the earlier surveys inpointing at major remaining deficiencies in the country's business environment, first o f all related to customs operations that are the primary obstacles for deepening Ukraine's participation in international trade and global integration. There are domestic obstacles, which are entirely under govemment control. Their removal does not require complicated international negotiations, therefore naturally the top government priority should be addressing these particular elements o f the trade regime. While in the last few years the Government made some progress in improving Ukraine's business environment by, for instance, streamlining regulations related to company 64 registration and licensing, these positive changes have not yet reached the area o f trade facilitation. 2.86 Removal o f the domestic behind-the-boarder obstacles for trade is broadly viewed as a strategic reform priority within the trade policy agenda. The World Bank (2003) report Global Economic Prospects 2004 lays special emphasis on non-transport factors intrade facilitation as a key determinant o f a country's ability to participate in the global economy. It singles out such policies as improvements incustoms administration, regulatory environment, and the availability o f services sector infrastructure for traders. The OECD (2001b) paper summarizes various available quantitative estimates o f the impact o f trade facilitation measures on costs o f international trade. For instance, Hummels (2001) concludes that each day saved due to a faster customs clearance i s worth 0.5 percent reduction o f ad-valorem import tariff. 2.87 Moreover, international competitiveness crucially depends on a country's overall business climate rather than trade-specific regulatory requirements. Lessons from international experience suggest that improvements in the business climate and associated FDI attraction are the key to export diversification and robust economic growth. Table 2.14 below presents the findings o f the global Doing Business survey conducted by the World Bank Group in 2004. Ukraine's business environment as reflected by the selected indicators i s (predictably) worse than inhigh-income OECD countries and for most indicators it i s less favorable than the average for the transition economies inEurope and Central Asia. As to neighboring countries, Ukraine i s lagging behind Russia and is ahead o f Belarus. Ukraine is behind Poland on indicators o f the intensity o fregulations, but ahead o f it on the indicators ofunit regulatory costs. Table 2.14: Selected Indicators for the Quality of the Business Environment, 2004 Ukraine Russia ECA OECD Belarus "landAverage average Starting a business Number ofprocedures 15 9 16 10 9 6 Time (days) 34 36 79 31 42 25 Cost (% of income per 17.6 6.7 25.3 20.6 15.5 8.0 capita) Min.Capital(% of 113.9 5.6 44.3 237.9 51.5 44.1 income per capita) Registeringproperty Number o fprocedures 9 6 7 7 6 4 Time (days) 93 37 23 1 204 133 34 Cost (% ofproperty 4.3 0.8 0.2 1.6 3.0 4.8 value per capita) Protecting investors Disclosure index (from 0 3 3 1 4 3.6 5.6 ~~ Source: The World Bank. Doing Business 2004. 65 G. CONCLUSIONS 2.88 This chapter's findings couldbe summarized as follows: 0 Overall, the statutory import trade regime inUkraine i s quite liberal compared with both the EUand transition economies inthe CEE (before theyjoined the EU), but not the most liberal. However, the real picture i s much less favorable because o f significant behind- the-border administrative barriers. Tariff levels are mild on average, albeit with a few peaks. The Ukrainian tariff structure appears to be in line with the comparator countries. There has been a steady trend toward trade liberalization interms o f reduction o f average tariff and NTB since the peak o f tariff and non-tariff protection attained in or around 1999. 0 However, the Ukrainian tariff schedule has three important drawbacks: high agricultural tariff equivalents, tariff escalation, and excessive complexity. Agricultural tariff equivalents were higher than non-agricultural by an order o f magnitude-3 1.4 versus 2.7 percent in2002. Agriculture seems to be excessively protected. 0 Tariff escalation increases protection of domestic producers o f finished products over statutory import tariffs. It does a disservice to the economy by overly shielding domestic producers from international competition, and dampening incentives for improvement in efficiency andintechnological advances. Ukraine's tariff schedule i s overly complex, which causes allocation inefficiencies, encourages commodity misclassification, and corruption. Modest results o f customs duty collection also do not justify the necessity for such a complex arrangement. Ukraine will be better-off with a simpler and flatter tariff schedule. 0 The number of non-tariff measures faced by imports into Ukraine has significantly increased since the mid-90s. Nevertheless, Ukraine seems to be quite liberal in terms of the index for official non-tariff core protection, compared to OECD countries. However, the level o fthe informal NTBs is not reflected in such an index. The survey results point to serious implementation problems o f NTBs that raise the effective level o f trade barriers and sour the business climate. 0 Ukraine tends to frequently apply contingency measures (safeguards and anti-dumping). Ukraine would be best served if it restrains its use o f contingency measures. Their application should be preceded by bilateral negotiations and based on better analysis o f pros and cons. Ukraine should also adhere to WTO rules governing the application o f such measures. Ukraine and its CIS partners should introduce WTO-style disciplines in CIS trade independentlyo f theirjoining the WTO. 0 Ukraine maintains export taxes andrestrictions on a limited variety o f products (selected agricultural products and metal scrap) and implicit subsidies to exporters, which creates a stumblingbloc inits WTO accession negotiations and trade relations with the EU. Since 66 the economic rationale for these measures i s dubious at best, the Government should work toward either repealing or phasing out these arrangements. 0 -There i s evidence that the 90-day currency c o n v & h t y x q u i r e m e n l Y d m r ~ for ~~ exporters. The Government should make it more flexible in the short run and move toward liberal currency regulations inthe long run. 0 Free economic zones in their current format are poorly set up and managed, and WTO- incompatible. Rather than fostering strong export performance, they create incentives and opportunities for tax dodging and rent-seeking, and breed corruption. Despite prior obligations taken by the Government, these regulations need to be completely revamped, albeit with special attention to minimizing the moral hazard o f regulation changes. 0 In the view of Ukrainian exporters, the major obstacles to their export expansion are domestic and relate to certain deficiencies o f the country's trade regime. Issues o f VAT refund and customs clearance are indicated as leading administrative barriers for trade. In addition, private sector representatives believe strongly that there were no improvements inUkraine's export regime duringthe last 12months. The Government has to prioritize cleaning the system from highly costly and distortive practices (indicative prices on inputs,unwantedexpensive services for traders, etc.) 0 The leading factors that influence the private sector's negative evaluation o f the trade regime include (i) high incidence o f informal payments, (ii)arbitrary interpretation of rules by government officials, (iii) frequent changes in requirements, (iv) contradictory and unclear rules, and (v) decision making i s too time-consuming. 67 E T d 3 E 1: d 3 8 2 23 E 32 8 2 8 8 Z - B e, m +- > E E m T d '0 z I 3 m I E I, 4 3 w 68 CHAPTER 3. UKRAINIANEXPORTS AND ACCESS TO THE EU MARKET A. OVERVIEW 3.1 This chapter reviews market access issues for Ukraine in the EU market and their implications for Ukrainian trade. The analysis below does not find that EU trade policies are a significant barrier for Ukrainian exports. It concludes that the primary constraints to export expansion in Ukraine are internal. Improvements in the domestic business environment and aggressive actions to attract FDI are identified as priority areas for government actions. Experience shows that domestic reforms and FDI, not trade concessions, are the primary sources of export gains for EUpartners. The recent EU expansion provides a window o f opportunity to Ukraine to attract FDI as investors look for new low cost production platforms to serve the EU market. The chapter also suggests that the EU reviews the antidumping measures that it maintains against Ukraine. 3.2 The major destinations for Ukraine's exports are the European Union (EU) and Russia, which in 2002 accounted for approximately 26 percent and 21 percent, respectively, o f total Ukrainian exports. Hence, access to these markets is o f critical importance to Ukraine. Given its political and economic ties, Russia has been a priority market for Ukrainian exports. Nevertheless, exports to the EUhave been growing whilst those to Russia have declined so that in2002, for the first timeUkrainian exports to the EUexceeded those ofRussia(see Figure 3.1). In1998, exports to the EUaccounted for only 16percent oftotalUkrainian exports. Figure3.1: UkraineExportstotheEUandRussia (vs%billion) 7 1996 1997 1998 1999 2000 2001 2002 Sowce: Wl3SYTCRev.2Mrror &a 69 3.3 However, predictions based on standard and widely applied trade models suggest that the EU market should be much more important for Ukraine than at present. Typical estimates suggest that a `normal' trading country o f Ukraine's economic size and proximity to major marketsaaLeuldexport upk40pe-f its t&l-exp&&o the EU( F r c i d " ct a1.,2084). It is worth noting that economically Russia i s very small relative to the EU. The mass o f GDP inthe EUis roughly 40 to 50 times larger than that o f Russia. Given that income is a key determinant o f the magnitude o f trade between countries, this explains why the EU should absorb a much larger share ofUkraine's exports. 3.4 The magnitude o f the EU share will, in practice, be mitigated by several factors: (i) existence o f free trade agreements that Ukraine has signed with other CIS countries; (ii) the strong historical ties with Russia; and (iii)the fact that nominal incomes in the CIS remain seriously underestimatedrelative to their real purchasingpower. Nevertheless, an important issue is to explain why the share o f the EUi s so low. Does this reflect protection in the EUwhich is constraining Ukraine's exports? Are there significant remaining barriers to commerce inUkraine which are limitingtrade expansion? 3.5 It is interesting that other countries in the region trade much more intensively with the EU. Poland, for example, sends much more than 50 percent o f total exports to the EU and the value o f Polish exports to the EUis about 6 times higher that o f Ukraine. Over the decade from 1992 and 2002, the growth of Ukrainian exports to the EU was relatively high at around 348 percent compared with the export growth o f Poland (160 percent) andRussia (80 percent), albeit that this growth took place from a very low base (Figure 3.2). Figure3.2: Evolutionof Exportsto the EU (US$million) 40 35 30 25 20 15 10 5 P4 m 2 IC, a m II 00 m 8 0 2 2 m m 2 2 2 2 2 2 0 0 0 0 N N 0 N 3.6 It is worth noting that the geographical reorientation o f the trade o f the Central and Eastern European countries including Poland toward the west and, in particular the EU, took place relatively quickly. By 1993 and 1994, it was not possible to distinguish the trade pattems o f most of the CEE countries from those o f a `normal' market economy. Ukraine still appears to 70 differ fiom these standard trade patterns reflecting that the transition to a market economy is far from complete. Table 3.1: Siructural characteristics of UkrainianandPolishtradeYriththeEU ~ ____ Poland Ukraine Grubel-Lloyd Index, 2002 54.8 22.5 - Change, 1996-2002 12.9 3.9 Trade complementarity Index, 2002 - Change, 61.2 33.0 1996-2002 11.3 7.8 Export diversification Index, 2002 186 257 - Change, 1996-2002 -011 +009 Source: Chapter 1,stafestimates. 3.7 However, what is worth noting is that even inthe second part o f the 90s the pace o f trade transformation remained much higher in Poland than in Ukraine. As Table 3.1 illustrates, inthe period 1996-2002, Poland considerably over-performed Ukraine in terms o f additional adjustments o f its commodity trade with the EU toward its higher diversification and complementarity. The level o f intra-industry trade also increased considerably, despite from a much higher base than in Ukraine. The primary driver for such changes in trade structure has been foreign investments. Net FDIper capita were about 8 times larger inPoland than inUkraine during this period. The main conclusion fiom this comparison is that at the moment Ukraine seriously under-utilizes advantages o f its geographic location (proximity to a major market) as a basis for attracting FDIandrestructuring its trade toward more diversification and specialization. 3.8 Between 1999 and 2002, Ukrainian exports to the EU grew by about 100 percent. However, since 2000 this growth has been driven by two erratic commodities: wheat and mineral oil/fuels. As Figure 3.3 shows, exports to the EU of non-wheat and non-oil products were stagnant during the three years from 2000 to 2002. Thus, recent export growth has been very narrowly based. 3.9 Ukraine has seen a small increase inthe range o f commodities exported. In 1997, Ukraine exported 19 percent of available product lines (as measured at the 6 digit level o f the HS), whilst in 2002 exports were recorded in 26 percent o f available lines. However, Ukraine exports a substantially narrower range o f products than other comparable countries in Europe. For example, in 2002, Poland recorded exports to the EU in 67 percent o f product lines, whilst Turkey exported 60 percent o f the available products. Hence, lack o f export diversification remains a key issue for Ukraine and is likely to be a major constraint during export expansion to the EU. 71 F i g u r e 3.3: U k r a i n e ' s E x p o r t s to EU (ECU million) 4000 3000 2000 1000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 -Total Trade Value -Total - Trade Value minus OiVCereals 4. ** Total Trade Value minus Cereals --X - Total Trade Value minus Oil 3.10 The heavy dependence o f Ukrainian exports to EU on a limited number o f sensitive goods was emphasized in 2003 when its wheat exports declined drastically. This occurred for two quite different reasons. First, the wheat harvest inUkraine in 2003 was substantially lower and Ukraine became a net importer ofwheat. Second, at the start o f 2003 the EU, after the rapid increase inwheat imports in2002, changed its regime o f import protection o fwheat. 3.11 Prior to 2003, EUregulation o f wheat imports was based upon a variable import levy and one that distinguished among different quality levels (low, medium, and high). Low quality wheat was subject to much higher levels o f protection. For example, in2001 the duty levied on medium quality wheat and spelt varied between 0 and 19.1 Euro per ton according to the month o f importation, whilst the duty on low quality products varied from 4.45 to 49.03 Euro per ton. In 2002, duties were lower reflecting a poorer harvest in the EU that marketing year. The duty levied on low quality wheat and spelt varied form 0 to 20.23 Euro per ton in 2002. The duty on mediumquality wheat was inthe range o f0 to 8.45 Eurosperton. 3.12 It appears that in 2002 the surge in wheat from the CIS countries, including Ukraine, although primarily used as animal feed, qualified as medium quality due to its protein content and was therefore subject to low or no import duties. As a result the EU changed its border protection for wheat in a way which discriminates more heavily against CIS producers such as Ukraine. The EU has introduced a tariff quota system, under which a specified amount o f all types o f wheat can be imported at a relatively low duty (12 Euro per ton), while amounts imported outside o f this quota are subject to a much higher duty (95 Euro per ton). These duties are now applied regardless o f whether the wheat i s classified as low or mediumquality. Within the quota there are particular amounts available to the U S and Canada. Information from the European Commission has confirmed that Ukraine is eligible to apply for a share o f the general non-allocated quota. However, given that this quota is low (2.4 million ton), ingood agricultural years the new mechanism would mean that most o f the wheat imports from Ukraine will be subject to the very high out o f quota duty. This entails that in future years, if Ukraine produces 72 similar harvests to those o f 2002, its ability to export to the EUwill be severely restrictedrelative to the situation o f 2002. B. POLICIESAFFECTING UKRAINE'S ACCESSTO-THE EYMARKET: THE~ENERGLI.ZED SYSTEM OF PREFERENCES (GSP) The GSP Scheme 3.13 Ukraine is a beneficiary under the EU's GSP (Generalized System o f Preferences) scheme, although Ukraine is excluded from preferences for fishery products, iron and steel, grains/seeds/hits and plants, and fertilizers. Further, a number of agricultural products of particular importance to Ukraine, notably wheat, are entirely excluded from the scheme. The GSP allows for lower duties than the MFN(Most FavoredNation) rates on certain products from particular countries subject to the products meeting the requirements stipulated by the EU; these include the rules o f origin which define the degree or nature o f processing that must be undertaken by the beneficiary for the product to qualify for preferential access to the EUmarket. Prior to 2002, products covered by the GSP were classified according to four headings according to the extent o f duty reductions: very sensitive, where the duty applicable was 85 percent o f the MFNrate; sensitive (70 percent of the MFNrate); semi-sensitive (35 percent ofthe MFNrate); andnon-sensitive, where products entered duty free. 3.14 A revised and slightly enhanced scheme was introduced from January 2002 and will apply until the end of December 2004.35 Currently there are only two categories o f products covered by the scheme: non-sensitive, for which duties are suspended, and sensitive. For the sensitive products there is now a flat rate reduction o f 3.5 percentage points from the MFNrate (although ifthe percentage reduction under the previous scheme leads to a lower rate then that is maintained under the new scheme). This entails highproportionate reductions for most industrial products, for which the average EU MFN tariff i s around 4 percent, but relatively low proportionate reductions for many agricultural products where the average MFN duty i s much higher, being at least 20 percent. A major exception i s made for textiles and clothing products where a reduction of20 percent o fthe MFNrate i s applied.36 3.15 Specific duties, those in which the duty i s related to physical rather than monetary values,37 are reduced by 30 percent (except for ethyl alcohol for which the reduction is 15 percent). However, when duties comprise both ad valorem and specific components, such as those applied to sugar confectionary, the specific duties are not reduced. Typically, the greatest part o f the protection o f these products i s provided by the specific duties. When minimum duties are specified in the EU's Common Customs Code, for example, the EU duty on beans i s 13.6 percent subject to a minimum duty o f 1.6 Euro per 100 kg being paid, these no longer apply for products covered under the GSP. Finally, ifthe tariff reduction provisions result in a preferential duty o f 1percent or less then the duty is suspended. Thus, ingeneral, the preferences offered by 35 The Commission has recently decided that, in light o f the failure to complete the Doha Round o f multilateral trade negotiations, the scheme should be extended for a further year. 36For clothing this roughly entails a reduction o f 2.5 percentage points given an average duty o f around 12.5 percent. For textiles, where the average duty i s around 7 percent, the GSP preferences entail a reduction o f around 1.4 percentage points inthe duty. 37Examples include a duty levied per tonne, a duty related to alcoholic strength, and a duty determined by the milk or sugar content o f the product. 73 the EUare much more generous for industrial goods, with the exception o f textiles and clothing, than for agricultural products. 3.16 The signed PartnershipandCmperation Agrmnt (PC&hetween JJkrahcand the-EU did not give Ukraine any additional trade concessions over the GSP. The main PCA-related benefit for Ukraine inthe trade area relates to the certainty o f MFNaccess to the EUmarket for all its exports with the exception o f steel. In this respect the EU policy toward Ukraine is different from the pace o f integration policy applied by the EU in other parts o f Central and Eastern Europe, where many economies basically obtained free access to the EU market relatively early in transition through signed FTAs and association agreements. The European Commission expects that the negotiations on FTA with Ukraine may be launched after its WTO accession. 3.17 However, it i s important to point out that most o f the adjustment in CEE trade toward the EUoccurred before their free trade agreements with the EUwere implemented, i.e., whilst these countries were still receiving the GSP treatment similar to Ukraine's current treatment. Hence, the lesson for Ukraine i s that trade reorientation reflects the depth and commitment to domestic reform rather than the magnitude o f preferences in the EU. Trade concessions, which the CEE eventually obtained during the 90s, largely followed integration o f these countries into the EU, but didnot trigger it. 3.18 A relatively importantpreference, however, that Ukraine enjoys inits trade relations with the EUrelates to the absence inthe EUo f any quotas on imports o f textile and clothing products from Ukraine. All quantitative import restrictions for textile and clothing products from Ukraine were lifted in early 2001 in accordance with the respective sectoral agreement signed with the EUon December 19,2000. The removal ofthese quotas was conditioned on Ukraine's cuts inits tariffs for EU textile exports to the maximum rates bound by the EUinthe WTO, as well as on Ukraine's commitment to further reductions in its maximumtariff rates between 2001 and 2004 inaccordance withthe tariffreduction schedule ofthe EUinthe WTO. Ukraine and the Hierarchy of EUPreferences 3.19 Ukraine i s competing in the EUmarket with countries which have secured various types o f preferential access to this market. This includes countries that have signed a free trade agreement or customs unionwith the EU(certain countries inthe Mediterranean, Mexico, South Africa, Turkey, EFTA countries), as well as countries that effectively receive duty free access to the EU under association agreements, such as countries in the Balkans. The market access position o f Ukraine relative to these countries will depend upon the products and sectors, which are excluded from particular trade agreements, typically certain agricultural products. 3.20 The EU's GSP scheme also includes additional preferences for countries implementing ILO codes on basic labor rights. Moldova and Sri Lanka are the only GSP beneficiaries at the moment that have successfully applied for these additional preference^.^^ Ukraine has applied to be treated under this special provision o f the GSP. The Commission has not decided to grant this treatment to Ukraine but i s still examining the case. If granted, Ukraine, with Moldova and Sri 38Informationabout countries that haveapplied for this provisionis sketchy, but it is known that Russiahas also appliedfor this provision. 74 Lanka, would be one o f the most preferred partners under the EU's GSP scheme (with the exception o f the LDCs who are eligible for duty free access for all products underthe Everything But Arms Agreement): it would make Ukraine eligible for an additional 5 percentage point reductio& the duty apwd on tepof thegeneral 3.5 . . e. Ingeneral, even under this preference, the ACP (African, Caribbean, and Pacific countries) will tend to have better access to the EUmarket than Ukraine because under the Cotonou agreement they have duty free access for almost all industrial products. However, in practice, the differences in market access are likely to be slight for most industrial products if Ukraine were granted access under the special provisions. Given that most import tariffs on industrial goods are below 8.5 percent, an 8.5 p.p. reduction would basically mean duty free export for Ukrainian exporters.39For a range o f agricultural products the EUprotection would remain high even with the special provisions preference, but this is also true for ACP countries. 3.21 Inprinciple, there are only six countries which paythe MFNrates when exporting to the EU - Australia, New Zealand, Canada, the United States, Japan, and Taiwan. However, in practice, there are countries by sector which are excluded from GSP preferences. Further, the lack o f full utilization o f preferences by many countries entails that a proportion o f exports from GSP beneficiaries, which varies byproduct, will also paythe MFNtariff. Trade Coverage and Utilization 3.22 We now proceed to discuss the impact o f the GSP in2001 interms of trade coverage and make an assessment o f the implications o f the new scheme introduced in 2002. Unfortunately, we are forced to use trade data for 2001 since the EU Commission has decided not to make available data on imports under preferences for a period whilst it seeks to clarify these data. 3.23 There are two key elements to assess the impact of GSP on a country's total exports: (i) the proportion o f exports which i s eligible for preferences; and (ii) extent to which exports the eligible for preferences are actually granted preferential access. Table 3.2 shows that 36 percent o f Ukraine's exports to the EU in 2001 were eligible for GSP. Of the remainder, about 35 percent o f exports to the EU are products for which the EU extemal tariff i s zero, whilst just 30 percent o f exports to the EU are products where there is a positive MFN duty but there are no preferences for Ukraine. The latter products include cereals and steel. We return to this issue below. 39Inpractice, the threshold value should be 9.5 percent since under the GSP tariffs of less than one percent are not applied. It should also be noted that certain products excluded from the GSP, such as wine, are also excluded from Cotonou preferences. 75 Table 3.2: Ukraine GSP Scheme, 2001 Category Euro thousand Total Trade Value 3,495,163 Duty-Free 1,217,687 ~~~~ ~~ ~~ ~~~ Value for Eligibility 1,247,796 Value for Preferences Requested 618,482 Value o f Preferences Eligible (tariff margin trade value) 27,739 Vale o f Preferences Requested (tariff margin trade value) ** 14,980 Share o f GSP eligible products intotal exports to EU 35.7 percent Share o f products subject to MFNzero duties 34.8 percent Share o fproducts excluded from preferences 29.5 percent Utilization rate o fpreferences 49.6 percent Value o f Preferences requested (share o f total export) 0.4 percent Source:EUROSTAT,UNCTAD TRAINS. 3.24 Table 3.2 also shows that just under 50 percent o f exports to the EU, which were eligible for preferences, actually requested those preferences4' This is comparable with the broader international experience with utilization o f GSP preferences (Sapir, 1997). This implies that the remaining 50 percent of eligible exports paid the full MFN tariff when they entered the EU. Thus, the potential impact of the GSP for Ukraine is weakened by the under-utilization o f available preferences. The reasons for this low utilization o f preferences are likely to include the difficulties in satisfying the rules o f origin o f the EU scheme and the small margin o f preference for certain products relative to the costs of satisfying and proving origin as well as lack o f knowledge o f the scheme. With regard to the latter, it i s worth noting that whilst the availability o f information concerning the GSP and EUpreferences has increased inUkraine and knowledge o f the scheme has circulated, the utilization rate changed little between 1998 and 2001 being 47 percent in the earlier year. Nevertheless, the utilization o f preferences by Ukraine i s similar to that o fRussia andto that o f the GSP scheme as a whole. 3.25 Table 3.4 below shows that the utilization rate o f preferences in sectors dominated by large firms (steel and oil products) tends to be higher than that o f sectors characterized by smaller firms (clothing, processed fruit and vegetables). This suggests that the costs o f complying with the rules of origin are a major factor affecting the low utilization o f preferences. This may also providejustification for expanding technical assistance programs to exporters and potential exporters in the sectors that are dominated by SMEs. A more detailed discussion o f issues raised by the rules o f origin i s provided inBox 3.1. 3.26 In2001, the preferences requested under the GSP led to an implicit transfer (the tariff revenue that would have been paid to the EU if these preferences had not been given) o f 14 million Euros to Ukraine - equivalent to about 0.4 percent o f the total value o f Ukrainian exports to the EU. If preferences had been fully exploited then the estimated transfer would be twice higher and have amounted to 0.8 percent o f exports to EU. These amounts are calculated (at the tariff line level and then summed) as the difference between the GSP and the MFN tariff 40Data are not available on the amount of these exports which were actually grantedpreferentialaccess. Hence, the figures here are upper limits on the extent ofpreferences. 76 multiplied by the amount o f exports which entered the EUwith preferences. Thus it is assumed that the internal price in the EUi s determinedby the world price plus the MFNtariff. This will overstate the transfer if imports only come from preferential suppliers. However, for most p r o d u c t s I y a proportion o f imports from preferentiai suppiiers actualIy receive preferences ~~ with the rest paying the MFNtariff. It is also assumed that all of this rent goes to the Ukrainian exporter, whereas inreality some or all o fthe rent may go to importers inthe EU. Box 3.1: Rules of Origin There are two elements to the constraining impact o frules o f origin. First, there is the nature o f the rules themselves, which can be very difficult to meet whilst remaining competitive o n the EU market. For example, the EU rules o f origin for clothing stipulate manufacture from yam. This entails that clothing producers in Ukraine cannot import fabric, except from the EU under the bilateral cumulation that exists under the GSP, and still receive preferential access to the EU. This entails that clothing must be subject to a double transformation inUkraine-not only does the EUrequire that the clothing be cut and made-up inthe beneficiary country but also that the weaving o fthe yam into knitted or woven fabric be undertaken inUkraine or that such yarn be imported from the EU. A clothing producer in Ukraine, who has established an efficient manufacturing process o n the basis o f importing fabrics from, say another CIS country, may find it difficult to expand since its product does not qualify for preferences due to the use o f non- qualifying fabrics and there may be substantial costs in changing suppliers o f fabrics. Ukrainian producers cannot source fabrics from l o w cost locations such as China and India and receive preferences under the GSP. Such rules o f origin, which can force producers to source inputs from expensive domestic or EU sources, undermine the preferences that are being offered. Second, there is the issue o f the costs of providing the necessary documentation to prove origin. If these exceed the margin o f preference, then the GSP i s redundant. There i s limited information o n these costs but available studies suggest that the costs o f providing the appropriate documentation to prove origin can be around 3 percent o f the value o f the export shipment for companies indeveloped countries. These costs are likely to be higher indeveloping countries. A provision which can reduce the restrictive effect o f rules o f origin, is cumulation.This allows imported inputs from specific partners to be counted as ifthey originate in the country concerned. One possibility, which is potentially available to Ukraine, is to request to be included in the so-called Pan-European Area o f Cumulation regarding exports to the EU. This would allow Ukraine to use inputs from CEE countries, Turkey and certain Mediterranean countries, and count these as qualifying material, subject to those materials satisfying the relevant EU rules o f origin. If other CIS countries were also to be included, Ukrainian producers could use fabrics from the region and still receive preferences to the EU provided that these fabrics satisfy the EU rules o f origin for that product, which require manufacture from fibre; imported yam cannot be used. Tariff Barriers in the EU 3.27 Another way to look at the impact of preferences on access to the EU market is to analyze the average rates o f duty that would be applied if Ukraine did not receive preferences with those rates that are actually applied under the current preference scheme. Table 3.3 shows the trade weightedaverage tariffs on Ukraine's exports to the EUusingtrade data from 2001 and comparing the GSP scheme o f 2001 with that introduced in2002. We have excluded wheat from our calculations due to the variability of export volumes to the EU over time and due to the complex nature o f EU protection, and the difficulty in identifying the duty actually levied. A detailed discussion o f wheat i s providedbelow. 77 Table 3.3: Weighted Average Tariffs on Ukraine's Exports to the EU 2001 2002 Ave. Tariff Ave. Tariff MFNFGEs- 4.20 percent 4.09 DerceT- ~~ ~ GSP applied to Ukraine - assuming full utilization o fpreferences 3.39 percent 2.39 percent GSP applied to Ukraine -actual utilization o fpreferences 3.76 percent 3.44 percent GSP without Ukraine exclusions and assuming full utilization o fpreferences 3.25 percent 2.21 percent GSP with additional labor preferences, assuming full utilizationo fpreferences 1.50 percent 1.38percent Note: Excluding exports o f wheat. Source:Source: EUROSTAT,UNCTAD TRAINS,Staf estimates 3.28 Table 3.3 again suggests that EU preferences have very little impact on market access conditions for Ukraine under the current structure o f trade and under the existing GSP scheme. The table shows that if Ukrainian exporters had not received any preferences in 2001 and paid the MFNtariff on all products exported to the EUthen the average duty levied would have been about 4.2 percent. This duty would have declined to 4.1 percent in2002 due to the commitments under the Uruguay Round.41Under the standard GSP applied to Ukraine, assuming all available preferences were fully utilized, the trade weighted tariff on Ukrainian exports to the EU would have been 3.4 percent. So even with full utilization, the average margino f preference enjoyed by Ukraine would have been less than 1percentage point. This indicates that just over one-third o f Ukraine's current exports to the EU are eligible for preferences and margins o f preference for GSP eligible products are often small. In 2002, the enhanced preferences available under the revised scheme would have led to a preferential duty o f 2.4 percent, assuming all preferences were utilized and the structure o f exports remained the same as in2001. 3.29 Once one takes into account the actual utilization o f GSP preferences the trade weighted average tariff levied on Ukrainian exports to the EU in 2001 was almost 3.8 percent in 2001. This average takes account o f the fact that only a proportion o f the available preferences were actually requested and that duties were levied on those exports which were eligible but did not request preferential access. The changes introduced to the GSP in2002 reduced the average tariff levied on EUimports from Ukraine to 3.4 percent. 3.30 Table 3.3 then shows the impact on the average tariff o f two scenarios o f enhanced preferences. First, it shows that the inclusion o f products covered by the GSP, for which Ukraine is currently denied preferential access (fishery products, iron and steel, grains/seeds/fruits and plants and fertilizers), would have little impact on the average duty levied (less than 0.2 p.p.), even assuming full utilization o f these additional preferences. This reflects low levels o f current exports o f certain products, e.g., fishery products, and low duties on other products, such as iron andsteel. 3.31 Second, as seen from the final row of Table 3.3, ifUkraine were to be granted additional preferences under the special labor clause then there would be a more significant impact on the average tariff levied on EU imports from Ukraine. If preferences were to be fully utilized then 4'The standard period for implementation o f tariff reductions under the Round was 5 years but for certain products a 10 year period o f implementation ending in 2004 was negotiated. 78 the average duty in 2002 would have been 1.38 percent, although the duty would have been 3.2 percent with the current level o f preference utilization. This scenario reflects to a large extent the treatment o f clothing products, where the labor preferences reduce relatively highMFNduties by an additional 20 percent&ut where p r e f e r e n c e u t i - l i z a t i c m iat~20 percent.- 3.32 We now turn to a more detailed look at key sectors in Ukraine's exports to the EU and the preferences that are available. This shows the importance of clothing to these scenarios but also that one must take into account the amount o f outward processing trade inthis sector. The ImpactofEUTariff Preferenceson Key Sectors 3.33 EU protection and preferences for key products o f Ukrainian exports to the EU is presented in Table 3.4. Within the agricultural sector, there are two key preference receiving sectors: animal or vegetable oils (HS 15) and processed vegetable and fruits (HS 20). These two sectors accounted for 91 percent o f agricultural products eligible for preferences in 2001, but only 8 percent o f Ukrainian agricultural exports to the EU. Hence, at the moment preferences play a very minor role in influencing Ukraine's exports to the EU. This reflects in part that certain agricultural products exported by Ukraine are subject to zero MFN duties, but more importantly that key products exportedbyUkraine are excluded from preferences. 3.34 In 2001 and 2002, the key product exported to the EU that was excluded from preferences was wheat. Exports of this product fell off in 2003. Nevertheless, as we shall show below there are a number o f agricultural products that Ukraine exports elsewhere, such as meat and dairy products, which are subject to extremely high EU barriers without preferences. It is worth notingthat 62.1 percent o f animal or vegetable oils exports requestedpreferences to which they were eligible. Incontrast the proportion o f exports o fprocessed vegetable and fruits, which requested preferences, was only 28 percent. This could reflect difficulties raised by the rules o f origin and that processors may need to partly source fruit and vegetables fi-om other countries to ensure consistent supply and effective utilization o f equipment. 3.35 Inmanufacturing, there are three keypreference receiving sectors: clothing (HS 62), steel (HS 72), and oil (HS 27). These sectors accounted for 47 percent of exports eligible for preferences and 55 percent o f total exports to the EU. The proportion of oil products requesting preferences was almost 100 percent in 2001. The utilization rate o f steel preferences i s about 70 percent, while the utilization rate o f clothing i s relatively low at only 20 percent. The utilization rate o f steel i s relatively high,but the 30 percent o f exports not utilizingthe available preferences may reflect relatively low preference margins (often less than 1 percent) and the rules o f origin requirements for certain steel products, which require production o f finished products from primary forms o f steel. 79 Table 3.4: Key Sectors inUkraine's Exports to the EUand Tariff Preferences Agriculture Manufacture Animal or Total Cereals Veg. oils Processed Veg. Total Oil (HS 27) (HS 62) Clothmg Steel (HS (HSlo) 15) (HS &Fruits(HS20) 72) Trade Data 2001 (Euro thousand) EU Exportsto 456,331 144,335 23,153 14,795 3,038,832 695,246 343,027 618,863 Outward 3 0 0 0 333,856 0 322.168 0 Processing Trade Outward Processing Trade 0.0 0.0 0.0 0.0 11.0 0.0 93.9 0.0 (percent) Prefs Eligible 40,453 0 22,198 14,634 1,207,343 105,858 342,749 119,416 Prefs Requested 19,570 0 13,779 4,122 598,911 103,599 69,385 82,507 Share Requesting Preferences 48.4 0.0 62.1 28.2 49.6 97.9 20.2 69.1 MFN& GSPRates 2001 Average MFN Tariffs (percent) 33.0 81.0 6.1 22.2 3.5 2.4 12.2 1.2 Average GSP Tariff ( percent) 32.7 ... 5.2 18.6 2.7 1.9 10.4 0.9 Average tariff with actual preference 32.9 ... 5.5 19.2 3.1 1.9 11.9 1.o utilization Note: The calculated duty for cereals assumes that all exports were subject to the maximumduty for low quality wheat. Source: EUROSTAT, UNCTAD TMINS, Staff estimates 3.36 and so the impact o f preferences on the export price will be very small. If we roughly assume that 20 percent o f the recorded value of these products exported to the EUis value added inUkraine then the 20 percent GSP reduction on duties on clothing products, which may be as much as 12 percent, reduces the price of a product processed in Ukraine by less than 1 percent relative to the situation o f the full tariff being applied to the value added inUkraine. This may be an insufficient incentive to request preferential access and compile the necessary paperwork to satisfy the rules o f origin, even though by definition outward processing confers origin to Ukraine through the use o f EUoriginating fabrics. One way for firms to move up the value chain inthe moderntextile and clothing sector is to produce clothing from own designs. This typically requires companies to be able to flexibly source fabrics themselves, but this i s severely constrained by the current GSP rules o f origin. The current tariff preferences for Ukraine would reduce the price o f a fully sourced clothing product by around 2.2 percent. 80 3.37 Table 3.4 indicates that the total weighted agricultural duties are quite high (33 percent for MFN) relative to specific sector levels. This reflects the way that we have treated cereals, for which we have applied the maximum duty levied in 2001. The ad valorem equivalent o f the --- e Y be 81 F=cPn+Y 7 ' f average for the agricultural sector. However, there i s a high degree o f uncertainty as to how exports from Ukraine were actually classified and what amount o f duty would have been levied on this product. It i s for these reasons that we excluded cereals from the calculations o f average tariffs presented earlier. Clearly ifthis exercise were to be repeated once data for 2003 becomes available, the average duty on agricultural products would be considerably lower due to the absence o f exports to the EU o f cereals in that year. It is to cereals that we now turn with a slightly more detailed analysis. K e y Specific Products Cereals (HS 10) 3.38 Ukraine was the biggest exporter o f this product to the EUin2002. Its share o f total EU imports was 19 percent, followed by USA (16.5 percent), Russia (15.4 percent), and Canada (7.2 percent). Ukraine exports one particular product inthis sector, which i s spelt, common wheat and m e s h (excl. seed) (HS 10019099); about 86 percent o f its total exports o f this sector are to the EU.For this particular product, the share o f Ukraine in total EUimports was about 30 percent, while the shares o fRussia, US, and Canada, the key competitors for this product,were around24 percent, 12 percent, and 10 percent respectively. Table 3.5 shows the evolution o f exports to the EU from these suppliers. However, it appears that the products produced by the USA and Canada are deemed to be of much higher quality than those o f the CIS countries. The trade value o f exports of this product from Ukraine has been increasing in recent years. However, as noted earlier, exports were curtailed in2003. Table3.5: Exportto the EUof H S 10019099 Spelt in 1992-2002 (Eurothousand) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 EXTRA-EU 144,738 139,312 161,820 239,597 204,652 278,410 377,805 397,170 437,322 695,376 1,605,047 Ukraine 0 0 0 0 5 0 2,302 4,843 3,571 133,333 488,688 Russia 0 0 0 300 0 1 2,170 3,854 15 67,297 392,282 USA 55,931 41,024 35,569 111,592 82,653 99,208 162,015 154,200 179,450 197,962 199,117 Canada 83,147 67,040 63,513 67,122 88,287 117,950 137,628 173,794 195,940 169,029 153,847 Source: EUROSTAT, UNCTAD THINS, Stafestimates 3.39 Table 3.6 provides a comparison o f the unit values (ECUhon) o f the major suppliers for this product to EUmarket in 2002. This is relevant because EUprotection takes the form o f a specific duty, the incidence of which will tend to fall heaviest on low value suppliers. In2002, Ukraine exportedthis particular product at the lowest unit value, around 108.9 (ECU/TON). This is indicative of the low quality o f spelt from Ukraine. Nevertheless, the unit value increases at an average annual rate o f 4 percent between 1998 and 2002, suggesting a movement toward higher quality. When compared with the US, Canada, and the average o f all EUimports, the unit value o f Ukraine's exports has been increasing at a faster rate. Nevertheless, the low unit value o f Ukraine's exports entails that the tariff equivalent o f the EU duty will be much higher for 81 Ukraine than for other suppliers, and in this sense the choice o f a specific duty by the EU discriminates against Ukraine. This will be importantifUkraine's exports recover in future years as it i s expected that Ukraine's fbture tariff quota for this product, which allows lower duty access fora specific quantity, isIikdy-bbelow. ~~~ ~~~ ~ ~~ Table 3.6: Unit Value and Tariffs onH S 10019099 Spelt Exportsto the EU (US%per ton) Average 2002 Country 1998 1999 2000 2001 annual Average 2o02 change tariff (percent) (percent) EXTRA-EUR 153.2 156.7 176.7 150.9 124.3 -5 76 Ukraine 94.1 99.3 171.4 116.7 108.9 4 87 Russia 80.2 105.0 166.7 119.5 110.2 8 86 USA 159.6 156.4 172.4 169.7 176.8 3 54 Canada 174.6 170.9 183.0 193.0 191.7 2 50 Bulgaria 111.7 110.6 115.7 139.3 109.0 -1 87 Hungary 100.3 112.4 156.0 127.6 124.2 5 76 Kazakhstan 121.5 154.3 166.4 178.9 162.5 8 58 Romania 105.5 127.8 231.7 148.0 123.4 4 77 Source: EUROSTAT, UNCTAD TMINS, Staffestimates Steel (HS 72) 3.40 Steel i s a special sector in EU trade policy since imports from three CIS countries (Kazakhstan, Russia, and Ukraine) are subject to quantitative restrictions. No other suppliers o f steel are subject to such measures. Such measures are inconsistent with WTO provisions and would have to be removed once Ukraine joins the WTO. In the period 2001-03, quota levels have been substantially reduced (see Figures 3.4a and 3.4b). This reflects the EUresponse to the imposition o f an export tax in Ukraine on scrap metal, which the EU views as contravening the Partnership and Cooperation Agreement. Export restrictions on scrap metal are a sensitive issue because scrap i s a major input into the production o f finished steel products. Export restrictions on scrap metal reduce the price o f scrap metal inthe domestic market and, hence, reduce the cost of steel manufacture. However, as follows from the standard economic analysis, export taxes reduce Ukraine's overall welfare (see the discussion in Chapter 2). Moreover, given that Ukraine i s a significant exporter o f scrap, such restrictions raise the price o f scrap in overseas markets, leading to higherproduction costs. 3.41 The export taxation o f scrap metal i s an inefficient resource tax, although it does not appear that it directly violates any specific WTO provisions. Export prohibitions and quantitative export restrictions, which were used by Ukraine before the introduction o f export tax, are inconsistent with Article XI o f the GATT, but there i s no apparent discipline on export taxes eventhough suchpolicies reduce economic welfare inother countries. 3.42 InJune o f2004, after intensive negotiations, and takinginto account the EUenlargement, the EU took the decision to considerably increase the 2004 steel quotas for all three FSU countries. Relative to 2002, Ukraine's quota increased by 137 percent to reach 607 million tons. 82 Quotas for Russia and Kazakhstan were increased by 32 and 25 percent respectively. The key issue now for Ukraine is whether Ukraine would be better off removing the export tax on scrap metal to improve chances for additional growth o f quota allocations by the EUin the future and also tremourage a morepositive EWtitudet c + J k r a w . ~~~~ ~ Figure 3.4a: EUQuota on Imports of Flat-Rolled Steel Products from Ukraine 1997-2004 (Metric tonnes) i I 1997 1998 1999 2000 2001 2002 2003 2004 Figure 3.4b: EUQuota on Imports of Long Steel Products from Ukraine 1997-2004 (Metric tonnes) 1997 1998 1999 2000 2001 2002 2003 2004 3.43 Figures3.5a and 3.5b, show that inthe past these quotas were highly utilized, suggesting that they were binding on Ukrainian exports to the EU.42For all quota lines, with the exception o f other flat-rolled products, the utilization rate exceeds 80 percent and for three o f the product groups more that 90 percent of the quota was utilized in2002 and 2003. This suggests that the 42Quotas can be binding on trade at levels below 100 percent utilization due to issues of uncertainty over ifand when the quota may be exceeded. There is no hard and true method of assessing whether quotas are binding or not. The usual approach is to make ajudgment on the extent to which the quota is filled. A high level of quota utilization is taken to indicatethat the quota i s constrainingtrade flows, whilst a low level of quota utilization is seen as reflecting a lack of binding in that category. The removal of non-binding quotas will have no significant impact upon trade, production, and employment. Binding quotas are typically definedas those where the amount of importsexceeds 80 percent of the quota level. 83 liberalization of these uotas would have a significant impact on the exports o f steel products from Ukraine to the EU . 1 3 Figure 3.5a: Ouota Utilization Rates for Flat-Rolled Products MS% 1997-2003 t 120 1 F o i l s loo 80 - \ k L eavy Plate j 60 - L i Other Flat Rolled Products 40 - i! I 1997 1998 1999 2000 2001 2002 2003 Figure 3.5b: Quota Utilization Rates for long Steel Products in 1997-2003, percent 120 100 80 60 40 20 0 1997 1998 1999 2000 2001 2002 2003 3.44 A separate important issue with regard to steel quotas concerns the recent EU enlargement. There was clearly a need for the quotas to be renegotiated on the basis o f the market of all 25 EUmembers. In2002, Ukrainian exports o f total iron and steel products to the EU accession countries in central and eastern Europe amounted to 40 percent o f the value of Ukraine's exports of these products to the EU-15 members. Clearly, this justified the need for a substantial increase in the size o f the quotas after the EU enlargement. Simply maintaining current quota levels would be highly restrictive. Fortunately, after protracted negotiations the EU agreed to increase the post-enlargement quotas (See also Chapter 4 for additional details). 3.45 Finally, it is worth noting that quota constrained Ukrainian products do not comprise a substantial proportion o f EUimports. In2003, EU-15 imports from Ukraine o f coils amounted to less that 0.8 percent o f external EU imports, heavy plate 6.75 percent, other flat-rolled products 43The EU responseto the imposition of export taxes by Ukraine was to define a combinedquota for 2002 and2003. Subtracting the earlier defined quota for 2002 gives usthe 2003 quota shown inthe figures, which is the same as that defined later for 2004. However, separate utilization rates for 2002 and 2003 are not available, so we apply the overall utilization rate for 2002/2003 in each year. 84 0.2 percent, beams 0.44 percent, wire rod 3.26 percent, and other longs 2.72 percent. It i s difficult to imagine how even substantial increases in imports o f these products from Ukraine could cause substantial harm to EUproducers. It i s also likely that the quality o f steel products exported from Uktzbcentails that i h v t competing difectlywdhpm-ced in the EU. Inthis case, the impact o fthese quotas may be primarilyto divert trade away from Ukraine to other non-EU suppliers o f similar quality steel. This is an issue that would be worthy o f more detailed study inthe context of a reviewby the EUo fthe impact and rationale for these quotas. c. EUPROTECTIONAND THE STRUCTURE OFUKRAINE'S EXPORTS 3.46 It is, o f course, likely that the current structure o f exports from Ukraine leads to a distorted view o f the impact o f EU protection since high tariffs may be suppressing trade in precisely those products in which Ukraine has a comparative advantage. To try and shed some light on this issue we look at the structure o fproducts exportedbyUkraine to Russia, where for the majority o f products there are no tariff restrictions on market access, at least on paper, and ask what would be the average tariff on this bundle o f goods if it were exported to the EU? The key issue here revolves around exports o f agricultural products. In 2002, agricultural products comprised almost 20 percent o fUkraine's exports to Russia, and also 20 percent o f exports to the EU. However, once cereals are excluded, the share o f agricultural exports to the EU falls to 6 percent, but the share inexports to Russiaremains little changed at 19 percent. 3.47 More generally, the value o f the similarity index between exports to Russia and exports to the EU (calculated at the 6 digit level of the HS) is 13 percent, which suggests a very low degree o f overlap between the structure o f exports to Russia and that o f exports to the EU. I s EU protection the main reason behind this or are there other important factors, such as the differences in income levels, difficulties for Ukraine in satisfying EU food safety requirements, the increasing role o f Ukraine in processing EU inputs (concentrated on the clothing sector at present)? Table 3.7: ApplicationofEUTariffs to Productsthat UkraineExportedto Russiain2002 (percent) Trade weighted MFNTariff 10.4 Trade Weighted MFNTariff excluding Dairy Products 7.1 Trade Weighted MFNTariff excluding Dairy Products and Sugar 6.8 Trade Weighted MFNTariff excluding Dairy Products, Sugar and Meat 3.8 Source: EUROSTAT, UNCTAD TRAINS,Staflestimates 3.48 Table 3.7 shows a very tentative estimate of the average tariff that would be levied inthe EU on the products that Ukraine currently exports to Russia.44 The predicted trade weighted 44Unfortunately, this exercise is not straightforwardfor the following reasons. Firstly, the data on exports to Russia are not available at the same level of detail as the EU tariff schedule. The trade data for exports to Russia are at the 6 digit level of the HS, whilst EU tariffs are defined at the 8 digit. Hence we are obliged to use average tariffs at the 6 digit level. Secondly, a number of the duties inthe EU on key productsof interest to Ukraine are non-advaloremduties, usually specific duties, such as the duty of 41.9 Euro per 100kg for certainsugar products.To calculateaverage tariffs these tariffs basedon quantityhave to be converted into ad valorem equivalents. But this depends upon the value per unit of quantity. The protective impact of specific duties falls particularly heavily on low value low quality products and becomes less restrictive the higher the unit value of the product. Inthis exercisewe use the conversions provide by UNCTAD based on average unit values into the EU. The unit value providesa very rough indication of quality. But will Ukrainebe able to export to the EUproductsof the same unit value/quality 85 average MFNtariff that would be applied in the EUto Ukraine's exports to Russia is around 10 percent, which i s considerably higher than the average EU MFN tariff on EU imports from Ukraine (excluding cereals) o f around 4 percent. The next rows o f the table show that this high a v e r a g m s drivermainly by two sectors -dairy products and meat. Once these and sugar are excluded, the average tariffon the structure o fproducts exported to Russia is less than that on the structure ofUkraine's current exports to the EU. The important issue is, ifthe highEUduties on these products were to be reduced, would this lead to a sudden increase inagricultural exports which would rapidly increase the share o f the EUinUkraine's exports? 3.49 In this context it is worth looking at the duties on these products in the EU and identifying the key competitors for Ukraine. The precise magnitude o f duties on meat, dairy, and sugar products in the EU are difficult to ascertain since all o f the duties involves a non-ad valorem component. For example, the duty on meat products exportedby Ukraine is 12.8 percent plus 176.8 Euro per 100 kg. Nevertheless, it is clear that the level o fprotection is very high since EUinternal prices far exceed world prices for these products. The maincompetitors for Ukraine inthe EUmarkets currently appear to be Latin American countries and New Zealand for meat products, Australia, New Zealand, Canada, and certain central and eastern European countries for dairy products, and central and eastem European countries for sugar. The level o f protection i s intrinsically linked to the EUpolicies of support for these sectors and significant improvement inmarket access for Ukraine will be dependent upon a successful multilateral agreement at the WTO that may reduce external protection on these products. At the same time, high import duties on meat and diary are not the only constraint for Ukrainian exports o f these products to the EU.Another major barrier relates to the lack of adequate certification o f Ukrainian laboratories, which at the moment effectively blocks any export to the EU o f products o f animal origin that are designated for human consumption (except for honey). Giventhe experience o f the new EU members, obtaining such certification may require considerable efforts. But without addressing this issue, Ukraine would not be able to exploit any improvements inEUmarket access that are likely to emerge in the medium term. This is another reason why accelerating upgrades in the certification system should be among the government's top priorities. 3.50 This exercise leads to two key interrelated conclusions. Firstly, high levels o f EU protection on dairy and meat products could be an important factor hampering the expansion of Ukraine's exports to the EU. Secondly, it is difficult to conclude that protection in the EU on products o f interest to Ukraine, whilst important, can be the only factor constraining the expansion o f Ukrainian exports to the EU. A simple back o f the envelope calculation shows that it is not feasible that EUprotection has been the only or major factor constraining substantial reorientation o f exports toward the EU. For example, following from Table 3.6, if tariffs on products o f interest to Ukraine were reduced such that the average tariff declined from 10 percent to 4 percent, then given the extremely bold assumption o f a price elasticity o f demand o f 5 for Ukrainian products, which i s very high relative to standard estimates o f such elasticities, and it likely to lead to overestimation o f the impact o f EU protectionism, and the equally bold assumption o f fully responsive supply inUkraine, then exports to the EUwould increase byjust under 27 percent. This in turn would imply that the share o f exports to the EUintotal exports would increase from the current level of around 26 percent to 31 percent. Given that gravity as currently being exported to Russia?For these reasonsthe measures of average tariffs reportedbelow should be subject to a high degree ofcaution. 86 models suggest that under normal trade conditions the share o f the EU in Ukrainian exports would be much higher than this, it i s apparent that, whilst reducing EU tariff barriers could contribute to the increasingimportance o f the EUas a market for Ukrainian products, other more impom-Eaetors must also be addressed; ~~~ ~ ~ 3.51 It is also worth remembering that the share o f the EUinPolish exports quickly reached levels comparable to that o f EUmembers such as Spain even inthe face o f highEUagricultural protectionism. The early EU agreements did little to reduce EU agricultural duties on products from the Central and Eastern European countries in the 1990s. The biggest contribution to the expansion o f Polish exports to the EUcame from the expansion o f manufactured exports. EUAntidumpingMeasuresagainstUkraine 3.52 Ukrainian exports to the EU, like those o f any other external trading partner, with the exception of the EEA countries, may be subject to the so-called commercial defense instruments of antidumping and countervailing measures. In practice the EU very rarely implements countervailing. Antidumping policies are more widely used by the EU. Table 3.8 lists the 8 products (covering 25 tariff lines) exported by Ukraine to the EU in 2002, which are currently subject to antidumpingmeasures.45 3.53 Table 3.8 leads to three broad conclusions. Firstly, products exported by Ukraine, which are subject to antidumpingmeasures or investigations inthe EU, typically comprise a small share o f extra-EU imports o f the products concerned. The average share o f Ukraine in extra-EU imports across the products now subject to antidumping measures was 2.7 percent in2002. This is below the de minimis level o f 3 percent specified by the Agreement on Implementation o f Article VI of the GATT established under the Uruguay Round of trade negotiations. The de minimis rule states that imports from a particular country that are perceived to be dumped shall be deemed negligible if they do not exceed 3 percent o f imports o f the like product in the importing country. Of course what matters in the determination o f dumping i s the level o f imports in the period preceding the investigation. However, WTO rules permit the importing country to aggregate countries together even if individually they account for less than 3 percent of imports, and proceed with antidumping duties if collectively they account for more than 7 percent o f imports. This provision allows importers such as the EU to continue targeting small suppliers o f the EU market in antidumping investigations. However, for many o f the products currently subject to measures it is difficult to imagine how a relatively insignificant supplier such as Ukraine could be undermining competitive conditions in the EU and be causing substantial harm to domestic industry. Given the enlargement o f the EUand the importance o f the acceding countries as a market for Ukrainian products and the fact that these duties will be newly applied by the new members, a review o f the antidumping measures against Ukrainian products is justified. Inparticular, the EUshould consider carefblly the impact on countries such as Ukraine o f its current practice o f grouping negligible suppliers together as a tool o f bringing anti- dumpinginvestigations inlinewith WTO rules. 45Anti-dumpingmeasures onFerro-Silico-Manganese andPotassiumPermanganateexpired in2003. As yet, no action on anti-dumping investigations of these products have commenced. 87 Table3.8: UkrainianProducts Subjectto Anti-Dumping Measuresin the EU EU Imports Extra-EU Share o f . . X f E c t e d Products TzinYcme Ukraine i o m I- 2002 ukm" Anti-Dumping Extra-EU Dw 2002 (ECU'OOO) Imports Ammonium nitrate 31023090 340 113,220 0.30% 33.25 EUR/ 1000kg (26.8%) 31024090 0 1,672 0.00%33.25 EUR/ 1000kg (30.9%) Ferro-silico-manganese * 72023000 37,620 253,979 14.81% 150EUR/1000kg (29.8%) 31042010 0 291 0.00% 30.84 EUR/ tonne KCl 31042050 0 184,574 0.00% 46.65 EUR/ tonne KCl 31042090 0 12,807 0.00% 48.19 EUR/ tonne KCl Potassium chloride 31052010 0 187,539 0.00% 46.65 EUR/ tonne KCI 31052090 0 41,014 0.00% 46.65 EUR/ tonne KCI 3 1056090 0 8,014 0.00% 46.65 EUR/ tonne KCI 31059091 0 20,752 0.00% 46.65 EUR/ tonne KCI 31059099 0 7,94 1 0.00% 46.65 EUR/ tonne KCI Potassium permanganate * 28416100 0 3,248 0.00% 36.20% 73041010 1,933 37,004 5.22% 38.50% Seamless pipes and tubes o f non-alloy 73041030 4,321 41,088 10.52% 38.50% steel 73043199 776 14,442 5.37% 38.50% 73043991 1,670 77,595 2.15% 38.50% 73043993 3,219 53,607 6.01% 38.50% Silicon carbide 28492000 158 106,655 0.15% 24% Solutions of urea & ammonium nitrate 31028000 0 99,303 0.00%26.17 EUR/ 1000kg (30.9%) 73121082 150 25,424 0.59% 51.80% 73121084 47 26,764 0.18% 5 1.80% Steel ropes & cables 73121086 14 17,382 0.08% 5 1.80% 73121088 0 4,143 0.00% 51.80% 73121099 21 13,677 0.16% 51.80% Urea 31021010 0 379,301 0.00% 16.84 EUR/ 1000kg(13.1%) 3 1021090 0 4,335 0.00%16.84EUR/ 1000kg (12.1%) 73063051 0 33,193 0.00% 44.10% Welded tubes andpipes 73063059 6 30,384 0.02% 44.10% 73063071 0 22,987 0.00% 44.10% 73063078 18 34,403 0.05% 44.10% Sub-Total 50,294 1,856,737 2.71% Total Ukraine's Exports to EU 4,037,181 968,212,075 Share (%) 1.25% 0.19% ~~ ~ Note: The mark "*" indicates that anti-dumping measures for the products expired in2003. 1. The highest anti-dumping duties ifmore than one rate i s taken here. 2. A bracket indicates advalorem equivalents (AVEs) ifthe conversion o f specific duties into AVEs is feasible. The total value and quantity of imports from 2002 EU extra-trading partners i s used to derive AVEs. Source: EUROSTAT, TARIC. 88 3.54 Secondly, the products subject to measures comprise a relatively small share (1.3 percent) of total exports from Ukraine to the EU. It is also worth noting the disparate evolution o f products subject to antidumping measures. For certain products, exports to the EU have ceased r m & i d yafter a&idu@w BWWUIW- wV- . . e and potassium permanganate. Exports of other products have grown strongly even after antidumping measures were imposed. For example, exports o f ferro-silico-manganese have increased three-fold since 1997. Thus, although antidumping duties are an important obstacle to trade that undoubtedly have spill-over effects in closely related sectors and which most economists believe to be unwarranted, it would not appear that they have a major constraining impact upon aggregate exports from the Ukraine to the EU. 3.55 Thirdly, the average level of antidumping duties imposed by the EUis rather high (in a range o f 25-50 per cent), and this i s likely to affect individual Ukrainian exporters. D. THEIMPACT OF EUENLARGEMENT 3.56 With regardto the impact o fEUenlargement a key distinction must bemade betweenthe outlook for industrial products and the prospects for exports o f agricultural products. For industrial products the impact o f trade policy changes following enlargement o f the EUwill tend to be positive for CIS countries. There will be no significant change inrelative market access to the current EUmarket since all tariff and non-tariff barriers on imports from the CEE countries have already been removed. A number o f antidumping duties currently imposed by the EU on imports from the CEE countries will have to be removed. In 2002 there were 22 different antidumping measures against products from the CEE. Of these 10 were applied to steel products, 4 related to hardboard, 3 to baler twine and the remaining 5 measures applied to urea and ammonia products. However, as in the case o f Ukraine, these measures affect only a very small proportion o f the exports o f the CEE to the EU. Hence, whilst their removal may have implications for Ukrainian producers o f the product concerned, the broader impact on trade is likelyto be limited. 3.57 Infour instances, inwhich antidumpingmeasures were inplace at the endof2002, both CEE countries and Ukraine were involved. Since the measures will no longer be applied to the CEE countries after accession, there may be a case for these decisions to be reviewed. There will be additional justification for doing this, as i s likely, if imports from Ukraine are below the de minimis level defined by the WTO (of 3 percent o f the total volume of imports) and the case was only consistent with WTO rules with the inclusion o f imports from the CEE. It could be argued that in any such review the de minimis level should be inrelation to the total imports o f the new expanded EUo f 25 members. 3.58 Market access to the CEE for Ukrainian exporters, on the other hand, will on average improve since tariffs in the largest markets, Poland and Hungary, will decline as these countries implement the common external tariff and adopt the EU's GSP. For example, the Polish tariff on clothing products is currently 18 percent. This will fall to 12 percent on accession and the tariff applicable to Ukraine will decline to 9.6 percent as GSP preferences are applied. Inthe case of Hungary, duties on bars androds o f steel will fall from 4.5 percent to zero when the EUcommon external tariff i s applied. A recent estimate suggests that enlargement will increase Ukraine's exports to the four largest acceding CEE countries by as much as US$15 million each year 89 (Kawecka-Wyrzykowska and Rosati, 2002), an increase o f around 8 percent from the current level o f exports to these countries. There may also be a shift inprocessing activity to lower cost CIS members as labor costs in the CEE increase and as they adopt EU outward processing -w k- making up stage o f the production process to low labor cost, but proximate locations, such as Ukraine. 3.59 With regard to non-border policies the new EUmembers will have access to the Single European Market (for some sectors, certain countries do so already). The impact will vary sector by sector according to the importance o f technical barriers to trade and government procurement decisions, the key areas where market access i s influenced by the Single Market. In sectors where technical regulations are important, CEE exporters will have improved access to the EU market. However, in the main these are the sectors46where the CIS countries, through lack o f FDI and technological capabilities, are not effectively competing at present, and where the currently applied GOST regulations inthe CIS are a key constraint upon export expansion to the EU. 3.60 Hence, the direct impact on competition for productscurrently exportedbyUkraine to the EU will probably be muted.47Nevertheless, as the CEE countries will now have to apply EU standards this may constrain the access o f Ukrainian exports to their markets, which formerly applied standards more similar to those in Ukraine, although the adoption o f EU standards has been a process that commenced inthe mid-1990s. The act of accession itselfwill thus not have a significant impact on trade. Further, after enlargement the EU will comprise a market o f well over 400 million people governed by harmonized regulations for a large array o f products. Only if Ukraine were to upgrade its system of standards and conformity assessment and rigorously adopt EUand international standards, would its producers have adequate access to this enormous market. 3.61 For agricultural products it is very difficult to derive precisely the magnitude or even an indication o f any potential impact on Ukraine's exports. Relative market access conditions may worsen and there may be trade diversionaway from Ukraine and other agricultural exporting CIS countries, as the CEE countries, especially Poland, are given substantial preferences inthe EU. It is clear, however, that a Doha round, which leads to a major reduction inEUborder protection in agriculture, would ultimately help to alleviate any negative impact in this area. The impact o f enlargement on Ukraine could also be limited if the preferences under the GSP were further enhanced in the new scheme that should be introduced in 2005. On the other hand, duties in certain o fthe EU-10 were higher than EUduties and these decreased after accession. 3.62 Agricultural producers in the CEE will also become eligible for EU farm subsidies after enlargement. This will make it even harder for Ukrainian suppliers to compete in the enlarged EUmarket. Prices for most agricultural products are lower inthe CEE than inthe EUsuggesting that there will be a significant increase inproduction inthe CEE countries once the policies that generate the higher prices are applied there. These higher prices will lead to a decline indemand 46The key industrial sectors affected by technical barriers to trade are machinery and electrical equipment, transport equipments, chemicals, and processed foodstuffs. 47This conclusion i s consistent with the earlier analysis by Francois and Rombout (2001), who suggested that potential overall effects of the EUenlargement on third countries, including the FSU, would be small. 90 for many agricultural products in the new EU members. Production surpluses in the CEE are likely to arise. Part o f these will be absorbed by the markets o f the existing EUmembers, while the rest will be exported with subsidies or removed from the market. Thus, there i s a possibility h r a m r % e - enfargement Ukraine may face ~ ~ i o ~ ~ addI&onal~ pofzsof~ .~. c ~ ~ ~ agricultural products by the EU-10 to the third countries, inparticular to Russia (Kobuta, 2004). However, the ability o f the EUto expand subsidized exports is limitedbythe commitments made under the Uruguay Round Agreement. The export subsidy value commitments of the CEE countries amount to about 9 percent o f those o f the EU. Hence a large scale expansion o f subsidized EU exports after enlargement will not be possible without violating WTO commitments. 3.63 Overall, the short-term effect o f EU enlargement on Ukraine's trade is expected to be modestly positive. In addition, Ukraine should expect dynamic gains from the enlargement that would by far exceed possible (if any) short-term losses. These dynamic gains wouldbe drivenby factors such as (Kawecka-Wyrzykowska and Rozati, 2002): e FDI inflows. It is expected that, based onthe experience from the earlier EUexpansions, FDI inflows to the new members could double in few years after the accession. Other factors unchanged, under some conservative assumptions about import elasticities, this could lead to growth inUkrainian exports to EU-10 by about 2 percent. e Infrastructure investments. It is also expected that after accession considerable investments will flow in upgrading transport and customs infrastructure o f the EU-10. This is of particular importance for Ukraine because it could improve considerably conditions for Ukrainian trade with the EU by reducing the cost o f transit through the territory o f EU-10 countries, especially Poland. 0 Standard unification. Exporting to EU-10 will become subject to meeting the EU technical standards, which in the longer term i s beneficial for Ukrainian exporters, who will have to deal with the single set o f standards insteado ftwo as it is now. E. CONCLUSIONS 3.64 While EU protection, especially in agriculture, i s an important constraint for certain products produced inUkraine, EUtrade policies alone cannot explain why the share o f the EUin Ukraine's exports has not reached the levels o f comparable countries. A key issue for sustained export growth by Ukraine i s the need to accelerate export diversification. There i s no evidence that EU trade policies are constraining such a process. EU duties on industrial products are on average very low and are further reduced under the GSP. The evidence from the early 90s suggests that many central European countries managed to drastically expand their export to the EUunder similar conditions, which have not been fundamentally more concessional than those faced currently by Ukraine. The real driver for the early trade reorientation in the CEE was a broad commitment to reforms, which was manifested in rapid improvements in the regulatory and business environment, strong FDI inflows, and firm rates o f enterprise restructuring. Compared to CEE countries, Ukraine seriously under-utilizes advantages o f its geographic location (proximity to a major market) as a basis for attracting FDI and restructuring its trade toward more diversification and specialization. 91 3.65 While Ukraine has less preferential access to the EU market than many developing countries, as well as countries in the Balkans, this should not be considered as a critical factor that hampers export expansion because the actual tariff differences are small. This study did not find evidence to support the-claim that "Ukraine i s sxhjecttcrextremetractedrscrimirrrationfrom -~ the EU" (Aslund, 2003). Moreover, the recent enlargement o f the EU would not lead to any additional problems for Ukrainian exports to the EU, especially for manufacturing exports. 3.66 The primary constraints to export expansion and diversification in Ukraine are internal, and relate directly to conventional domestic factors such as weak capabilities o f the existing private sector and deficiencies o f the business environment that hamper new private entry, both domestic and foreign. 3.67 What are the implications o f these conclusions for trade policy in Ukraine and its relationship with the EU?First, agreements with the EUinthe form o fthe PCA andthe evolving "new neighbors" initiative should be utilized by Ukraine to address its domestic behind-the- border constraints to investments and trade and improve the competitiveness o f Ukrainian firms on international markets. A priority policy agenda should include further steps to improve the domestic business environment, upgrade investment promotion capabilities o f the government with the aim to improve the investment image of the country, and move aggressively to increase an inflow o f European FDI. The recent expansion o f the EU provides a major window o f opportunity for Ukraine to tap investments by`firmsthat have been looking for low-cost locations outside o f the EU. (See more suggestions on government trade strategy in Chapter 6.) This conclusion is fully consistent with the lessons from earlier experiences o f European integration: major economic gains for EUpartners have been coming not from the EUtrade concessions, but from domestic reforms triggered by the integrationprocess and from the FDIinflow. 3.68 At the more technical level, upgrading o f the system o f standards and conformity assessment, where implementation o f the provisions o f the PCA has been slow (UEPLAC, 2003), should be considered a priority. Whilst the implementation o f EU and international standards will be a key issue inimproving access to the EUand other markets, it will also play a key role in improving quality standards for Ukrainian consumers and in providing for a more efficient and effective conformity assessment system. Ukraine should also request its inclusion in the PanEuropean Area o f Cumulation regarding exports to the EU. 3.69 Second, WTO membership would allow Ukraine to pursue more effectively the key sector specific trade barriers inthe EUthat constrain Ukraine's exports. For instance, the quotas on steel products would have to be removed. Ukraine would be able to participate innegotiations on EUagricultural policies. Ukraine would also have access to the dispute settlement mechanism of the WTO, which could make a big difference, for instance, with regard to antidumping measures incases if,after WTO accession, the volume o f imports from Ukraine suppliers subject to measures didnot exceed the de minimis level o f 3 percent. 3.70 Third, despite the conflict over the taxing o f scrap metal exports by Ukraine, there is an urgent need for the EU to review its policy regarding both market economy status and antidumping practices for Ukraine. 92 3.71 Fourth, there i s a case for continuation o f EU technical assistance in the trade area, for which needs remain considerable in Ukraine's public and private sectors. Helping small and medium-size exporters, e.g., in the textile and food sectors, to more efficiently utilize trade iw&6rewes avaihble b&em could beoneef the premis&-sxhw&axe. . . 93 94 CHAPTER 4. UKRAINIANSTEELEXPORT: PERFORMANCE, SUSTAINABILITYAND MEDIUM-TERMPROSPECTS48 A. EXPORT PERFORMANCE 4.1 Ukraine is among the leading world producers and exporters o f ferrous metals. In 2003, its share in the global output o f cast iron and steel was 4.55 percent and 3.84 percent respectively, and it also accounted for 8.7 percent o f exports o f semi-finished steel products and 6.8 percent o f scrap exports. Together with Russia, Ukraine has an essential impact on trends at the world steel market. 4.2 The cast iron and steel sector i s the core o f the Ukrainian metallurgic and metalworking industry which plays an important role in the national economy: in 2003, the sector generated about 5 percent o f GDP and 24.3 percent o f the total industrial output. The sector accounts for 7.2 percent o f total industrial assets and 6.4 percent o f employment in the industry. Its annual production capacity i s 33.9 million tons o f cast iron, 42.1 million tons o f crude steel and 36.6 million tons o f rolled steel. The core o f the sector is representedby 15 large mills, most o fwhich are large fill-cycle metallurgic combines (producing cast iron, steel and rolled products). 4.3 Ukraine's steel sector is capable of operating as a closed technological system that covers raw material extraction and processing, coke manufacturing, cast iron and steel smelting, and it has limited dependence on imports. In 2003, imports o f finished rolled products and iron ore made up 2.5 percent and 12 percent of their national production. The country has an extensive raw material base, including large sources o f metal scrap supply. In addition, the country's power system and transportation network are sufficiently developed to support operations o f large scale metallurgicalproduction and exports. 4.4 Ferrous metals4' are the critical portion o f Ukraine's exports and in 2003 their exports amounted to US$6.7 billion, an increase by more than 70 percent over the period 2000-03 (Table 4.1). While the portion o f ferrous metals in total exports remains quite significant, it has been declining recently from 34.5 percent in2000 to 29.3 percent in2003. The sector's contributionto the total growth o fUkrainian exports in 1999-2003 was about 20 percent. 4.5 The sector's capacity, inherited by Ukraine after the breakup o f the Soviet Union, exceeds the internal needs o f the national economy several times, and it has consequently provided the grounds for the sector's heavy focus on exports. In2003, rolled stock exports made up 79 percent o f the total output. Due to its export orientation, the sector is quite sensitive to 48 This chapter i s based on the background report prepared by the expert team from the Ukrainian Center for Economic Development (CED) ledby Dr Alexander Paskhaver andDr LidiaVerkhovodova. 49Exports of steel and cast iron sector products are accounted in the group of 72 UKT VED. Cast iron, steel and rolled stock accounted for 85 percent of exports within this group of productsin 2003, while the rest of exports relatedto scrap, ferroalloys, etc. 95 developments o f the global steel markets, which have been recently characterized by the following trends: 0 a--&astic increase idemand since early 2002 fo-F&c&-de&stock-awLkp&s for the ~ metallurgic industry; 0 significant pricing growth for all main inputs inthe sector; 0 the expansion o f a relatively new niche on the world steel market related to a growing demandfor semi-finished steel products; 0 the co-existence o f producers with different technological levels, allowing traditional manufacturersto remainprofitable, while operators that use new technologies expand. 4.6 The recent growth o f export prices on Ukrainian steel i s mostly due to an increase inboth global demand and prices for steel and semi-finished products (Fig. 4.1), which was driven primarily by growth in demand in East Asia. Since the mid-90s' the global prices for ferrous metal had been declining, but this process ended in 2001. Then global market prices moved upward in 2002, turning to a galloping growth since July 2003. Ukrainian exporters have managed to use the favorable market situation for significant export growth and their expansion to new markets. 4.7 USSR's ferrous metals industry was primarily focused on meeting its domestic needs. While only 55 percent of Ukraine's metallurgy output was sold within the country, these shipments were primarilyto other former Soviet republics. The volumes exported to destinations outside o f the USSRwere hardly significant. In 1990, exports to foreign countries accounted for only 3 million tons (8 percent o f the output) o f rolled steel from the total of 15 million tons shippedoutside o fUkraine. 4.8 As a result, during the first years o f sovereignty the Ukrainian metallurgic enterprises lacked skills needed to operate at the global market. They were neither known among customers, nor were their products' quality in line with international standards. Consequently, Ukraine's products were relatively low priced. The situation was exacerbated by crisis developments on the global steel market. Significant extra volumes o f cheap metal that entered the market in the mid-90~~'threatened traditional manufacturers. Starting from 1995, Ukraine's steel producers have increasingly become subject to antidumping investigationmeasures and other instruments o f domestic market protection (Box 4.1). It is estimated that over the last 10 years almost 60 antidumping investigations were launched worldwide against Ukrainian exports of ferrous metals, which i s an extraordinarily high number for an industry with total sales below U S 1 0 billion. Eremenko and Lisenkova (2003) provide detailed information on anti-dumping duties imposed on Ukrainian steel producers during1993-2001. 50At that time, in additionto Ukraine,RussiaandBrazil also enteredthe marketwith the cheap metal. 96 Figure 4.1: Exports volumes and average export price i f o r the ferrous metal sector in 1999-2003 250 8 1; 7 - 6 per$t 2oo - U S 150 100 T 5 - ' 4 US$ 50 - bn o ! , 0 1999 2000 2001 2002 2003 / Average export price, US$/t / Exports o f ferrous metals, bn. U S $ Source: CED. Table 4.1: Contribution of the steel sector to Ukraine's economic performance in 2000-03 Indices 2000 2001 2002 2003 Gross domestic product, UAH million 170,070 204,190 225,810 263,228 Including: Metallurgy and metalworking, UAHmillion 10,687 10,520 9,122 12,600 - share inGDP, percent 6.28 5.15 4.04 4.79 Cast iron & steel sector, UAHmillion 4,569 5,157 5,476 6,423 - share inGDP, percent 2.7 2.5 2.4 2.4 Total industrial output, UAH million 144,412 155,891 171,207 220,605 Including: Metallurgy and metalworkmg, UAHmillion 33,900 35,270 39,03 1 53,650 - share inindustrial output, percent 23.5 22.6 22.8 24.3 Cast iron & steel sector, UAHmillion 25,153 26,114 28,029 38,455 - share inindustrial output, percent 17.4 16.8 16.4 17.4 Total exports, US$ million 14,573 16,265 17,957 23,008 Including: Metallurgy and metalworking, US$ million 6,459 6,365 6,555 8,419 - share intotal exports, percent 44.3 39.1 36.5 36.6 Cast iron & steel sector, US$ billion 5.03 4.98 5.37 6.73 - share intotal exports, percent 34.5 30.7 29.9 29.3 Source: Datafiom the UkrainianMinistryfor State Statistics and CED. 97 Box 4.1: EUquotas for Ukraine's Steel Imports. The EUintroduced quotas o n Ukrainian steel imports in 1996 replacing the previous CIS quota. The original annual quota was set at the level o f 212,000 tons, which roughly amounted to 1 percent o f Ukraine's steel output at that time. Since then the quotas have been adjusted annually. However, the 2001 quota was only 25 percent higher than its 1996 level, despite the increase in domestic production during the period by about 50 percent. As was shown in Chapter 3, the EU steel quotas are highly utilized, suggesting that they are indeed binding Ukrainian exports to the EU. It is worth noting that the Ukrainian quota-constrained steel imports do not comprise a substantialproportion o f total EUimports o f these products. In2001, the EUandUkraine hadapreliminary agreement ontrade insteelproducts, which envisioned anexpansion inquotas by 35 percent to 373,000 tons for 2004. This agreement has never become effective, and respectively the 2002 quota remained intact (263,600 tons). Moreover, after Ukraine introduced export duty on metal scrap in2003, the EUretaliated by cutting the quota by 30 percent. The actual volumes o f the steel sector's exports to the EU did not show much decline, however. This occurred because o f an expansion inproducts (such as ferroalloys), which are not covered by EUquotas. After extensive negotiations, the EU agreed in the context o f a new agreement to increase significantly the 2004 quota for Ukrainian steel. This reflects to a large part a recent EU enlargement: the new EU members represent a major traditional market for Ukrainian steel. The EU hrther suggested that the quota could be increased to 1.4 million tons in2005 ifUkraine eliminates export duty on scrap. It is worth noting that even after such an expansion, the EUquota would amount to only about 10percent o f Ukraine's total 2004 exports o frolled steel. Inthousandtons 1996 2002 2003 2004 2005 EU-15 quota 212 265.6 184,51117.9/a 184.51606.117~ 1,4001~ Actual exports to EU-15 656.8 868.8 a: 117.9 reflects the effective 2003 quota given the fact that the 2003 quotas were approved quite late inthe year. b: 606.1 reflects the latest EU-Ukraine draft agreement to revise quotas upward andto reflect EUenlargement. c: Preliminary proposal by the EU. 4.9 These actions considerably changed the commodity composition o f the metallurgy output andexports from Ukraine infavor of cheaper and simpler products -metallurgical inputs, semi- finished still products and simpler varieties of rolled steel. The share o f semi-finishedgoods in the total value o f the sector's exports increased from 21 percent in 1994 to 29 percent in 2003, while the share o f scrap metals grew from 0.6 percent to 3.4 percent5', and o f ferroalloys - from 1.0 to 8.8 percent (Figures 4.2 and 4.3).52 The distinctive feature o f the above products was that they did not fall under most trade constraints, such as the EUexport quotas. 5' The portion of scrap metalin total exports reached 8.7 percent in2002. 52 Iti s worthnotingthat inthe Soviet times, the share of productswith the higherdegree of processing, such as sortedrolled steel, was even higherthan in 1994. 98 Figure 4.2: Export structure of Ukrainian ferrous , metallurgy in 1994 by type o f product 2% 17% 21% I 60 i i I3Metallurgicalinputs Semi-finishedproducts Wolled steel 0Otherproducts Figure4.3: Export structure ofUkrainian ferrous metallurgyin2003 bytypeof product 1% 16% 0Metallurgicalinputs 4Semi-finishedproducts 0Rolledsteel 0Otherproducts I Source: CED. 4.10 Ukrainian manufacturers have also faced serious market access restrictions introduced against their exports to the principal global markets (EU and USA). However, by the end of the 90s Ukrainian exporters managed to resolve most of the initialproblems o fmarket penetration. 4.11 Sales to Asia amount to about a half o f total ferrous exports. Other major markets include the CIS, Africa and Europe (both EU-15 and EU-10). (Fig. 4.4) As compared to the late 9Os, the major change to the geographical structure of exports occurred due to a drastic decline in exports to the UnitedStates (the share declined from 5.4 percent to 1.2percent o f the total). This was compensated by expansion in sales to Africa (primarily Algiers and Egypt) and to the EU- 15. However, export growth in Europe took place largely at the expense o f scrap metals and other inputs. Overall, the export strategy of Ukrainian steel producers appears to emphasize markets in Asia and Africa, which together in particular years amounted to two-thirds of total exports. These markets are considered to have a capacity for further growth, while at the same time they are lesscompetitive. 99 Figure 4.4: Geographic structure of ferrous metal exports in 2003 Source: CED. 4.12 Ukrainian manufacturers are usingthe current favorable situation inthe world market for buildingup their market reputation. Inorder to strengthen their position inthe market, they have established strategic partnerships with leading steel traders. 11 out of 15 mills are currently exporting through such traders. This partnership also facilitates exporters' access to borrowing from foreign banks. Inaddition, Ukrainianproducers made a major effort to improve the quality of their products. Practically all steel exports are certified by intemational certification agencies. Starting from 2002 the quality control systems o f the largest Ukrainian steel manufacturers have been in line with international standards (IS0 9001-200). In order to reinforce their presence at major export markets, Ukrainian financial and industrial groups in the steel sector (FIGS)have started acquiring metallurgic assets abroad. 4.13 Currently, Ukraine positions itself on the market as a competitive manufacturer of steel products with a low degree of processing. This niche will remain the main focus of Ukrainian exporters in the medium term. So far, their penetration into the market niches o f higher-value products (e.g., coated rolled-stock) has been slow. This is reflected in rather a stable export structure and sustainable average export prices (Table 4.2). Such a conservative nature o f the export structure inthe sector i s due to the existing competition on the global market, on the one hand, and to Ukraine's current level of technological capabilities along with the low investment level, on the other. 4.14 The year 2003 marked a revival o f the intemal market o f ferrous metals inUkraine. After a long break, internal prices have started to increase due, first, to a stronger demand on the part o f rapidly developing metal-consuming industries (machine-building inparticular), and, second, a reduced supply caused by raised exports. As a result, in2003 there was a simultaneous growth o f both export and internal prices inUkraine that created even better conditions for development inthe steel sector. 100 l-- -+t- -H- 101 B. ASSETS, INVESTMENTS AND CAPACITY CONSTRAINTS 4.15 Ukraine has inheritedthe metallurgic industry from the USSR, which largely is based on ~~ ~~ outdated technologies and essentially depreciated assets. The economic crisis o f the early 90s entailed additional compression o f investments into the sector. The 1999 investments made up only 21 percent o f the 1990 level. The average level of fixed assets' depreciation reached 60 percent (70 percent inthe steelmaking sector) by the end o f the 90s. However, the situation inthe sector has started improving during the so-called "economic experiment" (the program o f large- scale government support launched in the second half o f 1999) and owing to the considerable expansion of exports. In2000, investmentsgrew by 35 percent. Inmore recent years the volume o f investments per ton o f steel output notably increased, in 2003 approaching two-thirds o f the 1990 level (Table 4.3). 4.16 During the period o f economic crisis in Ukraine the production capacities o f ferrous metallurgy remained largely unaffected. Only a limited share o f the sector capacity was liquidated. Adjustment largely took place through lower capacity utilization. While by 1996 (the lowest point o f production) production inboth casting and smelting declined by about 60 percent against 1990, the production capacity declined only by one-third. The rate of capacity utilization fell to 61 percent over the same period. 4.17 According to experts' assessment, at the moment the share of sectoral assets that needs immediate replacement is around 10 percent. These assets are distributed among different companies. Two o f the sector's enterprises are continuously operating at a loss: Makeyevsky Metallurgic Combine and Dnepropetrovsky Metallurgic Works named after Petrovsky (together they account for 5.8 percent o f sales in the sector). Both o f them are in critical need of deep restructuring. Inaddition, two small enterprises - Kramatorsky and Konstantinovsky Metallurgic Works - have not been operating for a while and are to be liquidated. But the hard core o f the sector appears to be quite viable. 4.18 Compared to 1996, the 2003 cast iron output increased by 77 percent, crude and rolled steel output grew by 68 percent and 85 percent respectively. The production growth became especially strong starting in2000. At the same time, analysis o f the data on production dynamics for the entire period since independence suggests that the sector still has a considerable share of unusedcapacity. Table 4.3: Output and Investmentsin the Cast Iron & Steel Sector, 1985-2003 1985 1990 1995 1999 2000 2001 2002 2003 Steeloutput (milliontons) 44.9 18.0 17.8 20.6 20.9 23.0 25.7 Cast ironoutput (milliontons) 52.6 22.3 22.3 25.6 24.4 27.4 31.8 Investments,total (US$million) 989.3 725.1 246.2 155.4 210.4 229.8 222.5 330.7 Investmentsper 1tonof steel(US$/t) 18.0 13.8 11.0 5.7 6.6 6.9 6.5 8.8 Source: CEDs estimatesbased on UkrainianAnnual StatisticalReports. 102 4.19 The investment resources currently available to the sector operators are insufficient to - -start their- in-depth restructuring and upgrading. An unfavorable investment climate. in-lhe country does not facilitate the attraction of foreign investment^.^^ Local operators are not strong enough yet, but at the same time they remain to be quite hostile to the idea o f strategic foreign investors entering the Ukrainianmarket. Moreover, the preparation o f large restructuring projects in the sector is constrained by uncertain forecasts for long-term developments on the ferrous metals market. Meanwhile, the current favorable state o f the market has provided even more incentives to insiders to postpone decisions on large investmentprojects. 4.20 The sector currently implements mostly small investment projects focused on a partial and narrowly selected upgrading o f the most deteriorated assets. Duringthe last decade only few new (green field) shops or major pieces o f equipment were put into operation. This approach provides for a cost-efficient equalizing o f the technical level among different stages o f the technological cycle within the companies and facilitates quality improvements. Output growth has been drivenmainly by increased capacity utilization and the recovery o f non-operating units. Such an investment strategy so far has proved to be a practical way to support output and export expansion. 4.21 Analysis also shows that new owners o f large metallurgical enterprises focus their medium-term (5-10 years) strategies on the utilization o f existing obsolete capacities until their complete physical depreciation. Maintenance and upgrading costs have been kept at the minimum,just enough to meet the immediate market needs and maintain the competitiveness o f products with the niche currently occupied by Ukraine. This strategy ensures the low capital intensity o f current production: 2-2.5 times less than in Russia and 3-4 times less than in OECD countries. 4.22 There are obvious adverse effects o f this investment strategy, including preservation o f obsolete technologies, maintenance o f an excessive energy intensity o f production, and an increased impact on the environment. But ultimately it is up to market participants to decide when and how much to invest in the sector. Inthe past, sometimes steel operators managed to use their older assets much longer that outside observers believe is efficient (Tarr, 1985). However, in the medium term the sector would inevitably face the problem o f liquidation and replacement o f outdated units, starting with those that operated before the 1950s. 4.23 In spite of a nearly 30 percent decline in metallurgical output during the years o f independence, the sector's employment level has remained practically unchanged. Moreover, employment in the sector increased by roughly 12 percent over the period 1995-2000. Consequently, labor productivity dropped even further than output. In 2003, one employee produced 180 tons o f steel (against 255 tons in 1990). The rate o f labor productivity in the Ukrainian ferrous metal industry i s similar to the one inRussia and it is above China's level, but it is much lower than inthe majority o f countries with more modem metallurgical industries. For 53 Iti s estimated that for the period 1992-2002, total FDI in the ferrous metallurgy and metal processing amounted to U S 2 8 1 million (5 percent of the total FDIin Ukraine). However, it is believed that a considerable portion of this capital inflow represents a return flight capital o f the sector's insiders. 103 inJapan- 631tons perperson. example, labor productivity inBrazil is 471 tons per person, inthe EU- 599 tons per person, and 4.24 . . . - m w v `e .4 Y mekuurgy i sq its employment structure, inherited from the Soviet era. Nearly a half o f the enterprises' staff i s still employed in operations that are not part o f the metallurgical production itself and that in OECD countries are performed by independent non-metallurgical companies. Those are, first, construction, maintenance, and technical upgrading o f metallurgical facilities, and, second, social services and agricultural production. The difference inlabor productivity insimilar metallurgical operations i s not so striking. Ukraine's productivity is 74 percent o f that inBrazil, 58 percent o f that in the EU, and 55 percent o f that in Japan. In 1999-2003, average labor productivity in the sector increased by about 50 percent.54 4.25 In the 9Os, the Ukrainian metallurgical companies managed to drastically reduce their expenditures on provision o f social services, which were substantial inthe Soviet era. First of all, they almost completely divested to municipalities the most burdensome and costly part of social assets - housing stock and childcare establishments. In2003, total spending on social services in the sector made up only 1-3 percent o f companies' profits and 0.2-1.0 percent o f their total expenses. 4.26 At the same time, the metallurgical companies have recently increased their expenditures on the socially attractive non-core assets (sports, medical, and recreational facilities). For top managers and owners in the sector, spending on such facilities turns into a political resource in their relationship with employees, local and central governments. The growth o f the employment rate in ferrous metallurgy since 1995 was primarily due to the expansion of non-core activities. The latter constitutes a major reserve for employment rationalization. c. GOVERNMENT POLICIES: MAIN INSTRUMENTSOF SUPPORT TO LOCAL STEEL PRODUCERS 4.27 Ukraine's ferrous metals industryhas been traditionally enjoying significant government support due to the importance o fthe role it plays inthe economy. Inthe event o f privatization in the sector,55the majority o f enterprises fell under the control o f several large domestic financial and industrialgroups (FIGs). 4.28 Privatization and subsequent operations o f the privatized and state-owned assets in ferrous metallurgy have formed the basis for the emergence o f the largest private companies in Ukraine. This process has nearly the same political and economical importance for the economical development and economical policy of today's Ukraine as had similar processes in the Russian oil industry At present, the process o f consolidating controls in the sector by new owners i s close to being completed. The Ukrainian FIGs generally are vertically-integrated 54 Itis worth noting, however, that during the latest period o f economic expansion labor productivity in Ukraine's entire real sector has been growing rapidly, and in this respect the steel sector under-performed significantly relative to the rest o f manufacturing. 55The share o f state owned enterprises inthe total sectoral output declined from 93 percent in 1992 to 45 percent in 1995 and to 14 percent in 1999 (Kuzmyn, 2002). 104 companies that have established an efficient control over financial flows o f formally independent enterprises, especially suppliers o fraw materials and other inputs. 4.29 I11the 98s, the government-activdy but i n d i r w - p r o - Y implementing policies that facilitated rapid capital consolidation by new owners. The latter policy included such measures as privatization "by request" o f influential private sector players, maintenance o f low prices on industrial inputs (raw materials, energy, and transportation), maintenance o f soft budgetary constraints for large firms. Inparticular, the government did not impose any significant sanctions on firms that had accumulated considerable tax and energy arrears. It was also a liberal observer o f the large-scale outflow of new owners' capital from the country. Box 4.2: Kryvorizhstal Privatization: Insiders Won, Who Lost? The sale o f Kryvorizhstal was the largest, controversial privatization effort in the history o f Ukraine. Inmid-2004, the 93 percent stake in the giant ferrous metallurgy firm was sold to the Investment Metallurgy Union (IMU), a consortium o f two major domestic FIGS(Interpipe and System Capital Management), for UAH4.26 billion (approx. US$0.8 billion). The qualification requirements for bidders, quality o f privatization procedures, and a short tender duration, all suggest the discriminative nature o f this tender. Failure to conduct such a major transaction transparently damaged Ukraine's investment image and in the medium term locked the country out o f benefits associated with the potential entry o f the global international player. In addition, government revenues fell well below the originally forecasted asset value o f Kryvorizhstal (estimated at about US$1.5 billion, Le., about 3 percent o f GDP). Kryvorizhstal i s the largest Ukrainian ferrous metal producer that accounts for almost 20 percent o f domestic steel and cast iron production with over 50,000 employees. In 2003, being fully state-owned, it generated over US$0.25 billion inprofits. The major discriminative requirement for bidders was a request to have experience in domestic coke production for at least three years (two o f which had to be profitable), a condition that no potential foreign bidder and very few domestic bidders could satisfy. Aside from being explicitly discriminative against foreign competitors, this requirement had little economic sense. Formally, it intended to address the issue o f growing domestic prices o f coke (due to expansion in its exports) by further consolidation o f the sector under the control o f few vertically integrated ~ompanies.'~ As a result o f such a policy, the combined share o f the new owners o f Kryvorizhstal inUkraine's total steel production may reach 50 percent. This poses a real risk o f undermining competition inthe sector. The tender procedure was further complicated by the tight timetable for submission of necessary bidding documents. Given these time constraints, a tender requirement for bidders to be registered in the national company registrar became a separate major obstacle. Despite participating foreign bidders (LNMAJS Steel and SeverstaliArcelor) offering substantially larger bids (the LNM-US Steel consortia offered about US$l.5 billion), the IMUwas selected as a winner. The fact that the primary owners o f the IMU are known to have close ties with the current government does not provide for additional credibility to the transaction. The privatization procedure generated strong resentment among Russian and British bidders. It may have longer-term negative implications for Ukraine's commercial diplomacy in times when the country needs the additional good will o f its partners to accelerate WTO accession and regional integration mocesses. 56 An immediate concem relates to the dominance o f vertically integrated companies and is linked to potential price discrimination: independent and potentially more efficient steel producers will face higher prices for major inputs (such as coal) compared to those steelmakers who are subsidiaries o f the FIGSthat also control/own producers o f inputs(e.g., coal mines). 105 4.30 Under these circumstances, the formation o f powerful FIGs has expanded the lobbying capacity o f the sector,57 ensuring its access to various types o f government support.'* The interests o f FIGs are explicitly taken into account in both intemal and foreign policies o f the mr\ 4 the Eu are considered. The recent privatization o f Kryvorizhstal, the largest Ukrainian steel producer and the last major metallurgical firm, whose privatization was initially delayed, illustrates the political leverage o f sector insiders (Box 4.2). 4.3 1 The main instrumentso f government support for the sector have recently included: 0 restrictions on scrap metal exports; 0 tax benefits granted withinthe "experiment" o f 1999-2002; 0 maintenance o f low energy tariffs, primarilyfor electricity. 4.32 Due to the upsurge o f prices at world markets, Ukraine and other countries with a developed metallurgy sector have faced the challenge o f skyrocketing domestic prices and expanded raw material exports, including exports o f scrap metals (Figure 4.5). Steelmaking in Ukraine requires a larger use of scrap since it still relies more widely on open-hearth furnaces. To ensure the same quality o f steel, the latter technology implies higher scrap consumption (70- 90 percent higher) per unit o f output compared to the newer oxygen-based technology. In other words, the higher intensity o f scrap consumption enables Ukrainian steelmakers to improve the quality oftheir steel and thus make it more competitive internationally. Figure 4.5: Evolution of scrap metal prices, 1999-2003, USD/ton 140 120 __ +Exportprice 100 80 -w- Domestic rice 60 exclusive %AT 40 -A- W o r l d market 20 price 0 1999 2000 2001 2002 2003 I Source: Datafrom the Ministryfor Industrial Policy and the National Statistical Sewice, world marketprices are according to httrJ://wtvw.steelonthenet.com/vfk.lztml ''See World Bank (2004) Ukraine CountryEconomicMemorandumon the role ofthe financial and industrialgroups inUkraine inthe latest periodofeconomic recovery. 58 Subsidization of domestic steel producers has been common to both developed and developingcountries, including Brazil, Turkey, India, China, and Egypt. Multilateral talks to introduce intemationalrules in this area and limit the amount of subsidies, ledby the OECD, havebeenunsuccessfulso far. 106 4.33 Inresponse to growth in global demand, Ukraine became one of the first countries that introduced restrictions on scrap metal exports.59 Initially, the GOU employed administrative restrictions, but since January 1, 2003, it introduced an export duty on scrap metal inthe amount o f Euro 381%. ~~~~ ~ ~ ~ ~~ 4.34 Onthe one hand, the measure caused Ukraine certainbothpolitical and economic losses: 0 Political losses. While Ukraine's partners protested aggressively against the tax, the country's international image has been affected, and the process o f Ukraine's integration . into the EUhas slowed down. In addition, this step raised pressures inside the country in favor o f further administrative interventions into metal markets. Inter alia, the industry's lobby has been insisting (so far unsuccessfully) on introducing quotas and export duties for other types o fmetallurgic inputs (coke andiron ore). 0 Economical losses. In 2003, the EU cut the de facto quota o f Ukrainian steel imports to 117,900 tons. Had the duty been removed, the quota would have been expanded to 373,000 tons in 2004 without the enlargement adjustment. As a result, the Ukrainian enterprises hadto shift exports to markets with lower prices that incurred certain financial losses to the industry. Moreover, overall collection and supply o f scrap in Ukraine declined in2003 because o fweakened incentives for scrap operators. 4.35 On the other hand, restrictions on scrap metal exports have brought some immediate benefits to Ukraine, such as: 0 a major expansion in scrap supply for domestic metallurgic enterprises,60 which in 2003 reached the highest level for the 10-year period (91.2 percent o f the total estimated needs o f the industry); 0 reducing costs o f rolled stock production and receiving extra yields (estimated at US$36.6 million); 0 ensuring additional budgetary receipts, including scrap export duties (estimated at US$41.3 million). 4.36 Overall, primarily due to the increased global demand for steel in 2003, exporters' aggregate net losses appeared to be insignificant. The losses in exports to Europe were compensated by increasedsales at other markets. After losing the quota of 237,000 tons o f the de facto quota for exports to the EU, Ukraine's growth in exports to the CIS in 2003 amounted to 1,258,000 tons, and to Afiican countries - 515,000 tons. Under different market conditions, however, the impact on the industry would have beenmore damaging. 59Other countrieshave recently initiated similar limitations of scrap exports. In2001, Russia introduceda duty of 15 percent or at least 15 EUROit on scrap exports, while South Koreahas started to apply its licensing. Since October 2003, Serbiaintroduced a duty on scrap exports in the amount of 15 percent of its customs price. Protectivemeasures have also been established by Venezuela. 6oIntroducedrestrictionsprovedto be quite efficient inlimiting exports of scrapmetals: from the averageo f4.8 million tons in 1999-2002to 3.8 million tons in2002 and 1.9million tons in2003. 107 4.37 Unfortunately, some in Ukraine have interpreted the temporary positive effects from the use o f export restrictions to justify a broad adjustment in policies aimed at expansion o f govemment regulation o f the industry and primarily at maintaining low input prices. Such perceptions indeed4 " e - + m p m -directly affect exporters and entail further distortion of market signals. These recent measures include, inter alia, increased rail.freightage rates for export of metallurgic raw materials and additional complications o f customs clearance procedures for exports. 4.38 Moreover, new shadow mechanisms have emerged to bypass the administrative restrictions on exports. Inparticular, the countries that have free trade agreements with Ukraine remain free o f export duty on scrap, and they are being used by exporters as duty-free transit channels. As reported by the Ukrainian media, in 2003 scrap exports to Georgia and Moldova were estimated to exceed 30 percent o fthe total Ukrainian exports o f scrap metal. 4.39 International experience suggests that export tariff restrictions may be used only as short- term extraordinary measures. Inthe long run, they will entail serious adverse effects o frestrained competition and distortion of market signals that are the basis o f strategic decision-making inthe sector. Strategically, Ukraine has no other choice than to bring its national system of metallurgy regulation and support in line with the generally recognized WTO and EU standards. In particular, despite the fact that export taxes are not illegal under the WTO, the reality of accession process would require that the Ukrainian government makes a commitment to change this policy. A practical solution would bethe development o fa schedule for the gradual (e.g., for the next 5-6 years) phasing-out o f scrap export duties as part of the government strategy o f WTO accession. Moreover, such gradual phasing out should be supplemented with a considerable (up to 50 percent) one-time cut ofthe duties in2004-05. Economic Experiment of 1999-2002 4.40 The Ukrainian government never provided direct budgetary support to steel producers like it did, for example, to the coal sector and agriculture. Inthe early 90s the GOUprovided the metallurgy sector with some support that was mostly on a case-by-case basis and was insufficiently transparent (Le., largely kept outside of the scope o f annual budgets), such as writing-off tax arrears, granting government guarantees to back commercial loans, etc. The economic experiment undertakenbetween July 1, 1999 and January 1,2002 that involved almost all the large metallurgical enterprises (overall 73 enterprises participated in the experiment) has been the only example so far o f government support to the sector, which was more o f a programmatic nature. The experiment was aimed at the financial rehabilitation o f metallurgic enterprises and the consequent increase o f exports, investments and demand inrelated industries. The analysis that pre-dated the experiment indicated that the lack o f working capital and accumulationo f arrears had completely blocked enterprise development. 4.41 Despite some improvements, the experiment as a program o f massive govemment subsidies remained far from being fully transparent. In a situation of considerable state budget deficit, the GOU decided to use writing-off and restructuring of tax arrears, and introduction o f tax and other payment benefits as its primary financial rehabilitation instruments.Moreover, the Government has never undertakena comprehensive cost-benefit analysis o f the program. Thus, 108 the real contribution o f the experiment to the eventual recovery o f the sector is not easy to measure accurately. n - t h e - ~ ~j ~ . .- ~ ~ h3 ~ kS ~~ -t.-t.L A A? um and tax benefits) provided to ore mining and steelmaking enterprises were estimated to amount to UAH 2.7 billion (US$514 million). This i s equivalent to an annual subsidy for a three-year period in the amount o f nearly 2.9 percent o f annual sales in the sector. In addition, during the same period the same enterprises were granted a tax deferral worth about UAH 2 billion (US$450 million). 4.43 During the short period o f time, the rendered financial support along with the contribution from other essential factors has drastically improved the sector's financial position as follows: 0 Profitability has improved markedly. In 2003, the average profitability rate in the sector reached 13.5 percent (due to both increased efficiency and pricing factors), while investment rates increased considerablyprimarily because o f reinvestedprofits. 0 Shortage o f working capital has disappeared enabling a decline in the share o f barter in total sales from 38 to 3 percent. 0 Enterprises have become reliable taxpayers. After the experiment they have not been accumulating any more arrears due either to the budget or to energy and input suppliers. By experts' estimates, in 2002 the sector paid the budget 3.5 times more in real terms than in 1999.6' 0 The drastic expansion ofmetallurgic exports has become a primary source o fmonetary and macroeconomic stabilization inthe country. 4.44 The above results look even more significant considering the crisis situation on the global steel market during the same period o f 1999-2001. It i s particularly important to highlight the psychological aspect o f the experiment. Having de facto declared a tax amnesty, the GOU has reduced the enterprises' risks o f potential bankruptcy and tax fines. This improved expectations for both companies' owners and managers that facilitated investments and more broadly implementation o f long-term development projects, andhas also reduced capital flight. 4.45 However, the successes in the sector could not be attributed solely to the considerable financial support provided by the government. The situation improved also because the support provided coincided with other essential factors, such as: 0 Ukraine's general economic recovery after 2000 that was due to genuine fiscal stabilization and improvedpayment discipline; 0 economic growth inRussia and consequent surge o f demand inthe Russianmarket; and 0 effects o fmostly completed privatization, and consolidation o f control by new owners. It is worth notingthat tax compliance inUkraine improved considerably across the board starting from 2002, reflecting major efforts of the Govemment to strengthen financial discipline inthe economy. 109 4.46 Therefore, the GOU should be careful not to overestimate the experiment's role. Moreover, it i s worth noting that under present conditions of a rapidly growing economy, repeating a similar program o f large-scale subsidization in other sectors would be even less jttstifi-idw. 4.47 The experiment was terminated in 2002, in part, because o f the increased number o f antidumping investigations triggered by experiment-induced subsidies, the steel operators requested the Government to stop the program. Since then the sector's taxation practice has been inlinewiththe general requirements ofUkraine's tax legislation. Energy subsidies to metallurgy 4.48 Government tariff policy in the energy sector currently represents a major instrument o f implicit government support to the real sector inUkraine. The metallurgy (both ferrous and non- ferrous) sector i s a major recipient of implicit energy subsidies inthe non-residential sector. The metallurgy sector received energy subsidies worth about US$0.3 billion or 0.7 percent o f GDP in 2002. The metallurgy sector accounted for about half o f all implicit energy subsidies to the Ukrainian industry. Most energy subsidies were provided in the form o f low electricity tariff while, according to World Bank's estimates, full economic costs o f producing and delivering electricity to large industrial consumers in Ukraine amount to 3.0 c per kWt-hour, the 2002 average tariff (net o f VAT) inmetallurgy was only 2.3 c. The 2002 energy subsidies amounted to about 4.7 percent o f Ukraine's officially reported metallurgical (ferrous and non-ferrous) exports o fUS$5.9 billion. 4.49 It is worth noting that we do not have data to estimate allocation o f the total energy subsidy `among ferrous and non-ferrous metallurgy sub-sectors. While the ferrous metallurgy sector (which i s the subject o f the analysis in this chapter) shows larger output and sales, it is likely that it receives a somewhat smaller portion of total energy subsidies because the non- ferrous metallurgy sector i s much more energy intensive. Still, it may be proper to assume that the implicit energy subsidies to ferrous metallurgy could reach 0.5 percent o f GDP a year inthe early 2000s. 4.50 At the same time, it has to be mentioned that the 2002 situation shows a clear decline in the level o f energy subsidization. In 1999, energy subsidies to the sector amounted to an estimated 1.4 percent of GDP. Most o f this decline derived from the upward adjustment in the power tariff (from less than 1.6 c in 1999). Gas subsidies to metallurgy have been insignificant. The average gas tariff for metallurgy exceeds 90 percent o f the respective LRMC. However, the sector received some additional energy subsidies through depressed coal prices. However, we do not have data to estimate the amount o f the latter, so coal subsidies are not reflected inthe above aggregates. The issue of VATrefund to steel exporters 4.51 The problem o f timely and accurate VAT refund to exporters has been a major fiscal and governance issue inUkraine for several years (World Bank, 2004). Inany event, the matter goes much beyond the problems of steel exports or for that matter o f the trade policy. However, it i s worth noting that steel producers, as most other leading country's exporters, are seriously 110 affectedby delays inVAT refund. It i s estimated that at the end o f 2003 the total amount o f VAT refund due to steel exporters exceeded US$200 million. While this amount represents a considerable and unnecessary tax on the industry, there i s no sign that these delays so far have k e " H o r the sector's m p m m s s ; - m .v . e v L i c it ~ ~ steel exporters (through their affiliated traders) do participate invarious schemes to inflate values of VAT refunds. This known fraud with the V A T refund does not make a reform o f VAT administration less urgent: the government has to upgrade the system, based on the best international practice, to ensure its transparency, equity and protection from external manipulations. As surveys o f Ukrainian exporters confirm, this is an important measure toward a general improvement in the economy-wide business environment. Given that the current arrangements are especially harmful to small and new exporters, which inthe existingsystem do not have sufficient leverage to lobby for VAT refund, sorting out the VAT administration has to be a priority for any future export diversification program the GOUmay want to pursue. D. COMPARATIVEADVANTAGES OFUKRAINIAN FERROUSMETALLURGY 4.52 The main competitive advantage of Ukrainian metallurgy is due to traditionally low domestic prices on sectoral inputs and energy resources. Until now, it has supported a lower level o f unitproduction costs comparing to OECD countries even considering the higher material (by 5-7 percent) and energy (by 25-30 percent) intensity of production in Ukraine. Based on 2003 data, the estimated comparative cost advantages with respect to four principal inputs (coke, iron ore, natural gas and electricity) showed that even accounting for relative over-consumption o f these resources, total unit costs in Ukraine made up only 87.4 percent o f similar costs at average world market prices. 4.53 Extra sources of comparative advantages o f Ukraine's metallurgy relate to the following factors: a lower labor costs62; b lowinvestment/capitalexpenses; and c low costs related to environmental protection. 4.54 Main differences in the aggregated structure o f costs in ferrous metallurgies o f Ukraine and Germany are shown inTable 4.4. Table 4.4: Comparativecost structure inferrous metallurgiesof Ukraine and Germany in2001(in per cent) Ukraine Germany Material costs 78.5 59.8 Depreciation charges 4.0 10.0 Payroll costs 6.9 25.2 Spending on social assets and services 2.5 Other operational costs 8.1 5.0 ~ In2003, the monthly average wage inUkraine's ferrous metallurgy was about US$200while it was nearlyUS$500inRussia, Poland and Brazil(source: www.infmetal.org). 111 Source: `National Metallurgy of Russia' magazine, September-October 2003, p.10. 4.55 It should be noted that the abovementioned estimates of the sector's comparative a b n t a g e s take full account o f the s~ . . . . on m- . . in 2003 fueled by the growth of world market prices. Within a year a considerable conversion o f global and domestic input prices has taken place and aggregate production costs per one ton of rolled steel increased in Ukraine by 17.3 percent. However, this did not worsen the sector's financial position since the internal and export prices were growing faster than costs. Compared to 2002, the sector's profitability rate rose from 7.5 to 13.5 percent in2003. 4.56 Pricing in the coal industry has been changing the most recently. Ukraine's coal mines traditionally enjoy an explicit government subsidy in an amount o f more than US$0.5 billion a year. These subsidies for a long time have been helping to depress domestic coal prices in Ukraine thus allowing for reduced metal production costs. The situation has started changing, particularly with regard to coking coal. First, the bulk o f coal industry subsidies by now are allocated to the mines that extract steam rather than coking coal: in2003, coking coal producers received less than 10percent of total subsidies to the industry. Second, exports o f Ukrainian coke increased drastically (5.4 times during 1999-2003). That has implied coke shortages on the internal market, expansion o f its imports and a consequent alignment o f national and global coke prices. In2003, the internal coke prices grew by nearly 60 percent. 4.57 The analysis shows that ingeneral inthe next 5-7 years the Ukrainian cast iron and steel sector will manage to retain its main competitive advantages notwithstanding cyclical price fluctuations on the global market. The cost advantages available to the sector at the moment make it relatively resistant to potential external shocks and challenges. The major factors o f retainingthe sector's competitiveness inthe middlerunare the following: 0 The existence o f largevertically-integrated companies that will retain control over the sources o f relatively cheap inputs (including ironore and ferroalloys). 0 The existence o f a developed raw material base, inherited from the Soviet era, which in the medium term would not require significant extra investments and would ensure low transportation costs, makingthe sector less vulnerable to the situation inglobal markets. 0 Maintenance of low energy tariffs (compared to the EU) primarily due to the secured access to Russian and Turkmenistan gas that i s suppliedunder long-term contracts. 0 Lower investmentand payroll costs. 0 Higherprofitability rate for major steelproducers that providesthemwith anextrasafety margin. 4.58 Extra (latent) financial reserves existing inthe sector are reflected inthe highmargins o f its export operations. This margin also includes a part o f revenues that producers prefer to leave outside the country. The comparison o f stated export prices and global sale prices shows that the export sale margin currently reaches 20-25 percent o fthe registered export price. 4.59 Table 4.5 shows the principal indicators o f the sector's financial performance that have grounded the conclusion on its resistance to potential external shocks. 112 Table 4.5: Financial indicators of Ukraine's ferrous metallurgy (calculated per 1ton of rolled steel) 1999 2000 2001 2002 2003 Production costs, US$/t 169.6 150.1 160.9 168.9 202.2 Revenues from sales, US$/t 174.1 176.0 175.2 181.5 229.5 Pre-tax profits, US$/t 4.5 25.9 14.3 12.6 27.3 Profitability, percent 2.7 17.3 8.9 7.5 13.5 Internal wholesale prices, net 261.2 239.3 226.9 215.3 258.8 ofVAT, US$/t Export prices, US$/t 159.7 179.8 175.5 176.7 224.8 World market prices*, in Expert estimate 124-165 percent to export prices Export sale margin*, in Expert estimate 20-25 percent to export price * Relates to the prices o fprincipal commodity groups ofUkrainian steel exports. Source: DECs estimates on the data from the Ministy of Industrial Policy and State Statistical Agency, and www.meus,co.uk,www.metaltorg.ru. E. MEDIUM-TERM PROSPECTS 4.60 Based on intemational projections, Ukrainian experts estimate that external conditions for the development o f ferrous metallurgy in the middle run will remain favorable. The prices for Ukrainian rolled steel exports are expected to remain at the same high levels throughout the whole period. While a certain drop inglobal steel prices seems very possible after 2007, average ferrous metalprices for the period to 2010 are not expected to be lower than their 2003 4.61 In such conditions, the Ukrainian cast iron and steel sector will most likely follow the inertia part based on its current development model. Production capacity will be expanded by only about 5 percent through reconstruction and partial upgrading. Further improvements in capacity utilization will remain the major source o f output growth. 4.62 Rolled steel output is expected to grow by 11.5 percent (Table 4.6) and steel output by 10.5 percent (Table 4.7). The growth will be driven primarily by increased internal demand. Export volume will remain practically intact. However, there are expectations o f significant shifts in the structure of exports toward products with a higher degree o f processing that would allow for raising unit export proceeds by 25-30 percent. 63 Iti s worth notingthat the recent forecast by the EconomistIntelligenceUnit i s much more conservative. It suggeststhat global metalpriceswould start to fall slowly by 2005. An aggregatedrop inprices during 2005-08is estimatedat 25 percent, Le., prices will actuallycome back to the 2003 level. However, given that 2003 priceswere also significantly higher than the average steel prices for the last 10 years, this scenario should not generate major problems for Ukrainian producers either (Source: www.eiu.com). 113 4.63 By the end o f the period the demand on the global market is expected to follow the downward trend, and that will be the time for the Ukrainian ferrous metallurgy sector to start a gradual closing down o f its depreciated production units. By that time Ukrainian operators should be-able t o ~ ~ ~ f ~ ~they-aret likely~to accumulate - ~ ~ ~ the required investment resources to finance the sector-wide restructuring effort that would be needed. Table4.6: Ukraine's projectedoutput, domestic consumption, exports andimportsof rolledsteelin2004-10, milliontons 2003 2004 2005 2010 Growth, 2003- forecast forecast forecast 2010, percent output 31.4 33.6 34.0 35.0 11.5 Exports, 24.8 26.45 26.5 24.5 -1.2 Including: Inputs and Semi- 10.18 11.0 10.7 7.5 -26.5 finished goods flat rolled steel 8.02 8.35 8.5 9.0 12.5 assorted rolled steel 6.34 7.10 7.3 8.0 26.0 Imports 0.80 0.85 0.9 1.o 25.0 Domestic consumption 7.40 8.00 8.4 11.5 49.0 Source: Estimates by the Ukrainian Economical Research and European Integration Policy Institute under the Ministry of Economy. 4.64 Projected growth is expected to entail a gradual employment reduction (about 10 percent by2010) and a labor productivity growth inthe sector (Table 4.7). Inthe mediumrun, labor cuts in the metallurgy sector will not be concentrated and remain mostly local phenomena. The current investment policy of Ukraine's metallurgical enterprises does not imply any considerable changes inlabor productivity and, as a rule, it does not entail any significant employment cuts in the sector. The expected capacity reduction will primarily concern individual units within the larger combines, but will not affect entire companies. The metallurgy sector also accounts for a relatively large share of pensioners in the total number o f employed. This provides extra room for future smooth restructuring and employment adjustments. 4.65 However, the issue o f labor force releases in the metallurgy sector could become sharper in the long run, considering the expected cyclical recession on the global steel market and the ultimate need for a deep restructuring inthe sector. Table 4.7: Medium-termprojectionsfor output and employment inUkraine'sferrous metallurgysector 1990 1995 2000 2001 2002 2003 2005 2010 forecast forecast Steel output, million tons 52.6 22.3 31.8 33.5 34.5 37.5 40.5 41.0 Growth, percent to previous year -57.6 142.6 105.3 103.0 108.7 108.0 101.2 Numberof employed, thousand 206.6 193.4 216.2 216.1 212.0 208.0 198.0 186 Growth, percent to previous year -6.4 11.8 -0.1 -1.9 -1.9 -4.8 -6.1 Labor productivity, tons per person 255 115 147 155 163 180 205 220 Growth, percent to previous year -54.9 127.8 105.4 105.2 110.4 113.9 107.3 Source: CEDs estimates on the basis of datafrom the Ukrainian Annual Statistical Reports. 114 F. CONCLUSIONS 4.66 Ukraine's cast iron and steel sector in the middle run will follow the existing development model that i s primarily based on outdated technologies and technical assets. This model will be efficient as long as the level o f global steel prices i s high, allowing Ukraine to retain its advantages as a lower-cost supplier o f low-end products. However, high material and energy intensity of metallurgical products and low labor productivity may threaten the sector's competitiveness inthe future. 4.67 Inthe medium term, the ferrous metal sector would not be able to remain a driver for further expansion inoverall Ukrainian exports. For the period to 2010 the sector is expected to maintain the current volume o f steel exports, while gradually increasing the quality o f steel products and unit value of export proceeds. Despite the sector maintaining its leading position in Ukraine's foreign trade, its share intotal exports i s expected to go down. 4.68 The sector's development within the existing model will be impossible by the end o f the decade. Ukraine will face the need to pick a new model for the development o f its steel sector. In that period the government and the sector's operators will face serious problems regarding the need to attract large-scale investments to implement in-depth sector-wide restructuring and settle environmental and social problems inthe metallurgical regions. 4.69 Ukraine's cast iron and steel sector i s highly export oriented and its development is strongly influenced by global market trends. Therefore, global integration processes, first o f all Ukraine's entry inWTO, will provide the sector with significant potentialbenefits, such as: 0 reduction o f limitations on the access o f Ukraine's metallurgy products to principal foreign markets; 0 better opportunities for protecting the interests o f Ukrainian producers under WTO procedures; 0 improved possibilities for attracting foreign investments; and 0 improvements in the domestic business environment due to stabilization and better transparency o fthe legal and regulation framework. 4.70 Trade liberalization will not threaten Ukrainian producers' operation on the national market as far as they preserve significant cost advantages. At the same time, Ukraine's entry into the WTO will require the limitation and further abolition o f specific arrangements that benefit domestic producers, as well as the leveling o f competition conditions for national enterprises. 4.71 Today's policy of government support for individual industries and enterprises should be replaced by a new industrial policy that would focus on creating incentives for private investments in an environment o f equal conditions for all market participants, as well as on creating real sector support mechanisms that would meet WTO requirements. In particular, a new governmental policy inthe sector should be based on the following principles: 0 transparent and maximum competitive privatization, including inthe coal industry; 115 0 withdrawal from administrative intervention in market mechanisms (administrative limitation o f exports, raw materialpricing and transportation tariffs); 0 tariff policy reforms in the energy industry and a gradual transfer to tariffs that are based ~ ~~~ upon estimates o f full costs (LTMC); 0 concentration o f budgetary support to the sector for programs that tackle elimination o f outdated capacities, implementation o f social and environmental measures in vulnerable regions, and financing o f research infrastructureprojects. 4.72 The future competitiveness of Ukrainian metallurgical companies will largely depend upon the rate of restructuring of the existing major operators inthe sector, including changes in their corporate management mechanisms. On the one hand, the existing sectoral structure with a, limited number o f dominant vertically-integrated corporations is currently a source o f considerable cost advantages for the sector and provides Ukraine with significant economic and fiscal benefits. On the other hand, it may become a source o f non-competitive tendencies and a barrier for sectoral restructuring. The situation has to be monitored closely. As a first step, existing Ukrainian legislation should be amended to take into account the realities o f operating large private corporations. At the moment, Ukrainian FIGs remain mostly informal structures, and this makes it complicated to monitor their operations andbehavioralpattems. The legislation should allow for legalization o f FIGs, which should include introduction o f consolidated reporting and taxation arrangements. 116 CHAPTER 5. UKRAINE'SACCESSIONTO THE WTO: COMPLETINGTHE NEGOTIATIONSAND MAXIMIZING THE BENEFITSOFMEMBERSHIP 5.1 Ukraine has been seeking membership in the World Trade Organization (WTO) for over a decade and now appears to be reaching the end o f accession negotiations. This chapter takes stock o f reforms Ukraine has made and identifies the remaining obstacles to accession. It summarizes findings from several recent specialized reports produced by intemational consultants as part o f various ongoing donor assistance programs. It also suggests ways that Ukraine can meet the challenges posed by implementation o f WTO agreements so as to maximize the benefits o f its membership. 5.2 The main messagespresentedinthis chapter are the following:: 0 Ukraine has introduced a considerable number of new laws that move the country closer to compliance with WTO norms. However, to complete accession negotiations, Ukraine will needto concentrate first on completingremaining legal reforms. 0 Passing the remaining legislation will require the direct involvement of the top political leadership o f the country. Mobilizing political constituencies behind these legal reforms and providing stronger internal support for the negotiating team are the key ingredientsto completing accession negotiations; this is not a problem o f inadequate technical assistance. 0 Negotiating remaining bilateral market access protocols i s a lower priority task at this stage: tariff concessions to trade partners do not compensate for a weak domestic institutional environment. 0 Ukraine will benefit from WTO agreements on intellectual property rights, standards, and customs in the long run only if the country accelerates institutional reforms; donor assistance will be critical to support these reforms over time. 5.3 The first half of the chapter looks at the accession negotiations, reviewing what has been done to date and what remains to be done. WTO membership is not an end in itself, so the second part addresses institutional reforms needed for Ukraine to benefit economically from WTO membership. 117 A. WTO ACCESSIONNEGOTIATIONS WTO Accession Requirements ~~ 5.4 What must a country do to join the WTO? The formal requirement i s that the candidate country demonstrates that its policies conform to the General Agreement on Tariffs and Trade (GATT) and other WTO agreements. First, the candidate country submits a written application and a complete description o f the all policies that affect international economic transactions (the Memorandum o f the Foreign Trade Regime). The WTO convenes a working party (made up o f all interested WTO members) to consider a new application. This working party then negotiates the terms and conditions o f membership with the candidate country; these become the protocol o f accession. When the working party is satisfied, it recommends the application to the WTO General Council (the collection o f all WTO members). Once approved, the applicant must ratify the protocol o f accession within three months. 5.5 The salient feature is that new members negotiate the conditions of their member~hip.~~ There are no WTO rules specifying universal, objective membership criteria such as, for example, maximum tariff levels or maximum amounts o f domestic support to agriculture. Each new member's protocol o f accession is different. Nevertheless, some trends in membership requirements have emerged duringthe WTO's first decade. Ingeneral, new WTO members have agreed to: bindall tariff lines at levels close to currently applied rates; bind at zero (i.e., permanently eliminate) all "other duties and charges"-taxes, surcharges, fees, and the like imposed on imports; 0 bindat zero all export taxes and any export subsidies onmanufacturedgoods; 0 commit to keeping domestic support to agriculture at or below de minimis levels;65 0 make binding commitments to provide non-discriminatory access and national treatment inmost major service sectors; and 0 forego transitional periods for implementing WTO regulatory agreements (e.g., TRIPS) that were givento developing and least developed countries inthe Uruguay Round. 5.6 To some extent, these trends reflect an escalation in the demands that existing WTO members place on candidate countries. Some complain that new members must commit to greater liberalization and internal reforms than existing members agreed to undertake in past negotiating rounds. For example, most candidate countries are pressured to join the Government Procurement Agreement, a code that i s optional for current members.66 WTO members have 64Moreover, only the candidate country makes concessions during accession negotiations. 65The de minimis is a threshold used when calculating levels o f trade distorting subsidies, which varies by country. In general, developed countries are to keep the total value o f trade-distorting domestic support below five percent o f the value of agricultural output, while developing countries commit to a 10percent de minimis. Ukraine i s negotiating accession as a developed country. 66Signatories to the Government Procurement Agreement (GPA) agree to certain disciplines designed to increase transparency of the process and to expand market access to other signatories (countries that do not sign the GPA do not gain more access to tenders in countries that have signed). Signatories include the EU (all 25 members) and most other OECD countries. Several CIS and Eastern European countries are negotiating accession (Moldova, Bulgaria, Georgia, Kyrgyzstan, and Albania) or are observers to the GPA (Croatia and Armenia), suggesting a willingness to join in the future. The other major countries who are observers or are negotiating accession include China, Taiwan, and Turkey. 118 agreed to moderate their demands with respect to least developed country (LDC) candidates. This does not apply to Ukraine, however. 5.7 There are two tracks to the WTO negotiations: (i)legal reforms to ensure conformity with WTO rules, which are negotiated multilaterally through the working party process; and (ii) market access commitments, which take place bilaterally. This section reviews progress made by Ukraine on both fronts. 5.8 Ukraine submitted its application to join the GATT in 1993 and its memorandum on its foreign trade regime in 1994. Progress stalled in 1998-99 after several rounds o f negotiations. The past three years have seen a renewed commitment by Ukraine to complete the negotiations and reforms necessary for WTO accession. Negotiators have met regularly with the working partyandthe pace o f signingbilateral market accessprotocols pickedupnoticeably in2003. 5.9 A draft report o f the working party was issued in September 2004.67Once completed, the working party report will contain information about policies Ukraine has undertaken or promised to implement during the course o f negotiations. The working party held its thirteenth meetinginSeptember 2004. The next is tentatively scheduled for the first quarter of2005. Market Access 5.10 Ukraine set import tariff rates fairly low after independence and average rates have remainedmore or less at the same level duringthe course o f negotiations (see Chapter 2). During the course o f accession negotiations Ukraine also eliminated a number o f trade barriers, including: 0 all quantitative import restrictions on trade in goods except as regards goods affected by safeguard and anti-dumping measures, 0 discriminatory excise taxes on manyalcoholic beverages andpetroleum products, and 0 local content requirements inauto manufacturing. 5.11 The Government has gradually increased protection of certain agricultural products during the course o f negotiations, however, and it also introduced various export restrictions. These measures have become a source o f tension inthe negotiations, as discussed below. Legal Reforms 5.12 Duringthe past decade Ukraine has introduced many changes to bring its trade regime into conformity with WTO norms and to accommodate requests o f its WTO working party. Ukraine's WTO filings list over 200 existing and draft laws relevant to WTO accession. Below are the highlightso freforms made inseveral key areas. `'WTO, "Draft Report of the Working Party on the Accession of Ukraine to the World Trade Organization," report number WTIACCiSPECIUKRlrev.1, Geneva: WTO, September 2, 2004. An earlier draft of this appears on the MEEI's website at http://www.me.gov.udgetfile.php?name=bin1267-1 .zip. 119 5.13 Customs. The customs code was recently prepared to bringUkraine incompliance with the WTO Agreement on Customs Valuation, the TRIPS Agreement, and GATT norms on fees. This new customs code went into effect on January 1, 2004.68Among other things, it eliminates the useof m i n i m u n l u e s , -estabkishcs-feesi"bon the cost o f rendering services; and empowers customs officials to enforce intellectual property rights laws. The Government has been drafting additional amendments to the Customs Code to address several remaining issues, such as, for instance, enforcement o f rules o f origin. 5.14 Intellectual Property Rights. Ukraine has acceded to major intemational intellectual property rights conventions. Between 1995 and 2003, Ukraine had drafted or adopted 37 laws to establish rights for specific forms o f intellectual property (e.g., plant varieties, integrated circuit designs, and utility models).69 The Government also revised the basic legal codes (civil code, criminal code, customs code, and civil and criminal procedures codes) to enforce intellectual property rights. Ukrainian negotiators report that 100 normative by-laws were adopted to regulate intellectual property rights protection. Finally, the Government has introduced policies that go beyond the literal requirements o f TRIPS to satisfy concems raised by the working party, including licensing, and other controls on trade inoptical discs andtheir components. 5.15 Standards. Since 1995. Ukraine has drafted or passed about two dozen laws related to the WTO Agreements on Technical Barriers to Trade (TBT) and on Sanitary and Phytosanitary Measures (SPS). Some laws reformed the institutional structure o f the standards regime.70The Law on Accreditation, for example, created an accreditationbody that operates independently o f conformity assessment and standardization organizations in line with intemational norms. In addition to administrative reorganization, Ukraine has begun incorporating international (e.g., ISO) and Westem European standards into Ukrainian standards. The Government is currently working with the United States Agency for International Development (USAID) to review all regulations coveredby the SPS Agreement. As o f October 2004, new SPS framework laws are in draft form. The European Union's TACIS program has been working with individual testing facilities to help them gain recognition from European accreditors. 5.16 Services. Ukraine passed framework laws governing regulation of key service sectors, such as banking, insurance, auditing, and legal services. In 2001, Ukraine passed laws eliminating the 49 percent cap on foreign ownership in various service sectors (e.g., insurance, telecommunications). Draft laws were prepared to amend the Law on Banks and Banking Activity to permit the establishment o f foreign banks' branches in Ukraine and disallow state ownership of commercial banks. Other draft laws are pending in the Rada that would eliminate citizenship requirementsinauditing and legal services. MarketAccess Offers 5.17 Ukraine has signed bilateral market access protocols with 25 WTO members, as of September 2004. These are listed in Table 5.1 below. Negotiations continue with Australia, Provisionson fees take effect in January2005. 69 Estimatedbased on informationreportedby Ukraine to the WTO, "Laws and Draft Laws Relevant to Ukraine's Accession to the WTO," Report number WTIACC/UKlUll l/Add. lRev. 1, Geneva:WTO, August 12,2003. 'OThe main examples include the Laws on Accreditation, Standardization, and Conformity Assessment. These were passed as one step towardharmonizingUkraine's lawswith those ofthe EuropeanUnion. 120 China, Dominican Republic, Taiwan, Honduras, Iceland, Japan, Turkey, Moldova, Panama, Norway, Kyrgyz Republic, Ecuador, Columbia, and the United States. The table shows that the pace o fnegotiations picked up sharply in2003. ~~ Table 5.1: Bilateral Market Access Protocols Signed Lithuania Malaysia Paraguay Argentina Switzerland 2003 Brazil Bulgaria Cuba Czech Republic Estonia European Union Hungary Israel Poland Slovak Republic Thailand 2002 Canada Georgia India Latvia Slovenia SouthKorea Before 2002 Mexico New Zealand Uruguav Source: Media reports through October 15, 2004. 5.18 Ukraine submitteda consolidated offer on tariffs in 1999, which it revised in2001 and 2002. These offers incorporate on an MFN basis all commitments made during the bilateral negotiations. The tariff offer promises significant liberalization inad valorem tariffs. Information provided by the Ministry o f Economy and European Integration (MEEI) indicates that the average bound rates will fall from an initial level o f 9.04 percent to 6.28 percent over an eight- year transition period. The maximumbound rate will be 10percent for most manufactured goods and 20 percent for most agricultural products. Tariffs will be bound at ceiling levels close to the currently applied MFNrates in most chapters of the tariff code: 57 out o f 96 total chapters will have average boundrates below current average applied rates at the beginning o f the eight-year transition period; 74 chapters will have average bound rates below current average applied rates at the end o f the transition period. Ten chapters will be bound at zero. The tariff on sugar, the subject o f much discussion during working party meetings, will be bound at a ceiling o f 50 percent.71Ukraine's tariff offer also includesjoining 16 o f the 19 sectoral initiatives, including in information technology, steel, textile and clothing, chemical harmonization, and non-ferrous metals. 5.19 Liberalization will also come through the conversion o f specific tariffs on many agricultural products to ad valorem duties. Duty rates will then be reduced substantially. Table 5.2 shows the plannedreductions in tariff for certain agricultural products, after converting the current specific tariffs to their ad valorem equivalents. WTO, "Review ofthe Latest Achievements inBilateral Negotiationson Market Access for Goodsand Services and Enactment of Legislation," Reportnumber WTIACCIUKWI09, Geneva: WTO, April 26,2002. 121 Table 5.2: PlannedReductionsinAgriculture Tariffs Commodity PercentageTariff ~~~~~~~ -ion- ~ Sunflower seed 90 Sunflower oil 80 Potatoes 67 Sugar 50 Meat 50 Butter 50 Source: Reported by Ukrainian negotiators in WTO report number WT/ACC/UWIIO/Add. I,October 24, 2002. 5.20 WTO members reportedly are quite pleased with Ukraine's services offer. Ukraine submitted its first services offer in February 1997. It has revised this offer several times, most recently in April 2004. Bilateral negotiations on services have been completed with most members. During the course o f negotiations, Ukraine has increased the breadth and depth o f its services offer, which now makes commitments in 139 out o f 155 services sub-sectors. It includes full market access commitments inkey sectors such as banking and telecommunications. Many limits on market access listed inthe initial services offer have subsequently been eliminated. For example, the 1997 offer restricted foreign ownership o f service providers operating in many communications, insurance, and transport sub-sectors to 49 percent; in the current offer, a foreign equity cap exists only innews services. 3. REMAINING ROADBLOCKSACCESSION TO 5.21 Ukraine has worked quite actively in its pursuit o f WTO membership during the past few years, most visibly in the negotiation o f bilateral market access protocols. Yet this level o f activity has not been matched by concrete progress. A final decision on accession appears to be still some distance away. Thus, it should be admitted that the accession process cannot be completed in 2004 (as was envisioned by the earlier government decision). The next section focuses on steps Ukraine may need to take to reach the end o f negotiations. 5.22 Discussions with those close to negotiations suggest that WTO members are generally satisfied with Ukraine's market access offers, although a few trade policy measures cause frictions in the negotiations. However, the main issues still outstanding in the negotiations lie elsewhere. WTO members are primarily concerned about more general problems with economic conditions in Ukraine, e.g., high transaction costs caused by weak legal institutions, vested interests, corruption, frequent changes in government policies, lack o f transparency, etc. These do not result from discriminatory trade practices and therefore violate no WTO rules. They do, however, raise the costs for those wanting to export to or invest inUkraine, making them a trade policy issue for WTO member countries. More importantly for the purposes o f this study, they create unnecessary barriers to Ukraine's integration into the world economy. Finally, some complain about what they perceive as a lack o f clarity inUkraine's trade policy. This lessens the credibility o f the Government's commitment to implement promises made during accession negotiations. 122 Market Access Barriers 5.23 Ukraine has reportedly addressed most members' concems about tariffs and other l7aTkrS. !ikt-sper- of tztiiff r- ' 7 " n accepted by other WTO members (OECD, 2003). Nevertheless, a few measures continue to attract controversy and pose obstacles to completing accession negotiations. Chief among these are interventions in sugar trade and export duties on metal scrap, hides, and certain agricultural products. 5.24 Sugar. The Ukrainian government uses several measures to intervene in sugar markets:72 0 The 1999 Law on Regulation o f Sugar Production and Sale allows imports o f raw sugar' only on the condition that all output o f refined sugar produced from this imported inputs i s subsequently exported. 0 A tariff rate quota (TRQ) is imposed on sugar imports: the 125,000 tons o f within-quota imports face a relatively low 30/ton duty and a high 300/ton duty is levied on any imports in excess o f the quota.73Licenses to import under this quota were auctioned o f f for 60/t0n.~~ At current world spot prices, the ad valorem equivalent o f the within-quota duty plus license is 38 percent and the above-quota duty is equivalent to a 127percent ad valorem tariff.75 0 The Government sets minimumprocurementprices on sugar beets and sugar refined from beets indomestic markets.76InWTO filings the Government estimated that price controls on sugar beets represented a subsidy (using the WTO's methodology) that averaged 59 percent o f the total value o fbeet productionduring2000-02.77 5.25 WTO members contest these measures, complaining that they violate rules on subsidies, local content requirements, and national treatment. The government acknowledges the requirementto export all sugar refined from imported cane indirectly violates the Agreement on Agriculture's prohibition on the use o f non-tariff measures.78Ukraine's negotiators dispute that other policies violate WTO rules, however, and they defend them based on the need to provide 72 Suchpoliciesare not unique to Ukraine, of course. 73 The within-quota quantity of 125,000 tons represents a small fraction of total domestic demand, which i s estimated at 1.8 million tons (Dow Jones, October 12, 2004). The GOU recently rejected a proposalto relax the quota during the coming year (Ukrainian News, September 15,2004). 74 ReutersSeptember 8, 2004. 75 The Intemational Sugar Organizationreports that the closing price of sugar was 8.8 centdpound on October 13, 2004. (Dow Jones Commodity Wire, October 14, 2004). At a dollarlEuro exchangerate o f 0.82, this translatesinto aprice of236 per metric ton. Sugar prices are extremelyvolatile, however, and the economic impact of a specific duty varies with the price. InMay 2004 the world price was 6 cents/pound (Intemational Sugar Organization, "Quarterly Market Outlook," September 2004). The ad valorem equivalent of the quota license and duty on within-quota imports is 56 percent when measuredat this world price, and the above-quotaduty is equivalentto an ad valoremtariff rateo f 186percent. 76 According to news reports, the minimum price for beets is currently US$31/ton (Reuters, October 14, 2004), and the 445/tonat current exchangerates -- well above the world price (DowJones Commodity Wire, October 12,2004). Government has been buying and selling sugar to stabilize the domestic market price at UAH 2,37O/ton, which is around 77 WTO, "Accession of Ukraine: Checklist of Issues, Addendum," report number WTIACCIUKWI 1OiAdd.2, WTO: Geneva, June 20,2003, p. 167. 78 WTO, "Accession of Ukraine: Additional Questions and Replies," Report number WT/ACC/UKUll4, Geneva: WTO, March 17, 2004. 123 economic support for the domestic sugar industry. Whether or not a given policy i s WTO- compliant ultimately depends on the findings o f a WTO dispute settlement panel. Inthe absence o f such a ruling on Ukraine's sugar policies, this debate involves pitting one lawyer's interpretation againSt~otl%%%XsapTacticalmatter, fliFlepE%l%Eis not centrar to either completing the accession negotiations or determining the best economic policy for Ukraine. The combination o f trade restrictions and domestic price interventions distorts Ukraine's sugar markets, leading to misallocations o f land, labor and capital, and transferring money from a large number o f consumers to a small number o f sugar producers. Even if there are externalities that prevent a competitive domestic market from emerging or social policy objectives that require transferring resources to sugar producers, trade restrictions and price controls are not efficient ways to solve these problems. 5.26 Ukraine's tariff offer relaxes the TRQ on sugar, expanding the quota to 260,000 tondyear and setting customs duties at 2 percent on the within-quota imports and at 50 percent on above-quota shipments.79WTO filings indicate that at least one member has asked Ukraine to foreswear the use o f TRQs entirely. WTO rules currently permit existing membersto use TRQs on agriculture, although some countries have proposed eliminating them and many candidate countries have agreed not to use them.*' Trade economists oppose TRQs because their economic effects are far less transparent than those of a simple tariff and because they require administrative interventions to allocate quota rightswhich may themselves be costly. 5.27 Ukraine's economy would benefit from gradually replacing all existing instruments o f protection o f the sugar market with those that are more WTO-consistent and create fewer market distortions. The TRQ and non-tariff trade barriers should be replaced with a simple tariff. The minimum price regime should be replaced with other forms of support, such as programs for regional development programs in respective regions, direct income support for farmers that is decoupled from current production levels or prices, and expenditures on environmental protection and agricultural research. 5.28 Export Restrictions. Export restrictions represent a second market access dispute. Ukraine employs export taxes, outright bans, minimum prices, and customs fees that act as additional export taxes. In 1996, Ukraine reintroduced export duties on the following agricultural products (after havingeliminated them inDecember 1993): Live cattle and sheep: ad valorem duties o f 50-75 percent with minimum specific duties of 390-1,500 per ton, depending on the type o f animal. Skins or hides of cattle, sheep and pigs: ad valorem duties o f 27-30 percent with minimumspecific duties that vary with the type o f skin. 0 Flax, sunflower, andfalseflax seeds: ad valorem duties o f 17 percent. 79The price o f quota licenses must be added to the statutorytariff rate to determine that full level of protectionon within-quota imports.The auctionprice for quotalicenses will naturallychange as the statutoryduty falls andthe quota expands. althoughthe record in general on TRQs and accessionis more mixed -- 8 of 18 new members entering through 2003 included None of the CIS members that have entered the WTO to date (Armenia, Moldova, Georgia, and Kyrgyzstan) employ TRQs, TRQs intheir goods schedules (Brink, 2003). 124 5.29 Ukraine also introduced a 30/ton export duty on scrap metal on January 1, 2003 (and at times it has maintained a complete banon exports o fvarious types o f scrap metal). Inaddition, the Government charges a customs clearance fee for scrap metal that i s five times higher than similar tees on other exports. -Ukraine's export license fees in general come under lire because the fees are set on an ad valorem basis (0.1 percent o f the transaction value), which violates the GATT norm that such fees must correspond to the cost o f providing a service. Finally, the Government employs minimum indicative prices to simplify calculation o f export duties and prevent These various export restrictions drive down domestic prices below world prices, favoring domestic users at the expense o f foreign buyers.83 5.30 Some WTO members, most notably the European Union, complain that Ukraine's export taxes are too high--so high as to be prohibitive in some cases. They have requested that Ukraine eliminate all export duties by the date o f accession and bind them at zero (i.e., commit never to reintroduce them in the future). Ukraine defends these taxes on classical mercantilist grounds - that they discourage raw material exports to encourage more domestic processing. Negotiators justify the export tax on oilseeds, for example, because this reduces the domestic price o f seeds and thereby increases domestic production o f oils, margarine, and fats. A tax on ferrous metal scrap has a similar effect on steel production. Although this alters domestic prices in favor of domestic manufacturing, it does nothing to help favored industries operate more competitively. Other economic reasons against using export taxes are presented inChapter 2. 5.31 While the GATT does not prescribe export taxes per se (any more than it bans import tariffs), their use i s the topic o f several cases before WTO dispute panels.84For example, the EU has requested consultations (the first stage o f the WTO dispute settlement process) with several countries that impose export taxes on animal hides: India (1998), Pakistan (1997), and Argentina (1999). Some o f the other CIS countries (e.g., Kyrgyzstan) that have joined the WTO agreed to bind export taxes at zero upon accession. EvenifUkraine succeeded in entering the WTO with its export taxes intact, it would remain vulnerable to WTO-legal trade sanctions in the future. One should also note that very few other countries inthe world employ export duties. Most that do are the least developed countries. Inonly one case (Ivory Coast) do export duties represent a significant share o f government revenues (13-15 percent during 1997-2001).85 5.32 Ukraine will need to come to some accommodation with WTO members on these market access issues if it is to gain their approval for WTO accession. One could argue that, apart from ad valorem licensing fees, these measures do not violate WTO rules per se. Instead these disputes are more akin to standard WTO negotiations over the level o f import tariffs: import-competing domestic industries want protection, foreign exporters want protection eliminated, and the Government must weigh political costs o f supporting certain domestic "ThisfeeisscheduledtoexpireonJanuary 1,2005. Minimum prices are also used for export of steel and other products subject to anti-dumping duties in importing country markets. 83 For example, the president o f a Ukrainian scrap metal association reported that the Government's export restrictions kept domestic prices at 100/ton, well below the world price o f 160 Eurolton ("Squaring the Circle," Metal Bulletin, November 20, 2003). 84 One should note that taxing exports is no less a departure from free trade than taxing imports. In principle they are even identical: an across-the-board ad valorem import tariff is equivalent in all respects to a uniform export tax o f the same rate, holding other factors constant and assuming that tax revenue is redistributed to consumers in lump-sum fashion (the Lerner Symmetry Theorem). 85 World Development Indicators, 2003. 125 producer groups against the economic benefits to the economy as a whole. Sugar is a clear case where politicians need to determine whether helping one domestic interest group is more important than achieving broader economic policy priorities. Does Ukraine's economic future depenCrcfi6iSly upon sugar? Ifso, it must iindways of supporting the development of the sugar industry that do not create frictions with trade partners and minimize costs imposed on consumers. 5.33 Support for domestic automobile industry. The Ukrainian Law "On Stimulation o f Automobile Production" adopted in 1997 provided domestic automobile producers with a major package o f tax exemptions. The new Law "On Development o f Automobile Industry inUkraine" adopted in March 2004 was expected to bring govemment policies in the sector in line with WTO norms. However, this did not happen. For the companies in the sector which had been established before 2004, the new Law extended the period o f effectiveness o f their tax privileges for an additional five years. Defacto, the Law established a dual investment regime inthe sector, which i s much less favorable to all potential new entries. Simultaneously, a new amendment to the Law "On the Customs Tariff' was passed that introduced significantly higher customs tariffs on imports o f automobiles andparts. PrincipalDomesticReformIssues 5.34 WTO membershave made it clear that Ukraine's concessions on market access will not substitute for progress inimplementing legal and institutional reforms. The major ones discussed here are standards, intellectual property rights, and agriculture subsidies.@ Standards 5.35 The domestic standards regime i s the set o f institutions that arguably least conform to WTO principles. Despite passing new framework laws, Ukraine's standards regime continues to exhibit many traits inherited from the Soviet GOST system: Inpractice, standards are set by the state, most existing standards are treated as mandatory requirements, and firms generally must satisfy these requirements through state certification. Mandatory technical specifications substitute for supplier liability laws. They are also used to regulate product quality inUkraine, a task performed by consumer choice in market economies. The national standards agency views its role as primarily a regulatory enforcer rather than a service provider. It continues to perform many functions that are usually performed by the private sector-both private enterprise and civil society-institutions inmarket economies. Taken as awhole, the existing standards regime adds to the cost o f doing business inUkraine and hinders the country's integration into the world economy. This i s clearly evident in business surveys (see Chapter 2) and problems with the standards regime have therefore become a negotiating issue for Ukraine's trade partners. 5.36 The official negotiating record contains many complaints by WTO members about overly restrictive technical regulations in Ukraine. A frequent rebuttal i s that these regulations are applied to foreign and domestic firms without partiality and are therefore WTO-compliant. This simply hurts both domestic and foreign firms, o f course, which is not the sort o f national 86WTO members have also taken issue with many other internal policies that affect trade. These include issues such as industrial subsidies, trade safeguards procedures, currency convertibility, and the operation o f free economic zones. 126 treatment trade negotiators had in mind when they drafted the standards codes. WTO members have voiced complaints about some specific measures as well as the general procedures that are employed inUkraine. The most common complaints are the following: ~~~ ~ ~~~ ~ ~ 0 Untilrecently, all Ukrainian standards were mandatory andUkraine hadno technical regulations and standards inthe conventional usage o f these terms. (see Box 5.1). 0 Risk is not adequately taken into account by the existing system. All agricultural products require certificates o f ~onformity.'~All consignments o f imported food products o f animal origin must undergo laboratory testing. All imports are subject to radiological testing. 0 Multipleagencies require certification or inspection o fcertainproducts." 0 Measures are not "least trade restrictive." For example, Cabinet o f Ministers Resolution No. 1611 requires that goods subject to mandatory certification be accompanied by the original, state-issued certificates. 0 Sanitary standards are too restrictive and not necessarily science-based. WTO members point to a long list o f banned food additives and restrictions on dried-egg products, pork, redmeat, andpoultry as examples. 5.37 In general, Ukraine presently does not recognize equivalent regulations of other countries. Instead Ukraine relies solely on mutual recognition agreements (MRAs) as an alternative to local certification. WTO agreements explicitly encourage unilateral recognition of equivalent regulations as an alternative to MRAs.'~ recent years many countries have turned to In multilateral accreditation arrangements (e.g., European Accreditation and International Laboratory Accreditation, due in part to frustration with the lack o f success o f MRAs as an avenue for facilitating trade. The State Committee o f Ukraine on Technical Regulations and Consumer Policy (DSSU) defends its policy o f recognizing conformity assessments conducted either locally or under an MRA on the grounds that this i s necessary to protect its markets from low quality andunsafe products. 5.38 assessment in fklfillment o f mandatory state standard^.^' This restriction i s inconsistent with In the absence o f an MRA, only Ukrainian residents may conduct conformity Ukraine's services offer (specifically those made in the technical services sector) and WTO agreements." Apart from its importance as an obstacle to WTO accession, this practice reduces the competitiveness o f the domestic market for conformity assessment services, thereby raising ''"Agriculture" i s definedas goods in Chapters 1-24 of the HarmonizedSystem. "Ukrainiannegotiatorsacknowledgedthis inwriting: "Thus, for example, importedfood ofanimal originwas subject to certificationby the Ministry of Health and authorizationby the State Committeeon Standardization, the certificatewas checked at the Health Border Point and the product, including collection of a sample, at the Veterinary Border Point, followed by surveillance in the market by the Epidemiological Unit, the Veterinary Service and the Association of Consumers' Rights." (WTO, "Draft Report of the Working Party of the Accession of Ukraine to the World Trade Organization," Report Number WT/ACC/SPEC/LJKR/S,Geneva: WTO, March 16,2004, paragraph 131). 89See Article 6.1 of the TBT Agreement. 90Articles 10 and 12ofthe Law on Conformity Assessment. 91Article 6.4of the TBT Agreement encourages WTO membersto recognize certificatesissuedby other members' conformity assessment bodies. 127 the cost o f doing business in Ukraine, which in turn makes Ukrainian goods less competitive in world markets. 5.39 The W?u-mandated enquirypoints for the `1'B'l'and SPSagreementsare not yet fully operational. These entities are expected to notify other WTO members about new regulations and respond to members' comments, and they increase the transparency o f the domestic standards regime. WTO members have pressed Ukraine to establish functioning enquirypoints by the date o f accession. The Government has taken some steps to do so and is receiving some assistance from foreign donors. 5.40 Some problems inthese areas can be addressed quickly. For example, the MEEIhas the authority to shorten the list o f goods requiring mandatory i n ~ p e c t i o nDSSU reports plans to . ~ ~ eliminate several categories o f goods from this list.93However, it will take time to review all SPS and TBT measures and eliminate those objectives that can be achieved in a less trade-restrictive manner (as requiredby the TBT agreement). USAID is funding a project to review all laws and government measures relevant to the SPS agreement and recommend steps to bring them into compliance. This project i s expected to conclude in 2005. The process o f reviewing standards relevant to the TBT agreement will take much longer due to the large number o f existing mandatorytechnical specifications inherited from the USSR. Box 5.1: Technical Regulations versus Standards "Standards" and "technical regulations" have very precise definitions in WTO agreements. Following international convention, the WTO defines a standard as a "document approved by a recognized body that provides, for common and repeated use, rules, guidelines or characteristics for products or related processes and production methods, with which compliance i s not mandatory." A technical regulation "lays down product characteristics or their related processes and production methods, including the applicable administrative provisions, with which compliance i s mandatory." Technical regulations are promulgated by governments. Standards, in contrast, can be developed by any body of experts, and as international standards are generally developed through consensus, they are self-enforcing. The WTO limits the legitimate use o f technical regulations to certain public policy objectives that are unrelated to trade: ensuring national security; the prevention o f deceptive practices; protection o f human health or safety, animal or plant life or health, or the environment. Mandatory technical requirements that have other objectives and restrict trade canbe challenged by other WTO members. 5.41 As o f September 2004, efforts were underway to consolidate all existing rules goveming SPS provisions, which currently appear in over a dozen laws and decrees, into three framework laws-one on veterinary medicine, one on food safety, and a third dealing with plant quarantine. These three would become the only laws goveming such issues, and they would incorporate all requirements o f the W T O SPS Agreement, including procedural and transparency requirements, andwould cover the following areas: 92The latest list of such goods submitted to the WTO working party i s 80 pages long. WTO, "Goods Requiring Customs, Sanitary, Veterinary, Phytosanitary, Radiological or Ecological Verification or Certificate of Conformity upon Import or Transit," Reportnumber WTIACCIUKRIIO5Rev. 1, Geneva: WTO, October 16,2002. 93These include tractors and agricultural machine engines, electrical machines, cinema and photographic equipment, and an additional20 productswith low consumer risk from other productcategories. 128 0 WTO terminology; 0 harmonization; 0 equivalence inmeasures; risk assessment and appropriate level o f protection; ~~ ____ ~ ~~ ~ ~~ 0 0 adaptation to regional conditions; 0 transparency - availability of enquiry andnotification points; and 0 inspection, control and approval procedures. 5.42 The new draft SPS laws provide for the radical reduction in documentation requirements for imported food products, clear delineation o f authorities between different government agencies, and streamlined border control procedures. 5.43 The Government could take additional steps to demonstrate its commitment to reforming the standards regime and, thereby, increase the momentum o f WTO accession. The short-term prioritymeasures are as follows: 0 Amend the laws on conformity assessment and accreditation to eliminate the requirement that only Ukrainian firms may conduct conformity assessment in the legally regulated sphere. 0 Identify a set o f low-risk products for which no Ukrainian conformity assessment certificate will be required if the product has already been tested to international standards inthe country of origin (e.g., ifit bears the EU's mark). 0 Establish and maintain a website with draft texts o f all proposedtechnical regulations translated into at least one o f the three official WTO languages. Intellectual Property Rights Protection 5.44 The highest profile obstacle to accession at the moment relates to the dispute over the production and export o f counterfeit optical discs (CD-ROMs and DVDs with movies, software, and music). Ukraine is allegedly one o f the world's leading violators o f intellectual property rights in the area o f optical media and one o f the largest exporters o f counterfeit optical This dubious honor aggravates trade relations with the US, which in 2001 named Ukraine the worst offender on its list o f countries employing (what it considers to be) unfair trade practices. As a consequence, the U S revokedUkraine's access to duty-free treatment underthe Generalized System o f Preferences (GSP)95in 2001 and imposed punitive customs duties worth $75 million annually on imports from Ukraine. The U S renewed these sanctions in 2004. It i s inconceivable that WTO members will approve Ukraine's membership until this issue has been addressed to their satisfaction. 94 The US-based Intemational Intellectual Property Alliance (IIPA), an advocacy organization representing copyright industries, estimates that its members have lost US$20&250 million dollars annually in recent years due to copyright piracy in Ukraine (IIPA, "2004 Special 301 Annual Report," Washington: IIPA, February 13, 2004). 95 The Generalized System o f Preferences i s a system o f non-reciprocal tariff treatment granted by industrial countries to many products from developing countries. Each industrial country sets its own rules on which goods from which countries will qualify for GSP treatment. The United States' GSP program grants duty-free treatment to approximately 4,650 products. 129 5.45 As noted above, Ukraine has passed many new laws in recent years to bolster intellectual property rights. At the April 2004 working party meeting, several key members praised Ukraine's progress in conforming its laws to the TRIPS agreement. WTO members continue To insist, however; th%lTJiEiine p Z s m e opticardisc l i c e n i g law as a -.__ condition o f WTO accession.96This bill has been held up inthe Rada on procedural grounds and it is difficult to predict when the Radamay finally approve it. 5.46 Working party members also complain that, in their opinion, enforcement o f new IP laws remains weak. Specific problems cited are the following: 0 law enforcement agents and judges lack sufficient expertise in intellectual property matters; 0 civil and criminal procedures codes have provisions for ex-parte search and seizure which have never been usedfor these purposes; 0 the Ministry o f Health does not validate patents when issuing clearances to manufacturepharmaceuticals; and 0 police and customs officials, inpractice, require intellectual property rights holders to file a complaint before launching an investigation even though current laws grant police ex-officio authority to initiate intellectual property cases on their own and confiscate counterfeit items. 5.47 The Government openly acknowledges many o f the shortcomings caused by lack o f administrative capacity. The State Department o f Intellectual Property reports that it has been working with the EUto train judges, for example. Improving the capacity to manage and enforce new laws will require more technical assistance. 5.48 The single most important step Ukraine can take in the short run to facilitate WTO accession i s for the Rada to pass the optical disc licensing law. A second important measure would be to revise law enforcement operating procedures to take practical advantage o f powers provided by recently adopted intellectual property rights laws. 5.49 In the long run, however, the GOU must also pay attention to the commercial dimension o f intellectual property. As discussed below, stronger enforcement o f intellectual property rights, in and o f itself, does not create economic incentives to invest in knowledge creation or new technologies. This is not a legal problem but a commercial problem-one of turning new ideas into marketable products. And this is where Ukraine will ultimately benefit from legal reforms mandatedby the TRIPS agreement. Agricultural Subsidies 5.50 Domestic subsidies to agriculture create another source o f friction in Ukraine's accession negotiations. On the surface, negotiators are debating the choice o f base years to use 96 "On Introducing Amendments to Certain Legislative Acts o f Ukraine," 24 February 2003, No. 3155. While not addressing intellectualpropertyrightsper se, the law would helpthe GOUmonitor optical disc productionand, by extension, crack down on exportsof counterfeitdiscs. 130 for computing base levels o f the aggregate measure o f domestic support for agriculture Ukraine wants to use 1994-96 as the base year; many WTO members argue it should use a more recent period. The WTO Agreement on Agriculture introduced a set o f benchmarks for WTO memkers-in 1994-96 at the conclusion o f the Uruguay Round, but this did not a d c k x l i o m w members were to be treated. The WTO Secretariat's guidelines for accession countries suggest (but does not require) usingthe three years prior to the commencement o f a candidate country's negotiations on agriculture. On these grounds, Ukraine argues that 1994-96 are the appropriate years. WTO members counter that these years were characterized by unusual macroeconomic fluctuations, that recent years are more representative o f "normal" economic conditions, and that too much time has elapsed since 1996 to justify usingthose years as the basis for future subsidy commitments. Table 5.3 shows commitments made by other countries that havejoined the WTO since the Uruguay Round. Most countries used base years that were more recent than what Ukraine proposes, but the historical recordremains rather mixed on this point. 5.51 This is not just an academic debate: new members must commit to reducing support when total AMs exceeds the country's de minimis level. The OECD reports that if 1994-96 are the base years, the total AMs i s over US$1 billion, compared to less than US$lOO million when the 1997-99 period i s used. Thus, using 1997-99 would cap Ukraine's future agricultural support at a much lower level. The latest calculations submitted to the WTO show that the sum o f product-specific AMs and non-product specific AMs was 11 percent o f the value o f production during the base years, so Ukraine will likely need to negotiate a reduction in support levels as 5.52 Ukraine's case for binding subsidies at a high level relies in part on the premise that current support levels are high for transitory reasons: it must make one-time expenses to write off old debts, rebuild infrastructure, complete the process o f land reform, and invest in technological modernization. Its negotiators also argue that Ukraine should be permitted to maintain AMs above the de minimis for reasons that apply equally to all countries and all times: compensation for seasonal demands for credit, volatility in world commodity `prices, and weather-related uncertainty. Finally, negotiators argue that Ukraine should be allowed to retain current AMs levels because they have made large concessions in other areas o f agricultural policy - it has offered to bind export subsidies at zero, forgo the right to apply special safeguards, and bind tariffs on important agricultural commodities well below their currently applied rates. 5.53 The new Law on State Support o f Agriculture in Ukraine was adopted in June 2004. The Law immediately raised several concerns from WTO members who believe that most o f the instruments o f government support to the sector, which are declared inthe Law, are classifiedby the WTO as subsidies from the so-called "yellow basket", while members would like to see more progress toward less distortive policies ("green basket") and general sectoral liberalization. In addition, several clauses of the new Law are in direct contradiction with WTO norms. This ~~ 97AMs includestax breaks, price supports, and off-budget assistance targeted at the production of given crops, notjust explicit subsidies. 98WTO, "Accession of Ukraine: Domestic Support and Export Subsidies in the Agricultural Sector, Revision," report number WTIACCISPECIUKRliRev.9, Geneva: WTO, April 11, 2004. Total AMs reported in Table DS4 is USl.36 billion and the value of agriculturalproductionis US$12.54 billion. 131 includes: (i) 3.1 that provides for use o f minimumand maximumprices inthe process o f Article agricultural exports andimports; and (ii) Article 8.2 that allows the GOUto introduce quotas for imports and exports. Another concern relates to fiture operations o f the new Agrarian Fund, whlchcouid become a potentiai source of considerabie market distortions through excessive price and procurement interventions. Inaddition, the Law did not address an important separate sectoral issue that creates considerable problems for Ukraine's WTO negotiations - abolishing the requirement for obligatory use o f domestically grown tobacco by the Ukrainian tobacco industry. Table 5.3: AgricultureCommitmentsby New WTO Members,1995-2003 Member Accession BaseYears de minimis BaseAMs Reduction Year level exceeds de commitment minimis? Cambodia 2003a 1998-2000 10 percent no Nepal 2003a 1996-1998 10percent no Macedonia 2003 1998-2 000 5 percent Yes 0 percent Armenia 2003 1995-1997 10percend5 no percentb Taiwan 2002 1990-1992 5 percent 20 percent China 2001 1996-1998 8.5 percent Moldova 2001 1995-1997 5 percent 20 percent Lithuania 2001 1995-1997 5 percent 20 percent Croatia 2000 1996-1998 5 percent 20 percent Oman 2000 1994-1 996 10percent Albania 2000 1996-1 998 5 percent Georgia 2000 1996-1998 5 percent Jordan 2000 1994-1 996 10 percent 13 percent Estonia 1999 1995-1997 5 percent Latvia 1999 1994-1 996 8 percend5 percent Kyrgyzstan 1998 1994-1 996 5 percent no Panama 1997 1991-1 993 10percent no Mongolia 1997 n.a. 10percent no Bulgaria 1996 1986-1988 5 percent Yes 79 percent Ecuador 1996 n.a. 10percent no a Date of accession protocol. Armenia's de minimis level i s 10 percent through 2008 and 5 percent thereafter; Latvia's de minimis was set at 8 percent through 2002 and 5 percent thereafter. Source: Brink (2003) based on WTOaccession protocols. Information on Nepal and Cambodia are taken directlyfrom WTOaccession packages. 5.54 It seems unlikelythat Ukraine will be able to enter the WTO without having to commit to reducing AMs. Transition economies entering the WTO in recent years with AMs above de minimis had to reduce AMs by twenty percent. Although, as Ukrainian negotiators rightly point out, major industrial countries maintain highlevels o f subsidies, their unwillingness to commit to reductions at the Cancun Ministerial i s precisely what halted progress on the Doha Round 132 negotiations. Policy makers should seek ways to replace current subsidies with a program of support that does not distort production andtrade.99 5.55 e e r a l l , our analysis suggests that a g r i e d t t t r a 1 - Pe-parat e sticking point in the remaining negotiations (similar to certain legislative changes). First, the Government tariff offer provides for a major reduction in agricultural protection, and it may apparently need time and a strong political strategy to get sufficient Rada backing for such a proposal. Second, in the past the liberalization in agriculture proved to be difficult. The Rada defeated a bill repealing the law on export duties for hides and live cattle in January 2000. The Cabinet o f Ministers rejected a similar measure inApril 2002. This calls for the need for a strong awareness campaign related to the role of agriculture in the WTO agenda. However, so far the issue remains quite remote from the core domestic discussions on WTO accession. c. REACHING THE ENDOF NEGOTIATIONS 5.56 The negotiating team has made considerable progress with foreign partners. What remains to be done is mostly an internal issue- negotiating the WTO agenda with domestic constituencies, including the Rada and individual interest groups. This is not a technical job, and it requires a major effort at the top political level o f the country. Inother words, the negotiation team now needs considerable help from the political leadership to pushthe WTO agenda through the Government and Rada, strengthen inter-agency coordination o f government efforts, improve communications, and adopt strategic decisions on capacity building. 5.57 Ukraine's first priority should be the legal reform agenda. The Government must move more aggressively with both acceleration o f adoption o f WTO-compliant laws that are still missing, and enforcement o f laws that are already in place. Apart from a few specific trade restrictions, such as sugar tariffs and export taxes, WTO members are reportedly rather satisfied with the pace of bilateral negotiations on market access. Incontrast, they remain concerned that liberalization at the border i s being derailed byproblems inthe domestic regulatory environment. This implies that the WTO unit inthe MEEImight focus less on negotiating additional bilateral protocols and more on championing domestic reforms.loo 5.58 Inmany cases the primary task is to eliminate objectionable policies. Much has been done to identify which laws need to be revised. A recent USAID-funded assessment o fUkraine's WTO accession lists specific laws that need revision to ensure Ukraine's conformity to WTO norms, and it proposes a timeline for adopting these laws. UEPLAC has also produced analyses of WTO-related legislation. The MEEI should move quickly to ensure that the necessary draft legislation i s prepared and ultimately passed. The ministry has some grant funding to conduct additional legal assessments, including one to revise the framework Law on Foreign Economic 99The development of Ukraine's agricultural sector ultimately depends on successful institutional reforms such as land reform, improvedproperty rights, and the development of rural credit markets. Subsidies will not help resolve these more fundamental problems. looThe WTO Secretariat's guidelinesfor accessionimply that the proper order of negotiationsi s to first complete the multilateral (legal reform) agenda and only then conclude bilateral market access negotiations:"When the workingparty has made suficient progress on principles andpolicies, parallel bilateral talks begin between the prospective new member and individual countries. They are bilateral because different countries have different trading interests." WTO, "Accession to the World Trade Organization:Proceduresfor Negotiationsunder Article XII," Documentnumber WT/ACC/I,Geneva: WTO, March24, 1995. 133 Activity, as well as o fmore specialized legislation (e.g., on intellectual propertyrights). It should make every effort to facilitate rapid completion of these assessments. 5.59 +hJw ce- -th-n3f+zgahd"? Tf- tvbe to- focus political will on WTO accession. Many WTO-compliant laws have beenblocked andmany non-compliant laws have been passed, not because those drafting the laws were unclear on WTO obligations, but because o f domestic political considerations. Box 5.2 presents several examples o f draft legislation facing problems in the Rada, including the CD-ROM licensing law. If Ukraine is serious about joining the WTO, those advocating accession will need to devote more political capital to this task and communicate its political importance to the Rada and general public more effectively. 5.60 Several additional factors impede progress toward WTO accession. Inparticular, it is clearly held back by insufficient cooperation between the lead government agency -the MEEI -andtheotherparticipatingagencies,betweentheGOUandtheRada,andbetweenthepublic and private sectors. The Interagency Commission on Ukraine's WTO accession reportedly has become moribund.lo'While virtually all the controversial points enumerated above require the attention of more than one government agency, there is ample evidence that agencies affectedby WTO accession often do not contribute to the negotiations or do not take into account the results of negotiations. For example, the Government's revenue projections reportedly do not reflect the import tariff reductions that negotiators have already promised. lo2 To a large extent, effective interagency coordination also hinges on political will. Currently the MEEI is not getting sufficient political support necessary for efficient mobilization o f all government entities to work as a team. This lack o f political support to WTO negotiators to a large degree explains the major delays with the resolution of core bottlenecks of the accession process. 5.61 Box 5.2 presents the list o f the most important pendingpolicy issues related to WTO accession. It contains a sub-sample from the longer list o f government tasks outlined in the Government Decree No. 325-p o f May 28, 2003 On Approving an Action Plan to Ensure Ukraine's Accession to the WTO. This Decree introduced a deadline o f the end o f 2003 for completion o f all identified actions. As can be seen from Box 5.2, a number o f core actions remainincomplete (as of September 2004). Most o fthis unfinishedagenda relates to cases where new legislative proposals have been preparedby the Government, but are pending inthe Rada to be debated and voted upon. This indicates that, despite the number o f decrees and strongly worded declarations issued at various recent occasions, the Rada does not consider WTO-related issues an overwhelming priority in its day-to-day operations. The attention o f the top decision makers inthe country is naturally attracted by some other pressing issues, including those related to the proposed constitutional changes and presidential elections. This explains why the pace of Ukraine's accession has been slower recently relative to Russia's, for example. 5.62 Information sharing between the GOU and other stakeholders, including the Rada, i s also weak. Many key players (e.g., business leaders, parliamentarians, and government officials) ~ lo' The Commission was originally established by the Government decision in September 1993. It was later restructured by the Presidential Decree No 619/99 o f February 19, 1996. lo* Some argue that, in practice, large reductions in many agricultural tariffs will not affect revenue collections either because they are currently set at prohibitive levels or because smugglers currently evade customs authorities. Such claims would be more convincing, however, ifbacked up by empirical evidence. 134 remain uniformed about both the actual state o f Ukraine's WTO negotiations, as well as of the implications-positive or negative-of membership. There are many indications that the MEEI is holding much of the information about WTO negotiationstoo close to its chest. For example, a 4 b & " - r .e . e to b ~ T c o m p*k meelaimed O not to have seen the USAID's comprehensive analysis o f Ukraine's legal compliance with WTO rules. In part the existing communication problems reflect the lack of empirical economic analysis conducted on WTO accession. The analysis to be conducted over the next year through a Dutch government's grant should fill some o fthe current gaps inknowledge. 5.63 Furthermore, MEEI's current public awareness efforts operate in only one direction - information flows from the state to the private sector. Discussions with MEEI officials uncovered no institutionalized mechanism for the MEEI to incorporate information from the exporters into the trade policy process. The Government needs to establish institutional mechanisms for regular input by members o f the public, including small and medium enterprises and civil society organizations. Doing so will help the Government strengthenthe constituency for WTO accession, and also help improve commercial diplomacy ingeneral. 5.64 Finally, progress i s thwarted by a general lack o f consistency inUkraine's trade policy- making, which is related in part to unfocused policy priorities in general. Trade policies in Ukraine change too frequently. The Government has introduced a number o f new trade barriers during the course o f accession negotiations. Often multiple laws address the same topic but in inconsistent ways.lo3 Ukraine has been pursuing several international integration agendas simultaneously -toward Russia, toward the EU, and toward the world economy generally - that at times appear to conflict with each other (see Chapter 6.) IO3Conflicts across existing SPS laws have been mentioned and these are being addressed in the new draft framework laws. Some observersalso find inconsistencies betweenIPR provisionsinthe Civil and CommercialCodes. 135 136 137 5.65 Although capacity constraints within the GOU do exist, additional technical assistance would probably not accelerate the WTO negotiatingprocess. Ukraine already receives assistance to help with negotiations, drafting laws, andpublic education from several donors: 0 the Dutch govemment has provided a grant to the MEEI to support rewriting trade- related laws; 0 DFIDprovides avariety o fassistanceto the MEEIonWTO issues; 0 the EU provides legal advice through the UEPLAC and technical assistance to several trade-related agencies through TACIS projects; 0 USAID conducted a comprehensive legal review o f WTO compliance and is fbnding the revision o f SPS laws; and 0 other U.S. govemment agencies are assisting with both WTO negotiations and general development o f commercial laws to support a market economy. 5.66 The total amount o f extemal assistance ought to be sufficient to support the completion o fnegotiations. The burdenis on the Government to use this assistancemore e f f i ~ i e n t l y . ' ~ ~ 5.67 In summary, despite the number of Government decrees, new laws, and bilateral protocols inrecent years, Ukraine's progress toward membership has been slow. Evenifpolitical will is mobilized and cooperation among stakeholders is improved, it will likely take at least twelve to eighteen months to work through the full agenda o f legal reforms. The 2004 presidential election understandably takes attention away from foreign trade policy concems. In addition, many o f the necessary reforms are politically sensitive, thus, it may be difficult for the authorities to push for their adoption before the presidential elections. In this case, it would be practical for the GOU to admit that completion o f the WTO accession in 2004 i s out o f reach, and adjust the overall timetable for WTO accession, switching to a later completion date. D. REAPINGTHE BENEFITSOFWTO MEMBERSHIP 5.68 WTO members will not admit Ukraine into the WTO until its laws comply with WTO rules. Compliance alone does not guarantee economic benefits. This section discusses areas where the Government must undertake additional institutional reforms to maximize benefits o f membership. It begins with a review of what countries expect to gain from membership. 5.69 Countries usually expect to gain four benefits whentheyjoin the WTO: (i)Improvedmarketaccess:WTOmembersgranteachotherMFNaccesstotheirmarkets (i.e., trade restrictions apply without discrimination); (ii)Externalpolicyanchor:membershipprovidesdisciplinetoimplementtradeliberalization and sustaindomestic policy reforms; I O 4Assistance has not always beenused very efficiently inthe past, and implementationo f donor-backed programs was slow. 138 (iii)Accesstobindingdisputesettlement:memberscanpresentdisputesbeforeanimpartial panel; and (iv) A seat at the table: WTO membersset rulesthat governmuchof world trade. 5.70 One must recognize that membership alone will not deliver any better tariff treatment for most Ukrainian products. Most o f its current exports enter CIS countries duty-free. Ukraine already enjoys nondiscriminatory (MFN) or better access to markets o f WTO members. What will change is that Ukraine's MFNaccess will become guaranteed and permanent once Ukraine becomes a WTO member.lo5Furthermore, the U S and EUcurrently impose quotas on Ukrainian steel. These would violate WTO rules if imposed on a WTO member, so these countries will need to either eliminate them once Ukraine joins or replace them with a presumably less onerous safeguard measure. In addition, the U S withdrew GSP and imposed trade sanctions in 2001 in retaliation for optical disc counterfeiting inUkraine. Since compliance with TRIPS i s a condition o f membership in the WTO, one could expect the U S to restore GSP to Ukraine once Ukraine joins the WTO. One benefit o f membership i s that Ukraine will be able to address such unfair trade practices through the WTO's binding dispute resolution process. (Naturally this will not apply to Ukraine's trade disputes with either Belarus or Russia, unless they alsojoin the WTO.) 5.71 WTO membership has the potential to lock in Ukraine's post-socialist economic reforms by making it more difficult to reverse both the domestic reforms and the trade liberalization undertaken since independence. Particularly inthe case o f former centrally planned economies, this irreversibility makes a Government's commitment to liberal economic policies more credible and sends an important signal to market participants. It is also a precondition for accelerating integration with the EU, which some see as ultimatelythe more important objective o f Ukraine's foreign policy. 5.72 WTO members establish the rules and institutions that govern much o f the world's trade. As a member, Ukraine will have the opportunity to influence these rules and the terms o f its access to other WTO members' markets. 5.73 What will it take to exploit these benefits?First, Ukraine must first increase its capacity to conduct effective commercial diplomacy. Elementso fthis were discussed above inthe context o f completing the accession negotiations. They include improved coordination o f trade policy across ministries, better communication between the executive and legislative branches, and institutionalized public engagement. In addition, the GOU should develop mechanisms through which Ukrainian exporters can report foreign trade barriers so that trade negotiators can address them through the appropriate dispute settlement procedures. 5.74 Second, Ukraine will need to preserve the trade liberalization accomplished during the accession process. Once Ukraine is a member, any backsliding on its commitments will open the door to sanctions from WTO members. Reforms to integrate Ukraine into the world economy mustnot end once the WTO accession protocol is agreed andsigned. `OsGuaranteed MFN access to the US market could possibly come earlier than accession: inMarch 2004, both houses of the US. Congress introduced legislation to grant Ukraine permanent MFN treatment. Unfortunately, this draft legislation also contains provisions providing for recourse to special safeguards against Ukraine in the event of import surges (H.R. 3958, Section 5, and S. 2201, Section 5). Similar language appears in draft legislation that would give permanent MFNstatus to Russia. 139 5.75 Finally, Ukraine will need to undertake substantial administrative and institutional improvements to benefit from several WTO regulatory obligations. The most significant o f these are WTO codes on intellectual property rights, standards, and customs. The rest o f this section focuses orthese v. Livingwith the TRIPS Agreement 5.76 The TRIPS Agreement embodies the intellectual property rights rules that evolved during the last several hundred years in market economies. The agreement presupposes the existence o f a state apparatus to administer these intellectual property rights and adjudicate disputes. It also presupposes the existence o f market institutions that give commercial value to intellectual property rights, such as venture capital markets, copyright collection societies, networks that connect inventors to entrepreneurs, and the like. When these preconditions are satisfied, implementing the TRIPS Agreement encourages investment in knowledge-intensive industries and greater integration into the world economy. When they are not met, as is the case inmost transition and developing countries, a government must first devote time andmoney to implementing the agreement, and the initial economic effect is primarily the transfer o f rents to companies in industrial countries.'06 The fact that the U S imposed trade sanctions on Ukraine over weak intellectual property rights enforcement reveals the economic importance o f these transfers. Inthe longer term, implementation o f the TRIPS is critical for realization o f Ukraine's high-tech aspirations that call for accelerated development o f knowledge-intensive sectors inthe economy. 5.77 For these reasons, the TRIPS Agreement can cause economic harm to Ukraine if compliance i s not supplemented with additional institution building. Duringnegotiations to date, the G O U has focused on approving and enforcing laws protecting intellectual property. These measures address the diplomatic problem o f protecting intellectual property owned by foreign companies. In and of themselves, the new laws will not stimulate new investment into research and creativity-intensive industries. Net benefits from TRIPS compliance will come only ifthese new property rights laws are matchedby the development o f institutions that help rights owners earn money from their rights. This will require first increasing the Government's capacity to process patents and copyrights, enforce laws, adjudicate disputes, educate rights-holders, and so on. Department of Intellectual Property officials reported that they have been working with a number o f other Government agencies (Customs, Interior, Justice, etc.) to establish specialized bodies to handle intellectual property issues, for example, laboratories for testing suspected counterfeit products. They pointed to weaknesses in the judicial system as a major obstacle, citing the need to establish local patent courts in all oblasts o f Ukraine, as well as a supreme appeals court. The department is working with NGOs to train judges, but more technical assistance i s needed in this area. Table 5.4 below shows the administrative start-up costs of intellectual property projects funded by the World Bank in Mexico, Indonesia and Turkey that one might take as examples o f what Ukraine can expect to spend to complete introduction o f world-class intellectual property protection."' I O 6Inthis sense multilateral property rights harmonization differs fundamentally from multilateral tariff liberalization: for absent market failures, the latter increases total welfare while the former transfers rents from one country to another. lo' These are components o f World Bank projects that also contained much larger components to fund industrial research and development. 140 Table 5.4: Intellectual Property Projects Country Project Components cost Duration M e x i c o Train patent office staff $32.1 million 1992-96 ~ ~ Automate patent office procedures Indonesia Draft new copyright laws and regulations $14.7 million 1997-2003 Turkey Draft new patent laws $19.3 million 1997-present Reorganize patent office Public education campaign Sources: WorldBankproject documents. 5.78 Even if Ukraine could enforce intellectual property rights to the satisfaction o f WTO members, its economy at the moment lacks many o f the complementary institutions that give commercial value to legal intellectual property rights. These institutions include venture capital markets, autonomous copyright collection societies,"' educational institutions teaching intellectual property law and management, information networks linking inventors with investors, agents who represent inventors and creators, and so on. These are not institutions that the Government can create with the stroke o f a pen. The state can-and should-play an important facilitating role, however, through market-friendly investment policies, educational policies, and other measures. Inaddition, these institutions must be embedded inan environment o f the rule o f law and Government regulations conducive to market entry. Building those institutions will take time and cost money. InstitutionalReform for TBT andSPS 5.79 Itis estimated that eighty percent o fworld trade is affectedby technical regulations and standards.lo9 standards are generally designed to solve information and coordination Product problems that often arise in decentralized markets. In established market economies, some technical specifications are set and enforced directly by Governments, typically as part o f broader public health and safety regulations (and military procurement). State-managed mandatory standards represent the minority o f standards in most market economies, however. The overwhelming majority o f standards are set and enforced solely within the private sector- by scientific organizations, trade associations, and private laboratories. Adherence to such standards i s generally voluntary.' lo The state's role is limited to indirect activities (e.g., handling contractual disputes or enforcing truthful advertising laws). This limited state involvement in lo'Collection societies channel payments from copyright users to copyright owners in decentralized markets. Private sector performance rights organizations (PROs) in the entertainment industry are the most visible examples of such organizations, but they also exist inother copyright industries.It appears that the only collection society in Ukraineis a government entity (Ukraine Agency for Copyright and Related Rights). The Governmentshould investigatewhat is needed for private sector PROs to enter this market andaffiliate with internationalbodies. IO9This estimate is frequently cited in press releases by the US National Institutes for Standards and Technology. See for example NIST99-18 (December 2, 1999), availableat httu://www.nist.gov/tmblic affairs/releases/n99-18.htm, andNIST's Technology at a Glance (Fall 2002). 'loFor example, software programmers are entirely free to write HTML code (for websites) that do not fully conform with the current HTML standard, as set by membersof the World Wide Web Consortium,andpost them on the world wide web. Doing so limits the usabilityof the product,of course. 141 standards reduces the scope for rent-seeking and allows standards to enhance the efficiency o f the private sector. 5.80 Athewgh keckffical reg- are wppesed to i n c r e w-ec-ic welfare, they can easily be manipulated to serve as trade barriers. They are the grounds for many o f the trade disputes taken to the WTO. Technical barriers to trade are far worse than traditional protectionist policies (such as import tariffs, quotas, or export taxes) since firms must devote real resources and skilled personnel to satisfying a standard. The Uruguay Round introduced GATT disciplines on suchregulations through TBT and SPS Agreements. TBTAgreement 5.81 The goal o f the TBT agreement is to reduce the adverse effects that industrial product standards can have on international trade. The TBT agreement requires that WTO members commit to applying technical regulations fairly and transparently: regulations must not discriminate by country o f origin, foreign products must be treated no less favorably than domestic ones, and members must notify others o f proposed regulatory changes, allowing other WTO members the opportunity to comment. The agreement encourages harmonization o f regulations across countries-members are supposed to adopt international standards wherever possible."' It also exhorts governments to adopt technical regulations that impose the least possible restrictions on international trade, though inpractice it appears that the WTO standards agreements are legitimizing more strict standards. 5.82 WTO rules require liberalizing technical regulations only as they apply to imports. From the perspective o f a transition economy, a sensible implementation o f the TBT agreement affects more than imports, however: it should also facilitate exports and reduce costs o f using standards in the domestic market. Standards are particularly important in production o f technologically sophisticated goods. Building a certification system that i s recognized by other countries will increase Ukraine's competitiveness inworld markets. 5.83 What has Ukraine accomplished thus far and what remains to be done? The GOU has publicly committed itself to harmonizing its technical standards regime with that o f the EU. These were outlined above in this chapter. Several years ago the Rada passed a number o f new laws goveming accreditation, standardization and conformity assessment. These need additional revision. In 2002, the Government formally separated the accreditation agency from the state committee overseeing standardization and certification. This body is now seeking to join international accreditation arrangements as one step toward gaining recognition in the EU for tests conducted inUkrainian laboratories. 5.84 Some o f the measures needed to implement the TBT agreement are inplace, but more remains to be done to create a standards regime that will help markets work more efficiently. Work is needed in all areas: standards harmonization, certification, organizational restructuring, andimproved legal environment. The WTO itself does not set these standards.A largenumber ofother bodies are involved in establishingstandards. 142 Standards Harmonization 5.85 The process o f standards harmonization works far too slowly.'12 The Government i s Cemmittd to adopting 500 international standards a-year-to -i-&-P!GA c.c"&ments. As o f October 2004, Ukraine has adopted 1,950 national standards harmonized with European and international standards. At this pace it will take more than a decade to complete this part o f the harmonization process. When confronted with this same problem, a number o f the new EU members in central and eastern Europe adopted an accelerated process of harmonization: international standards were accepted as national standards "as-is"-in their original language andwithout revision. Given that local standards generally should not differ fundamentally from international standards, this procedure could be an effective way for Ukraine to economize on scarce administrative resources. Some inUkraine advocate this approach because it also prevents translation errors from being incorporated into local statutes (a problem that has occurred inthe past in Ukraine). The stock of official standards continues to include 18,750 GOST standards from the Soviet Union. DSSU reports that these are being gradually abolished. Given the dynamic nature o f international markets, accelerating the retirement o f GOST standards would facilitate Ukraine's integration into the world economy. Conformity Assessment 5.86 While the GOU i s in the process o f harmonizing the content o f its technical standards with those o f international standards, it must also reform the process by which manufacturers comply with those standards to gain the full economic benefits o f standards harmonization. Ukraine's present technical standards regime relies almost entirely on mandatory certification, i.e., virtually all products are obliged to meet technical specifications set by the Government and, furthermore, to employ third-partytesting to show that the product does in fact comply with the standards.ll3 In contrast, the vast majority o f standards in the U S and EU are voluntary."4 The GOU must take care that, in the process o f standards harmonization, it does not transform the body ofvoluntary international standards into mandatory technical regulations. 5.87 The provision o f conformity assessment services is plagued by monopolization. The absence o f market competition i s pervasive inmany post-socialist economies, and the market for conformity assessment services (testing and certification) in Ukraine i s no exception. The Government i s attempting to address one pathology o f monopolies-higher prices-by establishing a committee that will regulate the level o f fees that providers charge companies for testing and certification. This is only a short-run solution, however. In the long run, greater competition i s needed through the entry o f new providers. To some extent, entry is hampered by restrictions on foreign conformity assessment service providers in the Law on Conformity Assessment, as was discussed earlier. `IzBox 6.4 in the next Chapter discusses the recent delays in implementation of the EU's "New Approach" technical regulatory regime. `I3The Government has been reducing the scope of mandatory certification as part of WTO accession negotiations. `I4 The biggest exception to this generalization involves military procurement specifications, which represent the bulk of mandatory standards inthe U S (National Research Council, 1995). 143 Accreditation 5.88 The flip side o f recognizing foreign conformity assessment providers i s gaining recognitiw by otPnllntr;PC-Tn-rornrans. . . TE- * el hccre& tion Agency o f Ukraine (NAAU) has been working to join International Laboratory Accreditation Center (ILAC), a multilateral accreditation institution. Membership will help Ukrainian laboratories that are NAAU-accredited to gain recognition in markets o f other I L A C members (and vice versa). The German accreditation agency has been providing technical assistance to NAAU to prepare for I L A C membership. TACIS is funding efforts to improve facilities at some key food processing and toy testing laboratories, a prerequisite to their gaining accreditation from EU accreditation agencies. Organizationa1Reform 5.89 Inmarket economies the different responsibilities for managing the standards regime are spread across many different organizations, some private and some public. Ukraine seems to be moving in the opposite direction: the DSSU is accumulating more new functions than it is shedding.Although the accreditationfunction was transferred from DSSUto NAAUin2002, the DSSU has expanded its mission into new directions, such as intellectual property rights enforcement. Consumer rights are now an important theme of its work. And its still maintains responsibility for overseeing conformity assessment services. A more sensible approach would be to divide rather than join: the Government should separate regulatory responsibilities from advice, extension, and advocacy. Where possible, it should move responsibilities to civil society and private enterprise. For example, the standards development process need not be conducted by a government agency at all. Certainly it shouldbe independent o fregulatory agencies or other bodies o f executive power. 5.90 The organizational responsibility for notifying new regulations to WTO members merits special attention. WTO filings report that notifications under the TBT Agreement will be handled by DSSU's National Information Center. The organization has plans to post translations o f draft technical regulations on its website in line with WTO requirements, but as recently as October 2004, attempts to find more than translations o f the basic laws on the website were unsuccessful. More recently, the MEEIhas indicated that a unifiedTBT-SPS enquiry point will be established inthe MEEI, which inturn will liaise with the DSSUand other technical agencies. Where it is housed i s perhaps less important than how its mission i s defined. The enquiry point should be designedto provide two-way notification. It should be designed from the ground up as an institution that channels other countries' notifications to the business and technical community in Ukraine, and not solely to respond to other countries' requests for information. The trade team at the MEEI should then incorporate feedback from the private sector into its commercial dipl~macy."~ '''Two mechanismsthat might serve as usefulmodelsare the US govemment's "Report aTrade Barrier" website and its "Export Alert" e-mail distribution system for TBT and SPS notifications that other countries submit to the WTO. These are at httu:llwww.tcc.mac.doc. gov/ andhttp:llts.nist.govlts/htdocs/21Olncscilexport-alert.htm. 144 Technical Assistance 5.91 . . Building a market-oriented industrial standards regime will require more than the exemsestaki- cafWTO PC4 n. Bothpublic and private sector investment will be needed. Donors can contribute to institutional reform through technical assistance and lending programs. Table 5.5 below lists some measures undertaken in World Bank-funded standards development projects during the 1990s in Turkey, Russia, and Indonesia. These give some indication o f the scale o f fundingthat could be required. Table 5.5: Technical Standards Projects Country Project cost (US$) Duration TurkeyI Construct facilities, procure equipment $74.2 million 1991-97 and train staff at metrology and quality campus Reorganize management of standards institute Establish independent accreditation organization Indonesia IS09000 (quality management) extension $5 million 1995-2001 services Russia Establish WTO enquirypoint $34 million 199699 Harmonize standards Gain international accreditation Turkey I1 Procure metrology equipment $42.5 million 1999-present Reorganize management o fmetrology institute Source: WorldBank project documents. SPSAgreement 5.92 Most, ifnot all, countries have laws goveming food, plant and animal hygiene, andjust as many countries accuse others of applying such laws to protect domestic producers rather than public health. The Uruguay Round introduced new rules to impose disciplines on national laws inthose areas. As with other WTO agreements, the SPS agreement requires WTO members to apply their laws transparently, without discrimination between different exporting countries, and treating imported products no less favorably than domestic products. According to accounts o f Ukraine's accession negotiations, WTO members frequently complain about onerous existing government regulations (e.g., rules on meat inspections). The response is typically that these meet conditions o f national treatment, transparency, and nondiscrimination and are therefore WTO-compliant. As with technical regulations, this i s "faimess" that hurts foreign and domestic firms alike, and is not the sort o f national treatment that those drafting the SPS agreement had in mind. Inaddition to the standard clauses on transparency and faimess, the SPS agreement also requires that members should: 145 0 base their regulations on principles o f "sound science" and existing international standards;' l6 0 introduce hazard control and risk-assessment procedures; 0 recognize the concept o f disease and pest-free areas; 0 write SPS rules that impede trade flows to the minimum extent possible (without sacrificing national health objectives); and 0 establish enquiry points and notify other WTO members about proposednew regulations. 5.93 These points imply the need for governments to devote legal, administrative, and scientific resources to rewriting laws, establishing new regulatory oversight bodies, outfitting laboratories and pest control facilities, and expanding agricultural extension activities. One should not infer from these comments that the SPS agreement i s onerous, but rather that implementingit is not a cost-free exercise. 5.94 On its surface, the SPS agreement appears to favor developing countries (especially food exporters) at the expense o f richer countries, where consumers have most aggressively introduced restrictive food safety laws - the agreement seemingly blocks importing countries from imposing arbitrary and capricious food safety rules at the border. Inpractice, however, the SPS agreement seems to be contributing to a "race to the top" in food safety regulation^."^ The agreement explicitly recognizes certain international agreements establishing food safety rules, which generally codify the generally stricter standards developed by OECD countries. Those standards are presumed to be already SPS-compliant, while other countries face the burden o f proving that their standards are also compliant. Meeting importing countries' standards requires exporting countries to upgrade their systems for disease control and prevention. The administrative cost o f improving a SPS regime obviously depends on the nature o f a country's agricultural industries and exposure to pests. World Bank projects in developing countries to eradicate diseases after they've broken out have consumed hundreds o f millions o f dollars. Argentina spent US$l50 million per year during the early 1990s to eliminate foot and mouth disease and thereby enable the ranchers to export fresh beef to the US and Western Europe."* Algeria spent US$112 million in 1988-90 to fight a plague o f locusts (World Bank, 1993). Preventing future outbreaks i s somewhat less expensive, and involves improving quarantine facilities, vaccination programs, capacity building, improving veterinary and agricultural extension services, and public education campaigns. 5.95 In Ukraine, USAID is currently funding a project to revise laws relevant to the SPS agreement, harmonize all Ukrainian SPS measures with international standards, and ensure compliance with WTO norms. TACIS has a SPS project that will help create an information center and introduce hazard analysis and critical control point systems. Compliance with international trade rules i s the first step toward integration into world food products markets. It ' I 6The WTO does not set these standards, but instead recognizes rules established by the Codex Alimentarius Commission, the InternationalOffice of Epizootics and the Intemational Plant Protection Convention. ''*See `I7 for example Otsuki et al. (2001a and 2001b). "Beef Exports Are Back," IDBAme`rica(August 1997). This "elimination" was short-lived-trade was halted a few years later when foot-and-mouth disease resurfaced in Argentina. 146 must be supplemented with improvements inthe general agriculture and food-processing supply chain. 5.96 WTO rules place two mainrequirements onmember countries' customs practices. First, members must value imports according to the price paid or payable for the good in the market, rather than establishing non-market reference prices. Second, apart from ordinary customs duties, any fees, charges, etc. that a member levies on imports or exports-including customs clearance fees-must reflect the Government's cost o f providing the relevant service. Ukraine's new customs code (described earlier) establishes the legal basis for compliance with these requirements. 5.97 Slow clearance and other institutional problems appear to impose greater barriers to trade than non-compliance with WTO rules. Delayed clearance increases the costs o f conducting international trade-time i s money-and prevents Ukrainian producers from integrating into international supply chains where just-in-time inventory management, rapid replenishment, and other modem supply management techniques are prevalent. In many countries, slow clearance enables inspectors to extort bribes from traders. InUkraine, according to State Customs Service (SCS) officials, if all paperwork for all agencies (not just customs) conducting border clearance is in order, clearance can take one day. If not, it may take several weeks. Contrast this with clearance statistics o f 50-100 minutes for most border points in Southeastern Europe, as reported by the South East Europe Trade and Transport Facilitation Project. Clearance times have dropped to around 30 minutes at many o fthese posts.119 5.98 SCS officials acknowledged problems with slow clearance, identified several contributing factors, and described the following measures the SCS is taking to speed up border processingand customs clearance: 0 The practice o f physically inspecting all shipments drives up clearance times. The SCS has established a risk analysis unit to lay the groundwork for more selective physical inspections. 0 Currently at least six government agencies may need to conduct clearances at the border. In addition to inspections by the border guard and the SCS, the State Tax Administration, DSSU, Ministry of Health, Ministry o f Agriculture, and the veterinary inspector may need to clear shipments. The SCS proposed centralizing all control procedures under the SCS, but was rebuffedby the other agencies. The SCS i s preparing a new proposal to at least allow it to conduct a unified clearance check for low-risk goods. 0 The SCS lacks the information technology infrastructure to automate clearances. In addition, existing laws restrict its authority to conduct post-clearance audits o f traders, thereby, acting as a de facto barrier to fuller automation o f clearance procedures. SCS officials said they are unable to address these legislative reforms. ` I 9See http://www,seerecon.org/ttfse. This comparison of clearance times should be taken as only a rough estimate as the calculation of total clearance times i s quite sensitive to the methodology used. 147 5.99 More general progress with civil service reforms may also be necessary, including improved personnel management, hiringpractices, training, and pay scales. Civil service reform -is often an important ingredient in successful- customs modernization programs. Payelevelsb~ ~ e ~ ~ - ~ ~ CISSb - & i ~ than insome other Ukrainian government agencies. 5.100 Both the U S and the EUhave been providing training for customs valuation as part o f WTO-related assistance. In addition, both recently started large assistance projects related to customs andborder clearance, which could be summarized as fol1owing:l2' 0 Last July TACIS signed a two-year, 2 million project (called "Customs-7'' provide technical assistance for the modernizationo f Ukraine's customs service.I l l November 2003, the European Commission promised to spend 16.5 million to improve the physical infrastructure o f border posts in Yahotyn, Rava-Ruska and Uzhhorod, andbringthose posts into conformity with EUstandards.'22 0 The U S recently beganworking on the regional trade and transport facilitation project for G W A M countries, modeled after the project in Southeastern Europe. The SCS reportedly requestedUS$40 million from the US.for customs modernization. 0 In addition, customs authorities in CIS countries recently signed a customs cooperation agreement and pledged to both simplify and harmonize clearance procedures inmember countries. E. CONCLUSIONS 5.101 This review o f Ukraine's WTO accession reveals that much has already been done in the name o f WTO accession. The Government has passed hundreds o f new laws and written thousands o f pages inresponse to questions from WTO members about its trade policies. These do not yet add up to a protocol o f accession, but the end appears to be in sight. To bring negotiations to a successful conclusion, the Government will need, first o f all, to concentrate on the domestic reform agenda: negotiating the WTO agenda with domestic constituencies, includingRada and individual interest groups. Legal analyses have been conducted. A roadmap for legal reforms is with the MEEI. What remains i s to mobilize the political will behind successful passage o f these laws. If Ukraine i s serious about joining the WTO, the top country leadership advocating accession will need to devote political capital to this task and communicate its political importance to the Rada and general public more effectively. This legal agenda should take precedence over bilateral market access negotiations-generous tariff concessions will not compensate for a weak legal environment. The trade agenda will also need higher priority inthe legislative program o fthe Rada. 5.102 Priority measures to accelerate W T O membership include the following: I2OInvestments in infrastructure improvements alone do not, in and of themselves, lead to quicker clearance. Customs experts note that simply changing the traffic flow pattem, without necessarily investing any money in physical infrastructure, often bringsthe largest reductions in clearance times. 12'European Report (July 19,2003). `22BBC Monitoring: Ukraine and Baltics (November 17, 2003). 148 0 rewritingthe Law on ForeignEconomic Activity; 0 eliminating all non-tariff interventions inthe sugar market; 0 reducing/eliminating export taxes; 0- m e n i n g theifst o f goods requiringmmdm- d o n ; 0 passing amendments to the CD-ROM import licensing law; and 0 passing amendments to the law on the automobile industry. 5.103 The Government has to improve its intra-agency cooperation with respect to resolving the pending issues o f the WTO agenda. The MEEIneeds to get additional political support from top government officials for efficient mobilization o f all government entities to work as a team. Stronger engagement o f the private sector in both domestic policy dialogue and commercial diplomacy abroad i s also desirable. There i s a need to advance and expand public discussions on the role o fagricultural issues inthe WTO accessionprocess. 5.104 Even ifthe political will i s mobilized and cooperation among stakeholders is improved, experts suggest it will likely take at least another twelve months to work through the full agenda o f legal reforms. The GOU should be realistic and adjust the overall timetable for WTO accession accordingly. But delaying accession at this stage would cause Ukraine to forego an important opportunity to integrate into the world economy. All around the world, countries are making concerted efforts to opentheir marketsandreap the benefits o f a more open intemational economy. 5.105 Full legal compliance with WTO rules will satisfy WTO members, but will not automatically yield benefits for the Ukrainian economy. To take advantage o f dispute settlement mechanisms available to WTO members, the MEEI will first need to enhance its capacity to conduct commercial diplomacy. More effective public engagement and better inter-agency coordination will help the MEEI address foreign countries' unfair trade barriers. More importantly, the Government will need to undertake significant institutional reforms to implement WTO regulatory rules in ways that facilitate integration into the world economy. Customs modemization and standardsreform will likely yield the biggest payoffs. 5.106 WTO accession and addressing the post-WTO accession agenda are critically dependent upon availability o f relevant intemational expertise. Currently the GOU has access to a broad range o f donor-funded sources o f technical expertise, but it i s not always using this assistance efficiently. More technical assistance may be needed over the next several years, but the Government will have to upgrade its capability to channel donors' programs toward the critical components o f its own agenda and avoid delays in the implementation o f assistance programs. 149 CHAPTER6. MEDIUM-TERMPRIORITIESFORTRADE INTEGRATIONSTRATEGY123 6.1 The objective o f this Chapter i s to discuss some fundamental principles o f the Ukrainian trade policy and develop recommendations that would help the government prioritize its medium-term integration strategy. At the moment, there remain considerable inconsistencies in Ukraine's trade strategy. A leading example is an adoption o f the two strongly worded declarations insupport o f both "European Choice o f Ukraine" andthe "Single Economic Space". These inconsistencies are confusing for Ukrainian business people and trade partners, and they complicate the process o f attaining of Ukraine's strategic goals. Some other examples o f such inconsistencies are as follows: 0 Signing specific declarations within the framework o f the Single Economic Space (SES) could be interpreted as an intention to establish a customs union with its CIS partners. Harmonization o f external tariffs with other members of such a customs union before completing the WTO accession process poses the risk o f re-negotiating the conditions o f accession. 0 There could be a better balance between pursuingoverarching political objectives o f the integration processes with the EU and immediate practical steps toward trade integration. Political integration with the EU (EU membership) can only be considered in the long- term perspective. This does not ignore the fact that at the moment Ukraine has a unique opportunity to accelerate its economic integration with Europe by pushing the idea o f a free trade agreement with the EU, without linking this agreement to the issue o f EU membership. However, the current pace o f the trade integration process with the EU appears to have slowed down considerably. 0 Government's WTO inspirations and its non-market are inconsistent with often WTO- inconsistent approaches to a resolution o f specific sectoral problems inthe real sector by introducing administrative restrictions on market mechanisms, providing implicit subsidies to local producers, and beingweak in limitingthe influence o f sectoral interests on government policies. 0 Declarations on strengthening economic integration with both the EU and Russia are accompanied by a considerable number o f ongoing trade disputes. In several cases, in particular with respect to Ukraine-Russia trade, short-term economic gains from the contingency measures introduced are quite insignificant and are not worth the damage o f souring trade relations. Such micro trade wars bring about considerable political damage and inflate the ambitions o f sectoral lobbyists. They also bring longer-term economic losses byreducing domestic competition. 123This Chapter i s largelybased on the backgroundpaperpreparedby Dr. Igor Burakovsky (IER). 151 0 Inconsistencies are also noticeable at a more technical level. For instance, Ukraine committed itself to adopting EUtechnical directives and standards, but at the same time it drags out this process by maintaining a regime largely based on mandatory GOST standards. ~~ ~ ~~ 6.2 Given the prevailing sentiments in the EU after the 2004 enlargement, it may be difficult for Ukraineto secure a firm commitment regarding its full EUmembership inthenear future. Under the circumstances, Ukraine needs to formulate a trade policy strategy which anticipates a fairly protracted interim period leading up to EU accession. In particular, a clear and realistic government strategy is important to help private sector participants adjust their expectations and shift from waiting to investing mode o f operations. It is also important for Ukraine's international partners: WTO members reportedly complain that the lack o f a coherent strategy renders Ukraine's policy commitments less than fully credible. This chapter intends to suggest several principles for such a strategy. A. TRADEINTEGRATIONWITH THE EU:FOLLOW PRAGMATIC APPROACH TOWARD ATTAINING REALISTIC GOALS 6.3 Ukraine had long ago declared a strategic goal for European integration, meaning full membership in the EU.'24Since the early 9Os, prospects o f EU membership, i.e., full political integration, played an important role inspeedingup economic reforms inthe countries of Central and Eastern Europe (CEEC). This Chapter argues that in Ukraine's specific political and economic circumstances, the path toward European integration will be quite different, but nevertheless it could be equally beneficial for the country. It seems practical for Ukraine to attempt to accelerate its economic integration with the EU while leaving the issue o f EU membership to be resolved somewhat later. A free trade agreement with the EU, which would inter alia provide for some improvement in market access for Ukrainian agricultural products, should be a medium-term benchmark for the strategy. EU membership should be viewed as a long-term anchor for institutional and structural reforms in Ukraine, while the immediate and more practical agenda is WTO accession. 6.4 The basis o f the longer-term trade strategy for Ukraine could be based on its strategic advantage - location between two much larger economic entities, EUand Russia. Moreover, it i s likely that for the foreseeable future, Ukraine would have lower labor costs than its neighbors. Ukraine's policy priority should be an efficient utilization o f this advantage by positioning itself as a potentially: 0 low cost platform to produce goods and services for both CIS and CEE markets; 0 natural bridge between EU and RussidCentral Asia, Le., performing as a reliable transit country; and 0 location with low regulatory costs, good proximity to major markets, and preferential market access to its larger neighbors. Both Timmerman (2003) and Najder (2003) argue that the Ukrainian desire tojoin the EUhas been primarily of a declarative nature, and it was not supported by a coherent set of policies. 152 6.5 Economic policies to support this longer-term strategy would require an adjustment in the following directions: 0 h n g a stronger stability/precticta~ilityof- gov- `qrt-e Ukraine's partners comfortable about their longer-term choices relatedto Ukraine; 0 making a major push for free trade arrangements inboth directions (East and West), but without requesting partners to make sensitive political commitments (such as EU membership); 0 improvingthe domestic business environment and expanding an inflow o f European FDI; and 0 upgrading domestic institutions for export and investment promotion, including the launch o f a broad communication campaignto improve Ukraine's investment image as an attractive location for business and investment. 6.6 With some simplification, one may claim that there are two dimensions to Ukraine's economic integration into the EU: (i) regulatory integration, which aims at accelerating changes inthe legal and regulatory environments to make them consistent with those inthe EU; and (ii) day-to-day business integration, which aims at making EU companies comfortable with doing business in Ukraine in terms o f a level playing field, enforcement regime, quality o f business services, etc. From this perspective, real progress along these two dimensions over the last few years has been rather uneven: the government paid more attention to regulatory upgrades, and was less concemed about the remaining weaknesses in the business en~ironment."~Such an imbalance has to be addressed now: drastic improvements in the business environment would make Europeanbusinesses a major Ukrainian lobbyist for hrther integration with the EU. 6.7 Moreover, in the medium term a delay with obtaining EU membership could be beneficial for Ukraine's economic prospects, because o f a number o f reasons, such as: 0 It would provide a good opportunity for Ukraine to learn from the experience o f its neighbors that joined EU in 2004, and if needed to make adjustments to the admission strategy. 0 Likewise, it would allow for delaying the introduction o f some portions o f EU regulations, especially social and labor regulations, which potentially could be costly for the private sector. Because Ukraine has a much lower income level than both the EU-15 and new EU members, it has to be more cautious about the risk o f over-burdening the economy with regulations that are inconsistent (and unaffordable) with its current income level. 0 As mentioned above, it would provide a window o f opportunity for Ukraine to position itself as a low cost economy in close proximity to major markets, but without the EU regulatory burden. 6.8 Ukraine signed the Partnership and Cooperation Agreement (PCA) with the EU in the summer o f 1994, but the Agreement went into force only in March 1998. As discussed in 12' InMarch 2004, the Ukrainian Parliament adopted the Law on National Program of Ukraine's Legislation Conversion to that of the EU. According to the law, a major part of the new draft legislation in Ukraine has to be mandatorily subjectedto expertise to check its consistencywith Acquis Communautaire. 153 Chapter 3, Ukraine has received limited trade benefits from the Agreement so far. And the track record o f the P C A implementationhas beenmixed. On the one hand, as mentionedearlier and in line with its PCA commitments, the Government implemented a number o f steps to liberalize its trade,ecialy -after 1999 O r r ~ t ~ ~ o ~ ~ e ~ ~ - ~ ~ x p ~number . ~ ~ ho fa ~ i d e n t remaining violations o f the PCA, such as quantitative limitations on exports and imports, discriminating advantages to specific local producers, excessive certification charges for imports, etc. (Schneider, 2001). 6.9 The basic approach to its relations with Ukraine was laid down in the EU's Common Strategy o f 1999 (Box 6.1). The 2004 enlargement o f the EU triggered a new interest toward clarifying both the prospects and framework o f cooperation between the EU and Ukraine. The EUhas announced the EuropeanNeighborhoodpolicy initiative, and it also has been developing new instruments o f cooperation such as an Action Plan. It is possible that the EU would offer Ukraine an enhanced agreement that would go beyond the current PCA. Ukraine must fully utilize the potential benefits of these initiatives. Moreover, since these initiatives are not well specified yet, the GOU has a chance to develop its position in advance, which should include both"wish list" requests, as well as specific concessions the govemment is willing to make. Box 6.1: EUCommon strategy toward Ukraine The EUCommon Strategy was adopted inDecember 1999 at the Helsinki EuropeanCouncil. It covers aperiod o f four years. The Strategy aims at developing a strategic partnership between the EU and Ukraine on the basis o f the PCA, while acknowledging Ukraine's Europeanaspirations andwelcoming the country's European choice. At the same time this document says nothmg about Ukraine's potential EU membership. The strategy sets four principal goals: 0 To support the democratic andeconomic transitionprocess inUkraine; 0 To meet common challenges ofthe Europeancontinent (stability and security inEurope, environment protection, energy and nuclear safety); 0 To strengthen co-operationbetweenthe EUand Ukraine inthe context o fenlargement; assistUkraine's integration into the European and world economy; 0 To enhance co-operation inthe field o f Justice and Home Affairs. Source: EUROPEANCOUNCIL COMMONSTRATEGYof I1 December 1999on Ukraine httv://mw.eurooa.eu.int/comm/external relationdukraine/intro/#2 154 Box 6.2: Acknowledgement and aspirations: EUand Ukraine positions on strategic perspectives of mutual cooperation ~ ~~ ~~ ~ EU's position: The EU acknowledges Ukraine's European aspirations and welcomes Ukraine's pro-European choice. The EU remains f d y committed to working with Ukraine at national, regional and local levels, in order to support a successful political and economic transformation inUkraine, w h c h will facilitate Ukraine's further rapprochement with the EU. The EU and its Member States offer to share with Ukraine their various experiences in building modern political, economic, social and administrative structures, fully recognising that the main responsibility for Ukraine's future lies with Ukraine itself. The EU is also prepared to examine the circumstances which might, in addition to the World Trade Organisation (WTO) accession, allow for the future establishment o f an EU-Ukraine Free Trade Area, as foreseen inthe PCA. I Ukraine's Ukraine's position: I gaining membership with the EU i s a prospective foreign policy goal. Strategy and timetable for achieving this goal: 2003-04 - sign an associated membership agreement with the EUand conduct talks on a free trade zone; 2004-07 - Ukraine is to follow all necessary procedures needed to implement the associated membership agreement and become an associate member o f the EU; 2005-07 -Ukraine i s to set up a customs union with the EU; 2007-11-Ukraine i s to meet all the requirements for EUmembership. Source: EUROPEAN COUNCIL COMMONSTRATEGY of December 11, 1999 on Ukraine (1999/877/CFSP)// Official Journal of the European Communities 23. 12. 1999L 331. Resolution of the Verkhovna Rada ((Onprincipal directions in Ukraine'sforeign policy)), 1993. TheEuropean choice, Annual Presidential Address to the VerkhovnaRada, May 31, 2002. 6.10 For Ukraine, the President's Strategy for European Integration o f 1998 has repeatedly been confirmed at various levels (See also AHT, 2003). Ukraine has officaly declared its intention to become an EU member, while the EU so far has only acknowledged Ukraine's European aspirations. The EUdoes not consider Ukraine as a prospective EUmember at least in the medium run,but it is ready (with some reservations) to discuss the possibility o f establishing a free trade zone (Box 6.2). 6.11 An important pre-condition for negotiating an FTA with the EU is Ukraine's WTO accession. As argued elsewhere inthis report, completion o f the WTO accession process (based primarily on commitments that are EU-consistent) is currently the best option available for Ukraine's policy to accelerate its Europeanintegration. Establishing a trade-compatible business climate for foreign investors in Ukraine has more potential for improving access to European markets than opportunities associated with obtaining additional trade preferences from the EU. Two other major issues in Ukraine-EU trade relations (lack o f the market economy status for Ukraine and EU safeguard measures against Ukraine) have also to be resolved as part o f the WTO accession process. 6.12 Market economy status. Ukraine does not have market economy status either inthe EU or the US. This status is important for antidumping investigations in both markets, since non- market economies are discriminated against in the course o f such investigations. The U S also places limits on MFN treatment extended to imports from countries labeled as non-market 155 economies.'26 At present, the EU classifies Ukraine as a "country in transition,'' which means that individual companies subject to anti-dumping investigations can request to be treated as if Ukraine were a market ec0n0my.l~~ October 2000, the EU Council o f Ministers passed a In d e c i s i i n i a n t i n g market economy enterprise status for particular Ukrainian firms fnarcan substantiate that they operate under market economy conditions.12* 6.13 The European Commission cites two significant unresolved issues hindering the granting o f market economy status to Ukraine: (i)bankruptcy legislation, and (ii)state intervention in the price-setting mechanism. The EU believes that current Ukrainian legislation blocks initiating bankruptcy procedures for certain state-owned enterprises under circumstances that are not clearly definedby law and therefore could be interpreted too liberally. There is also a concern that so-called "city-forming enterprises" are protected from the bankruptcy law, and as such they may potentially be able to export whilst technically being bankrupt. 6.14 The EU Commission also believes that the state continues its market-distorting interventions in pricing of specific commodities, such as fertilizers and metals. Both complaints are valid, and the GOU has to prepare a reasonable compromise in the context o f its WTO negotiations to appease EUconcerns. 6.15 EU representatives and others frequently argue that gaining market economy status would not appreciably change Ukraine's access to the EUmarket, since this classification affects only anti-dumping investigations and since the EU imposes anti-dumping duties on fewer than ten products from Ukraine. These products collectively make up a small fraction o f Ukraine's total exports to the EU. While true, the continued classification o f Ukraine as something other than a normal market economy, despite the extensive economic reforms undertaken in the past decade, nevertheless has more than symbolic importance. It seriously hurts Ukraine's investment image and causes a chilling effect on foreign companies' willingness to invest inUkraine and do business with their Ukrainian counterparts. 6.16 Trade protection measures against Ukraine. The safeguard measures against Ukraine are described in some detail in Chapter 3. Inthe medium run, the EU i s likely to continue the application o f quotas on steel imports from Ukraine. However, after the accession o f CEEC into the EU in May 2004, the quotas have been revised upwards taking into account the achieved level o f Ukrainian exports to CEE. Anyway, the analysis presented in Chapter 3 reveals that the existing trade protection measures do not appear to constitute a major constraint for Ukrainian exports to the EU. 126The U.S. President must issue an annual waiver to renew MFN treatment. Bills have been introduced to give Ukraine a permanent waiver, but none have beenpassed. 12'Other "countries in transition" are Albania, Armenia, China, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Mongolia, and Vietnam. The EU applies the more restrictive classification of "non market economy" to Azerbaijan, Belarus, North Korea, Tajikistan, and Turkmenistan.Russiaachieved market economy status in2002. '*'Later in 2001, the EU recognized the market economy status of two Ukrainian enterprises, JSC h o t (Cherkassy) and JSC Concem Stirol (Gorlovka). COMMISSION REGULATION (EC) No 1497/2001 of 20 July 2001. Overall, seven Ukrainian firms have requestedthis status, according to communications with EU officials. 156 B. TRADE INTEGRATIONWITH THE CIS: EXPANDCOOPERATIONBASEDONWTO PRINCIPLES &lT-A s amemberofthe CIS, Ukrainehasfreetrade agree- ' -er Soviet republics. Although the CIS was established in 1991, and the Plurilateral Agreement on the Establishment o fthe Free Trade Area was signed by all CIS countries (except Turkmenistan) in 1994, this framework agreement has never been ratified by all signatories. As a result, the FTA in the CIS has been established through a web o f bilateral trade agreements among its members. 6.18 Overall, available evidence suggests that the CIS free trade area generates a lot o f intra- bloc trade (see Freinkman, Polyakov, Revenco (2004) for a quantitative analysis o f intra-CIS trade). Due to its common economic and political past, CIS members trade more among each other than it would be expected from economies at this income level and other fundamentals. Moreover, this "excessive" intra-bloc trade i s not trade diverting because it does not reduce the trade flows between the CIS members and the rest o f the world. 6.19 Table 6.1 presents Ukraine's bilateral free trade agreements ineffect today. All o f them are with the other CIS members except for Macedonia, whose FTA i s plagued by extensive exemptions from the free trade regime and does not have much significance for Ukraine's trade. The wording o f the signed bilateral FTAs i s rather similar. They stipulate import duty-free trade in all goods (while allowing for unspecified potential exemptions) and free transit o f goods through the signatories' territories. 6.20 The exemptions from the free trade regime are introduced in the protocols to the bilateral free trade agreements. These protocols are considered inseparable parts o f the agreements and are defined by bilateral trade committees, which meet on an annual basis, Exempted products are subject to MFNtariff rates. These exemptions can be non- symmetric, i.e., in the same trade dyad each partner can exclude different products. Introduced exemptions are normally accompanied by a schedule to eliminate them. Although there is an agreement to eliminate about 90 percent o f existing exemptions between 2004 and 2009, the last portion o f exemptions are not plannedto disappear before 2012. 157 Table 6.1: Bilateral free trade arrangements signed and ratified by Ukraine Country Date Exemptions from free trade Armenia October 7, 1994 None Azerbaijan July 28, 1995 None Belarus December 17, 1992 White sugar; homed cattle undergrowth, cows, bulls, others cattle, live sheep, homed cattle hides, sheep or lamb hides, pig hides. In2002, Ukraine unilaterally excluded fromthe free trade regime: Sugar made of sugar-cane or sugar-beet, chemically pure sucrose, insolid state; other kinds of sugar including chemically pure lactose, maltose, glucose and fructose, insolid state; sugar syrups without aromatic substancesor dyes; artificial honey, mixed or non-mixed with natural honey; caramel sugar and molasses. Georgia January 9, 1995 In2004, Ukraine unilaterally excludedfromthe free trade regime: Sugar and sugar syrups Kazakhstan September 17, 1994 Live homed cattle (undergrowth), cows, bulls, others cattle, live sheep, homed cattle hides, sheep or lamb hides, pig hides; Alcoholic and non-alcoholic beverages; Tobacco and tobacco substitutes (industrial) Kyrgyzstan May26, 1995 None Moldova August 29, 1995 In2001, Ukraine unilaterally excluded from the free trade regime: Sugar made o f sugar-cane or sugar-beet, chemically pure sucrose, in solid state; other kinds o f sugar including chemically pure lactose, maltose, glucose and fructose, insolid state; sugar syrups without aromatic substances or dyes; artificial honey, mixed or non-mixed withnatural honey; caramel sugar and molasses. In2004, Ukraine unilaterally excludedfromthe free trade regime: Sugar and sugar syrups, seeds of sugar-beet Russian June 24.1993 Exported from Russia to Ukraine: white sugar; confectionery (including white Federation chocolate) without cocoa: white chocolate, boiled candies with or without filling, caramel and similar goods indifferentforms; chocolate and other cocoa inclusive food substances with or without filling, sweet cookie and wafers; cigars, cigars with cut tips, cigarillos, and cigarettes made o f tobacco or tobacco substitutes. Exported from Ukraine to Russia: white sugar, non-denatured ethyl alcohol with alcohol no less than 80 percent proof, denatured ethyl alcohol and alcoholic drinks o f any proof, non-denatured ethyl alcohol les than 80 percent proof, cigars, cigars with cut tips, cigarillos, and cigarettes made o ftobacco or tobacco substitutes. In2004, Ukraine unilaterally excludedfromthe free trade regime: Sugar SPPS Tajikistan July 6, 2001 None Turkmenistan November 5,1994 None Uzbekistan December 29, 1994 In1994, the parties signed aProtocolonexemptions from the free trade regime: Live homed cattle (undergrowth), cows, bulls, others cattle, live sheep, homed cattle hides, sheep or lamb hides, pig hides. Precious metal ores and concentrates, precious metals incolloidal state, organic and inorganic compounds o fprecious metals. Non-processed and semi-processed precious stones and metals. Waste and scrap ofprecious metals, waste and scrap of metals with additions 158 o f precious metals. The same Protocol contains the list o f exemptions from free trade regime unilaterally applied by Uzbelustan: Export: Non-ferrous metals, rollednon-ferrous metals, non-ferrous metals waste and scrap; Crude oil, gas condensmpffor o fdlErenttypes,-gaS;oil (diesel oil); Cottonfiber; Precious metals, precious metals alloys and products, waste and scrap o fprecious metals, natural precious stones and products fromprecious stones, waste andpowder and recuperator o f natural precious stones, pearls andpearls products, amber and amber products. Import: Drugs, toxins, narcotics andpsychotropics, chemical herbicides Macedonia January 18,2001 Tenyear transition periodto implementthe free trade regime FTA covers HS commodity groups 1-24 (agricultural goods) and25-97 (industrial goods) Exemptions: mannitol, sorbitol, other aromatic mixtures o f substances and mixtures, casein for textile fiber production and industrial purposes except producing foodstuff or forage, albumin and albumin derivatives, dextrin and other modified types o f starch, fixing agents and dye meant for ink fixing, natural cork, disheveled or unbleached cotton, raw or processed flax other than spunincluding tow and waste, raw or processed cannabis sativa including tow and waste. Source: IER. 6.21 The free trade agreements stipulate the possibility of contingent protection - temporary protection, antidumping measures, and safeguard measures. Temporary quantitative restrictions for imports or exports can be introduced unilaterally (normally for up to two years) incases o f an acute shortage o f the goods in question on the internal markets, large deficits in the balance o f payments, realized or potential injury for domestic producers, and/or as re-export control measures. The laws on antidumping and safeguards in Russia, Ukraine, and most other CIS members (those who have enacted such laws) are in line with WTO rules. The problem, however, lies in their application, which i s basically unilateral, with little recourse provided to the targeted country. 6.22 Contingent protection measures are most pronounced in Russo-Ukrainian trade, in which reciprocal protection measures have been plaguing bilateral trade relations for years (see Box 6.3). I Box 6.3: Russo-Ukrainian Reciprocal Trade Protection Measures Here are some recent salvos o f the protracted trade confrontation between Russia and Ukraine. In 1999, Ukraine imposed special quotas on electric filaments, artificial furs, and worsted canvas, and, in2000, on some polyurethane products. The same year, it replaced the quota on electric bulbs with an anti-dumping tariff o f 97.5 percent for a period o f five years. Russia immediately responded with anti-dumping tariffs on Ukrainian metal pipes. In 2001, after bilateral negotiations, Russian antidumping measures on pipes were liftedbut replaced with negotiated quotas. In2002, Ukraine imposed an anti-dumping tariff of 59.4 percent on crossing pieces. The same year it threatened to impose tariff quotas on a variety o f Russianproducts from the textile and chemical industries ifRussia re-introduced a special tariff on Ukrainian metal pipes. In 2002-04, Russia introduced safeguard tariffs on Ukrainian zinc, steel, rolled ferrous metal products, armature, ball bearings, caramel, cocoa-containing candies and confectionery products, corn starch, fire-bricks, baking soda, electric bulbs, syringes, and quotas on pipes and poultry products. Ukraine introduced safeguard tariffs on cars with an engine capacity o f 1,000-1,500 cm3 (the majority o f Russian- produced cars are in this category), matches, railway switches, and biscuits, and quotas on syringes, baking soda, and Portlandcement. These measures are ineffect as o f mid-2004. 159 6.23 While the list o f discriminated products looks impressive, it covers only a fraction of both actual and potential bilateral trade. According to the Russian Ministry o f Economic Development and Trade, the aggregate estimate o f the damage these restrictions impose on m p ~ c t i v t n m miinon a y"useof .,,. m . I Ukrainian restrictions, and Ukraine loses around US$l50 million a year. Russia's damage is equivalent to about 3.5 percent o f its 2003 non-energy exports to Ukraine, and Ukraine's damage is equivalent to 3.5 percent o f its exports to Russia'29. 6.24 However, some impacts o f these micro trade wars can be detected inbilateral trade. For instance, in 2001, Russia experienced a fall in machinery exports to Ukraine due to the imposition o f a quota on car imports. In the same year, Ukraine experienced a dive in its metal products exports to Russia due to a quota on pipes. However, the negative impacts o f these measures had beenovercome by 2003, when both export flows exceeded their pre-2001 levels. 6.25 Nevertheless, the frequent application o f contingent protection brings unnecessary uncertainty to CIS trade. Moreover, there i s no established mechanism in the CIS which would govern dispute resolution cases and provide for some protection o f exporters' rights. In addition, the competition policy within the bloc remains largely unregulated. As a result, current CIS trade could be legally affected by possible export subsidies of different types.' Adhering to WTO disciplines (inregulatingbothdispute resolution and export subsidization) would help to resolve acrid issues o f contingent protection. 6.26 Another sour issue o f Russo-Ukrainian trade relations until recently has been Russia's continued application o f VAT on its exports o f oil and gas to the CIS. Despite its general switch to a destination principle in taxation o f foreign trade within the CIS, Russia preserved the old arrangements for its main fuel exports due to obvious fiscal reasons. Inorder to lower domestic energy prices, Ukraine decided to avoid double VAT taxation o f fuel and it waived VAT on imports o f these products, foregoing considerable amounts inpotential tax revenues. Such direct VAT losses are estimated to be close to on average US$650 million a year (1.5 percent o f Ukrainian GDP). While some portion o f this loss was ultimately recovered through taxation of domestic energy users, net fiscal costs remained considerable due to various leakages in the system.13' However, the goal o f keeping domestic prices on energy products inUkraine low has been generally achieved. For instance, in the summer o f 2004, the price o f gasoline in Ukraine was only 10 percent higher than in Moscow (55 U S cents versus 50 U S cents per liter o f grade A95). In the summer o f 2004, Russia announced this export tax would be eliminated in early 2005, thus removing a major bilateral trade problem. 6.27 CIS members' trade benefits from rather liberal rules o f origin introduced by the bloc. The basic criterion o f sufficient processingis a change intariffheading. According to this rule, a product i s considered to be o f CIS origin if it i s fully produced in the CIS country or, when 12' Other CIS countries also occasionally resort to trade safeguard measures. For instance, Kazakhstan used temporary protection measures from 1999 to 2000 on cement, metal pipes, agricultural products and foods. These measures were caused by weakened Kazakhtrade competitiveness due to a relative appreciation of the Kazakhtenge vis-&vis the currencies of its main trading partners in the CIS (due to the 1998 Russia crisis) and were lifted soon after the depreciation o f the tenge. I 3 O Iti s worth noting that, because of its limited effect on the real sector, full economic costs of this taxation to Ukraine are considerably lower than its fiscal costs. 160 imports are used in its production, if the designation o f the product i s different from the designation o f the inputs according the 4-digit Harmonized System clas~ification.'~~Two other rules are ad valorem (50 percent value added in the free trade area) and technological Lee4.- * e " \'pw valorem rule allows for the full cumulation o f origin among all 12 CIS countries and, hence, all materials originating in the CIS area can be included to satisfy requirements concerning sufficient domestic processing. These rules of origin do not seem overly restrictive, although the 50-percent value added requirement appears quite demanding. 6.28 CIS members also recognize each other's standards according to their 1992 Mutual Recognition Agreement (amendedin2000). The Agreement established the Interstate Council on Standards, Metrology, and Certification, which develops a system o f harmonized (mutually recognized) standards. The harmonized set o f standards is, however, only a part o f the national standards systems o f each of the CIS members. The reciprocal recognition applies only to interstate standards, but does not cover national standards.Because most members introduce new national standards on an ad hoc basis, this leads to problemswith mutual recognition. 6.29 As discussed in Chapter 4 o f this report, Ukraine, together with Russia and other CIS members, faces a monumentaltask of the harmonization o f standards with international norms. The process o f harmonization is under way in all these countries, albeit at a different pace. It is important to ensure that common CIS standards do not act as a drag inthis harmonization effort. The Interstate Council on Standards should reform the interstate CIS standards system in accordance with WTO guidelines and international standards systems. 6.30 At the same time, there are two main problems with the existing bilateral trade agreements inthe CIS: 0 A lack o f permanency of the existing free trade agreements. Potential exemptions from the free trade regime create a degree o funcertaintywith respect to future market access. 0 The general weakness o f mechanisms and rules to support the development o f intra- bloc trade affairs. This includes lack o f a transparent mechanism of dispute resolution with respect to potential contingency measures. 6.31 A number o f CIS and bilateral agreements on transit have been largely ineffective and failed to bring about free transit in the region, despite the fact that many of these agreements provide for national treatment o f CIS transportation companies. The principleo f transit freedom i s upheld in the above-mentioned FTAs, as well as in specialized CIS agreements, such as Agreement on Transit through the Territories o f CIS members (1997), Agreement on Common Transport Policies inthe CIS (1997), the Agreement on Transport Tariffs inthe CIS (1997), and others. However, these agreements intheir current form are more like political statements rather than practical implementation arrangements. Ukraine has not been providing a reliable and free transit corridor for its neighbors so far. The history o f transit disputes with and complaints by Moldova and Russia has been quite long and expansive. The Ukrainian Govemment's policy on 13'This i s the defaultprinciple.However, a number of goods are exemptedfrom this rule. 161 transport tariff regulation (especially, on railways and pipelines) maintains the protection o f the domestic market as one o f its main goals. 6.32 ustom- m-7l t h r o w c r f 3 d e m the region. Despite Customs cooperation agreements within the CIS and a number o f bilateral agreements, transit countries do not always recognize the seals and documents o f transiting countries. Moreover, transit countries tend to create extra hurdles in customs clearance, often in violation o f the existing agreements. These hurdles include mandatory high-cost customs convoying, insurance, and other highfees. 6.33 While many existing agreements in the CIS do not operate properly, there i s a clear tendency within the CIS to propose new, ever more complex, schemes o f cooperation. The new Agreement on the Single Economic Space (SES) has recently initiated a new integration effort. The SES includes the four largest out o f twelve CIS members - Russia, Ukraine, Kazakhstan, and Belarus. The declared intentions o f contracting parties are very ambitious and present a mixture o f different elements belonging to different types o f regional integration arrangements, such as free trade zone without exceptions and limitations, a Customs Union, and even an economic and monetary union.'32 International experience suggests that the process o f regional integration has its own logic o f transition from one integration stage to another: Free Trade Area +Customs Union+CommonMarket+Economic andMonetary Union+Political Union. At this point, it is important for SES partners to sequence properly the proposed integration efforts. 6.34 It is worth noting that there is a fundamental contradiction between Ukraine's aspirations to join the EU (which among other things is a customs union on its own) and the language o f signed SES declarations that suggests a future formation o f the customs and monetary union. Ukraine's membership intwo customs unions simultaneously could be possible only if these two regional blocks merge. Thus, in the longer term, simultaneous economic integration into the EU and the SES does not represent a sustainable strategy. However, in the mediumterm, Ukraine could and should pursue its free trade agenda inboth directions (EU and SES) inparallel. 6.35 Improving the functioning o f the existing free trade zone inthe CIS should be the first priority'33 at least due to the following reasons: 0 A free trade zone is much easier to implement than a customs union. At the same time, the free trade zone would not hamper the process o f WTO accession. 0 All SES contracting parties had already signed bilateral free trade agreements and the plurilateral free trade agreement. Thus, there i s a good foundation to buildupon. 13*Polese (2003) argues that the establishmentof SES is drivenprimarily by political, but not economic considerations. 133According to Ukrainian President Kuchma, "Our position has remained unchanged: completing the creation of full scale free trade zone without exemptions andrestrictions is apriority task withinthe context o f Single Economic Space formation." President's Speech at the meeting o f the Heads o f States that signed the Agreement on SES formation, March 24,2004 ht~://www.~resident.eov.ua/activity/za~avinterv/~erfomiance/256180.html 167 162 6.36 Future transition from a free trade area to a customs union (and to higher integration arrangements) would depend primarily upon experience gained and mutual trust among the partners. These pre-conditions have still to be met because so far the free trade zone in the CIS has not been working properly. A heavy political flavor o f integration discussions and earlier multiple failures to accelerate real integration within the CIS neither strengthen mutual trust nor help to make a discussion o f complex integration issues more constructive. Yet it is too early to judge whether the SES initiative will be more successful than similar politically motivated attempts in the past (from the CIS Customs Union to EURASEC and to Russia-Belarus union state). 6.37 After individual CIS members join the WTO, it would help them to make the operations o f their regional trade bloc more predictable and generally more efficient. WTO membership i s important as a tool for establishing the rule-based behavior o f CIS countries. At o f now, the CIS bloc lacks some basic features o f a multilateral trade integration unit, as defined by the WTO. Bringing WTO principles and disciplines to the rescue would strengthenintra-CIS trade links. In addition, harmonization o f the regulatory regimes through the WTO would bring the regulatory environments o fUkraine and its CIS partners closer. 6.38 It is clear that Ukraine needs to preserve and further develop mutually beneficial links with the CIS countries in order to secure market access for Ukrainian products and the supply o f critically important inputs (especially energy and other resources). At the same time, enhancing CIS cooperation must not prevent Ukraine from further integration into the world economy, WTO accession, and European integration. From this perspective, it is important for Ukraine to avoid specific commitments within the SES initiative, which potentially could become a barrier for its completion o f WTO accession. Inparticular, the following points are worth noting: 0 While improving free trade arrangements in the CIS i s clearly in Ukraine's interests, harmonizing external tariff with the members o f the proposed customs union could become a major problem with the WTO accession process because it may require re- starting negotiations on the tariff offer. (It i s unlikely that a future common tariff in the potential Customs Union'34 would be identical to the one proposed by Ukraine in its WTO bid.) Moreover, so far Russia has been following a much more protectionist strategy (which inpart reflects the peculiarities o f its industrial structure) than Ukraine. It is questionable that under the circumstances aligning its tariff structure with Russia is in Ukraine's longer-term interests, ifthe latter i s serious about its European integration. 0 It is also difficult to findjustification for a proposed strategy that would require the close coordination o f WTO accession among SES partners. Such coordination, given existing coordination problems in the CIS, poses the risk o f considerable delays in decision making. Each partner should continue its WTO bid at the pace it considers appropriate for its situation. What would be sufficient as a safeguard measure is signing a separate agreement among SES partners, under which those who enter the WTO first would avoid imposing new policy requirements on others. '34It is easy to predict that reaching a compromise on a common external tariff would be a major stumblingblock for SES members and this couldput at risk the entire SES project. 163 c. STRENGTHENINGINSTITUTIONALFRAMEWORKFOR TRADE POLICYFORMULATION 6.39 Trade-related institutions are critically important for the success o f Ukraine's V I r tracte policymaking and implementation requires an institutional framework with clearly defined responsibilities, strong coordination mechanisms and efficient communication channels with the main non-government stakeholders and the general public. 6.40 Currently, such a fi-amework inUkraine remains under-developed. As was discussed in Chapter 5, it is affected by: (i) intra-agency coordination, (ii) weak insufficiency of the mandate o f the Ministry o f Economy and European Integration (MEEI), the primary agency responsible for trade policy, for effective control o f sectoral interests, and (iii)inadequate participation o f other main stakeholders, primarily Rada and the private sector, inelaboration o f trade policies. 6.41 The centralresponsibility for coordinatingtrade policy inUkraine belongs to the MEEI, although other ministries have their own trade departments. Within the MEEI, the Department for Multilateral Economic Cooperation (MEC) plays the central role in formulating overall national trade policy and designing the mechanisms o f its implementation. It i s responsible for preparing policy proposals to the government and for final approval o f documents submitted by Ukraine to the WTO Secretariat. According to the Government Decree, all draft laws on economic and regulatory matters have to be checkedby the M E C for their conformity with WTO Agreementsbefore they canbe submittedbythe Government to Rada. 6.42 However, in practice inter-agency coordination remains rather weak and is rather formal in nature. While the establishment o f the Inter-Agency Commission on Ukraine's WTO accession, chaired by the deputy Prime Minister, was an adequate approach toward resolving problems o f coordination, so far, the commission has not be able to operate efficiently. This issue requires immediate attention. 6.43 At the same time, government procedures are not sufficiently flexible, which often becomes a major barrier for timely resolution o f relatively simple problems (see Box 6.4). Individual ministries and governmental agencies often try to conduct their own "sectoral trade policies'' that are not necessarily consistent with Ukraine's international obligations. Moreover, some sectoral ministries, such as e.g., the Ministry for Agricultural Policy and the Ministry for Industrial Policy, instead of formulating government policies for the sector in question, often lobby for policies that represent sectoral interests. There i s also a simplistic view o f trade policy coordination as mere bargaining among different interests in the government and the business community. 6.44 At the same time, the MEEI does not share information about the status o f WTO negotiations and the real stumbling blocks on the way to accession. Many key players (e.g., business leaders, parliamentarians, and government officials) remain uninformed about both the actual state o f Ukraine's accession process, as well as the implications-positive or negative-of membership. In part, unavailability o f up-to-date information to the general public narrows public support for trade reforms. It generally weakens the position o f the WTO negotiating team inits dialoguewith sectoral groups and other opponents. 164 6.45 A major problemo ftrade-related institutional arrangements inUkraine derives from the government capture - close interlinks between specific business interests and the government (not unlike inother post-Soviet countries). Many leading businessmen have been elected to Rada * e d y represent-hirhsheeinterests iii I%dh"t.At t officials directly or indirectly pursue their own business interests. Overall, specific business interests are well organized and have proved capable o f passing new legislation in Rada, which benefit them directly, without much consultation with the Government. Box 6.4: Adoption of the EUtechnical regulations A s part o f its commitments under the PCA, Ukraine agreed to implement the EU's "New Approach" technical regulatory regime. An important part o f this commitment relates to the approval o f 11 government regulations that would give certain EU Council directives the status of domestic Ukrainian regulations. These are Ukraine's first true "technical regulations": they impose only very general heath or safety requirements and give businesses considerable flexibility in how they demonstrate compliance. They therefore serve as important milestone in a broader program o f standards reform. For this reason, adoption o f these regulations was also selected as a benchmark for the government's P A L I1program, supported by the World Bank. These regulations are little more than translations o f EC directives. (Direct translation and adoption o f EU technical regulations and standards was exactly the procedure that several central European countries employed to meet EU accession deadlines.) Thus, one could expect that adopting them inUkraine should be a quick and simple process. In reality, however, the government's approach to their adoption was the same as if they were brand-new regulations: they were circulated to all affected ministries and technical bodies for comment and revision, and then were sent to the Cabinet o f Ministers for more review and final approval. After the changes inthe Cabinet inlate 2002, the whole process had to start over again. By December 2003, only one out o f the 11regulations had been approved. Duringthe PAL I1negotiations, the World Bank team argued that the standard approvalprocess was not relevant in this case and that GOU neededto employ a special fast-track procedure. At the end o f2003, the head o fthe State Committee on technical regulations (DSSU) finally received authority from the Cabinet o f Ministers to approve the new technical regulations on his own, without having to send them up to the Cabinet. H e signed o f f on 10 remaining regulations o n December 31,2003. It i s worth noting that it took more than four additional months for regulations to get registered by the Ministry o f Justice and thus become effective. The DSSU should use its new authority and current momentum to quickly approve all the remaining regulations that correspond to the EUNew Approach technical directives (about 20 o f them). It appears realistic to target the middle o f 2005 as a completion date for this task. 6.46 These institutional deficiencies lead to a number o f problems in trade policy formulation and implementation. One i s the widespread practice of granting privileges to trade and economic actors, such as the direct and indirect support of specific sectors (see other Chapters o f this report for examples o f such practices). In the past, important WTO-compliant laws were blocked by coalitions o f sectoral interests, and WTO supporters in the government were not able either to directly prevail over this opposition or to find a workable compromise on the matter. 6.47 In the fiture, WTO disciplines could serve as a remedy against unrestrained protectionist pressures. Thus WTO accession should be viewed as both an instrument o f integrating Ukraine into a multilateral trade system and a way o f locking the country's policies on the path o ftrade reforms. 165 6.48 The system o f trade policy elaboration in Ukraine should be gradually reformed with the goal o f making it more efficient, expedient, flexible, and transparent. A new system should bebased on the following broad principle^'^^: - -- - -~ _ _ - __. ~ 0 Establishing a clear, internally coherent and well articulated trade strategy that i s closely integrated with the overall economic strategy o f the country. The strategy has to have a longer-term view o f the country's development priorities andintegrationprospects. 0 Setting efficient mechanisms o f intra-governmental trade policy coordination to be conducted through the existing Inter-Agency Commission chaired by the Deputy Prime Minister, but the Government has to review and upgrade its operational procedures and mandate. The Commission has also to operate as a "gatekeeper" capable o f stopping policy decisions that are non-compliant with WTO provisions, and more generally enforce prioritization o f strategic integration objectives over specific sectoral development goals. 0 Setting efficient mechanisms for consultations among key stakeholders, such as government, business community and civil society. The consultative process should become automatic and transparent. A more formalized model o f consultations in the "Government - business associations" format has yet to be developed to replace the existing informal lobbying through mostly personal and informal relations. 0 Strengthening mechanisms for collection, dissemination, and analysis o f trade and trade- related information. Economic agents today are often not well aware o f global trends in their respective areas, which sometimes leads to biasedperceptions o f trade liberalization polices. 0 Formation o f trade supporting institutions, including think tanks, consulting companies, government entities responsible for trade facilitation, etc., fostering a networks o f trade experts indifferent fields. 6.49 WTO accession would require considerable changes to the method by which the government runs its daily business. It i s important for the GOU to appreciate in advance a scope o f forthcoming changes and start necessary preparation without much delay. Some o f the important tasks that require urgent attention are the following: 0 The govemment has to develop a coherent longer-term framework to harmonize its real sector policies that up to now have been largely developed either sector-by-sector (various programs o f development o f agriculture, metallurgy, etc.) or driven by external commitments. In particular, the existing Concept o f Industrial Policy (adopted in 1996 and amended in 2000) has to be revised to make its policy principles and instruments compatible with WTO requirements. This document should become a set o f clear guidelines for governmental agencies with respect to the preparation o f specific sectoral programs. The same recommendation is relevant to the Program o f Export Stimulation adopted by the Cabinet o f Ministers on October 26, 2001, as well as to a number o f sector-specific govemment development programs. `35See e.g., OECD (2001) for the principles of establishing a modem framework for trade policy development and implementation. 166 0 Inline with the WTO Agreement on Subsidies and Countervailing Measures, the GOU will have to reconsider its current policy of supporting specific groups of domestic producers. It has to prepare a special Law "On State Subsidies", which would incorporate m e ~ - b a s i c p ~ K ~ l ~ s - o f t k e - e f ~ ~ iof~statec support such as accountability, v o ~ o n transparency, adequate institutions, and limitedscope and duration o f state aid.'36 0 WTO membership will require financing relatively large investments in modernization and harmonization o f various institutions involved inthe conduct o f trade and investment policies. The GOU has to develop estimates for such incremental costs related to WTO commitments and take them into account while developing medium-term budget expenditureprojections. 0 Ukraine needs to develop an effective notification system for WTO members on Ukraine's legislation, trade policies and practices. This obligation will provide additional transparency inthe system. 0 After WTO accession, the GOU will have to publish a set o f documents carefully explaining to other stakeholders and the general public Ukraine's commitments and their implications for future policy-making. D. CONCLUSIONS 6.50 The institutional framework for trade policy elaboration and implementation inUkraine requires considerable reforms aimed at strengthening intra-Governmental coordination and more efficient control of sectoral and group interests. 6.51 Ukraine needs to formulate a realistic trade policy strategy which anticipates a fairly protracted period o f economic development outside o f the EU. This should not preclude Ukraine from pushingaggressively the agenda o f economic integration with the EU.Ukraine should fully utilize potential benefits of the new EU neighborhood initiatives. It also has to be prepared to negotiate a FTA with the EU and remove the main stumbling block on the way to such negotiations-non-membership inWTO. 6.52 Completing WTO accession should be considered as an overriding policy priority for Ukraine, which has to dominate over specific interests o f particular sectoral and business groups. WTO accession must be viewed notjust as an instrument o f global integration, but also as a tool o f advancing domestic economic reforms. Further delays with WTO accession may mean that Ukraine would miss the existing chance o f accelerating its economic integration with the EU. 6.53 As a member o f the CIS, Ukraine benefits from the free trade area, the mutual recognition o f standards, and generally non-restrictive rules o f origin. However, the existing arrangements within the CIS trade bloc are deficient: (i) free trade agreements lack stability, (ii) potential exemptions from the free trade regime create a degree o f uncertainty with respect to future market access, and (iii)weak mechanism for dispute resolution has a stifling effect on a trade; and free transit and efficient customs cooperation have not been achieved. 136The Antimonopoly Committee of Ukrainehas alreadyproposedthe drafi Law "On State Support". 167 6.54 The CIS clearly needs further reform to address the deficiencies in the bloc setup and operations. CIS countries should introduce WTO-style principles and disciplines in their intra- bloc affairs independently o f their joining the WTO. The harmonization o f the regulatory f l T @ 6.55 The success o f the new SES initiative is so far impossible to assess. 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Trade Policy Review:Poland. WTO. 2002. TrU& P~K+~%%ww: E-. WTO. 2003. Source: World TradeReport2003. 173 174 StatisticalAnnex STATISTICAL ANNEX 'Table A1: I'oreigntrade stafistics' sources: a comparison 1997 1998 1999 2000 2001 2002 2003 Export of goods, mln USD SSC (FOB)* 14232 12637 11582 14573 16265 17957 23080 NBU(FOB)* 15418 13699 13189 15722 17091 18669 23739 DOTS* 14232 12637 11582 14579 16126 17872 WITS* 14217 12637 11582 14573 16265 17927 _-__ mu-ssc Difference between sources 1186 1062 1607 1149 826 712 659 DOTS-SSC 0 0 0 6 -139 -85 WITS - SSC -15 0 0 0 0 -30 _--_ Export of goods, %GDP SSC (FOB) 28.4 30.2 36.7 46.6 42.8 42.4 46.8 NBU(FOB) 30.7 32.7 41.8 50.3 45.0 44.1 48.1 DOTS 28.4 30.2 36.7 46.6 42.4 42.2 -- WITS 28.4 30.2 36.7 46.6 42.8 42.3 _- Difference between sources NBU-ssc 2.4 2.5 5.1 3.7 2.2 1.7 1.3 DOTS- SSC 0.0 0.0 0.0 0.0 -0.4 -0.2 -- WITS - SSC 0.0 0.0 0.0 0.0 0.0 -0.1 -- Import of goods, mlnU S D SSC (CIF) -17128 -14676 -11846 -13956 -15777 -16977 -23021 NBU(FOB) -19623 -16283 -12945 -14943 -16893 -17959 -24008 DOTS -17113.8 -14675.5 -11844.3 -13954.7 -15694.4 -16800.2 -- WITS -17124.9 -14676 -11846.1 -13956 -15775.1 -16975.9 -- Difference between sources NBU-SSC -2495 -1607 -1099 -987 -1116 -982 -987 DOTS- SSC 14 1 2 1 83 177 -- WITS - SSC 3 0 0 0 2 1 _- Import of goods, %GDP SSC (FOB) -34.2 -35.0 -37.5 -44.6 -41.5 -40.1 -46.6 NBU(FOB) -39.1 -38.9 -41.0 -47.8 -44.4 -42.4 -48.6 DOTS -34.1 -35.0 -37.5 -44.6 -41.3 -39.7 -- WITS -34.2 -35.0 -37.5 -44.6 -41.5 -40.1 _ _ Difference betweensources NBU-ssc -5.0 -3.8 -3.5 -3.2 -2.9 -2.3 -2.0 DOTS- SSC 0.0 0.0 0.0 0.0 0.2 0.4 WITS - SSC 0.0 0.0 0.0 0.0 0.0 0.0 _--_ Source: SSC, NBU, DOTS, WITS. * Here andfurther on: SSC = State Statistics Committee ofUkraine, NBU=NationalBank ofUkraine, DOTS =DirectionsofTrade Statistics, WITS =World IntegratedTrade Solutions, COMTRADE 175 StatisticalAnnex Table A2: Balance of payments in 1997- 2002, $ mln 1997 1998 1999 2000** 2001 2002 2003 Current account" -1335 -1296 932 1237 1402 3173 2891 Trade balance -1536 -1207 1095 1331 613 1857 1288 Export of goods and services* 20355 17621 16332 19278 21086 23351 28953 Import of goods and services 21891 18828 15237 -17947 20473 21494 27665 Merchandise trade balance -4205 -2584 -482 535 198 710 -269 Merchandise exports* 15418 13699 12463 15478 17091 18669 23739 Merchandise imports 19623 16283 12945 -14943 16893 17959 24008 Balance of trade in services 2669 1377 1577 796 415 1147 1557 Export o f services 4937 3922 3869 3800 3995 4682 5214 Import o f services -2268 -2545 -2292 -3004 -3580 -3535 -3657 Net income -644 -871 -869 -942 -667 -606 -581 Net current transfers 845 782 706 848 1456 1922 2184 Capital and financial oDerations account 1413 -993 -163 -516 -188 -1050 247 Capital account 0 -3 -10 -8 3 15 -17 Financial account 1413 -990 -153 -508 -191 -1065 264 Direct investment 581 747 489 594 769 698 1411 Portfolio investment 1603 -1031 -86 -201 -866 -1716 -922 Other investment -771 -706 -556 -901 -94 -47 -225 Medium-term and long-term -65 -567 -463 -154 -306 124 418 Guaranteed -324 -760 -272 -424 -538 -367 -363 Received 545 358 157 109 165 118 140 repaid (schedule)** -869 -1118 -429 -533 -703 -485 -503 non-guaranteed 259 193 -191 270 232 491 781 Short-term capital -706 -139 -93 -747 212 -171 -643 Errors and omissions -785 -810 -954 -150 -231 -885 -953 Balance -707 -3099 -185 571 983 1238 2185 Financing 707 3099 185 -571 -983 -1238 -2185 Reserve actives -383 1324 -283 -398 -1606 -1045 -2045 Net use of IMFcredits 285 275 78 -604 -79 -191 -215 Used 285 381 635 245 375 0 0 Repaid 0 -106 -557 -849 -454 -191 -215 Exclusive financing 805 1500 390 431 702 -2 75 Government debt 805 1418 390 70 310 0 75 Restructuring 0 82 0 0 244 333 282 Indebtedness ("+"-accumulation,"-"-repayment) 0 0 0 361 148 -335 -282 Source: NBU -- in *Without value of goods given to Russia for repayment o f debts: in1999the value was equal to $mln726 according to the agreement onthe Black Sea fleet 2000 the value was equal to $mln 274 inexchange for debt o fNAK "Naftogaz Ukrainy" owed to JSC "Gazprom". **In2000without mutual settlement o fstate externaldebt o fUkraine according to the agreement betweenUkraine's and Russia's governments signed on M a y 28, 1997. 176 StatisticalAnnex Table A3: Merchandisetrade balance, exports and importsof Ukraine in 1990- 1994, $ mln -~ 19- ~ ~~ 1990 1991 1992 1993 1994 change Trade Balance -3655 -14419 -663 -1916 -763 2892 Exports, Total 78336 58098 11262 11969 12105 -66231 Inter-FSU Exports 64947 49598 5262 5669 7457 -57490 Exports to ROW 13389 8500 6000 6300 4648 -8741 Imports 81991 72517 11925 13885 12868 -69123 Inter-FSU Imports 66083 61217 6425 9185 8521 -57562 15908 11300 5500 4700 4347 -11561 Trade Balance 294.5 -95.4 189.0 -60.2 -79.1 Exports -25.8 -80.6 6.3 1.1 -84.5 Inter-FSU Exports -23.6 -89.4 7.7 31.5 -88.5 Exports to ROW -2.8 -36.5 -29.4 5.0 -26.2 -65.3 Imports -11.6 -83.6 16.4 -7.3 -84.3 Inter-FSU Imports -7.4 -89.5 43.0 -7.2 -87.1 Exports 100 100 100 100 100 Inter-FSU Exports 82.9 85.4 46.7 47.4 61.6 -21.3 Exports to ROW 17.1 14.6 53.3 52.6 38.4 21.3 Imports 100 100 100 100 100 Inter-FSU Imports 80.6 84.4 53.9 66.2 66.2 -14.4 Imports to ROW 19.4 15.6 46.1 33.8 33.8 14.4 Source: Foreign Trade Statistics in the USSR and Successor States. - Ed. By M.Belkindas and 0.Ivanova; *WITS, COMTRADE (1995) Inter-republican trade is estimated at official i commercial exchange rate 177 StatisticalAnnex Table A4: Geographicstructureof merchandiseexportsin 1996-2003, % - 2003 - 2003- 1996 1999 Lnnc -7 I n n o LW 2881 LW2 L y e 3 1440 Total, $ million 0.8 14231.9 12637.4 10332.7 14572.6 16264.7 17957.1 23080.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 CIS 51.4 39.2 33.3 27.7 30.9 28.7 24.4 26.2 -25.2 -1.5 Belarus 5.0 5.8 4.3 3.0 1.9 1.5 1.5 1.5 -3.5 -1.5 Kazakhstan 0.6 0.7 0.7 0.4 0.5 0.7 1.1 1.3 0.7 0.9 Moldova 1.7 2.1 1.4 1.o 1.2 1.7 1.7 2.1 0.5 1.1 Russia 38.7 26.2 23.0 20.4 24.1 22.6 17.8 18.7 -20.0 -1.8 Turkmenistan 1.9 1.2 1.o 0.8 1.o 0.7 0.6 0.8 -1.1 0.0 Uzbekistan 1.2 1.7 1.1 0.7 0.8 0.7 0.4 0.4 -0.9 -0.3 ROW 48.6 60.8 66.7 72.3 69.1 71.3 75.6 73.8 25.2 1.5 Europe 22.2 24.2 29.8 36.7 30.0 32.4 36.3 39.7 17.5 3.0 EU 11.1 12.3 16.8 20.5 16.2 17.3 19.7 19.8 8.7 -0.7 Austria 0.7 0.8 1.1 0.9 1.1 1.1 1.3 1.1 0.4 0.2 Belgium 0.5 0.6 0.7 1.4 0.7 0.5 0.7 0.6 0.1 -0.8 Denmark 0.0 0.1 0.3 0.2 0.2 0.1 0.2 0.2 0.2 0.1 Finland 0.2 0.3 0.2 0.1 0.2 0.2 0.2 0.1 0.0 0.0 France 0.8 0.7 0.9 0.6 0.8 0.6 0.6 0.7 -0.1 0.1 Germany 2.9 4.0 5.1 4.0 5.1 3.3 4.2 6.2 3.2 2.1 Great Britain 0.9 0.6 0.9 0.8 0.9 1.8 3.0 1.3 0.4 0.5 Greece 0.7 0.6 0.5 0.6 0.3 0.8 0.6 0.7 0.0 0.0 Ireland 0.4 0.2 0.7 1.7 0.2 0.0 0.0 0.0 -0.4 -1.7 Italy 2.4 2.8 4.4 3.2 4.4 3.8 4.6 5.5 3.1 2.3 Luxembourg 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Netherlands 0.7 0.9 0.9 0.6 0.9 ,2.0 1.6 2.1 1.4 1.5 Portugal 0.1 0.1 0.1 0.1 0.1 0.6 0.5 0.2 0.1 0.1 Spain 0.6 0.8 1.o 0.8 1.1 2.2 2.1 0.9 0.3 0.1 Sweden 0.1 0.0 0.1 0.0 0.1 0.1 0.1 0.1 0.0 0.1 EUAccession 9.9 10.0 10.8 8.2 11.4 12.2 12.5 14.3 4.5 6.2 Cyprus 0.3 0.3 0.8 0.3 1.2 1.8 1.1 1.2 0.9 0.9 Czech Republic 1.o 1.2 1.4 1.o 1.3 1.2 1.o 0.9 -0.1 -0.1 Estonia 0.4 0.3 0.4 0.4 0.4 0.3 0.5 1.6 1.2 1.2 Hungary 2.6 2.2 2.1 1.9 2.2 2.1 2.9 3.7 1.1 1.8 Latvia 0.5 0.6 0.6 0.4 1.1 1.5 1.3 1.2 0.6 0.7 Lithuania 0.9 0.7 0.8 0.6 0.6 0.9 1.1 1.0 0.1 0.4 Malta 0.0 0.0 0.2 0.2 0.0 0.1 0.1 0.1 0.1 -0.1 Poland 2.5 2.7 2.5 1.9 2.9 2.2 2.8 3.3 0.8 1.4 Slovakia 1.6 2.0 1.9 1.4 1.6 1.2 1.6 1.3 -0.3 -0.1 Slovenia 0.1 0.0 0.1 0.1 0.1 0.9 0.1 0.1 0.0 0.0 Bulgaria 1.o 1.1 1.6 2.1 2.6 1.8 1.5 1.4 0.5 -0.6 Romania 1.1 1.o 1.3 0.4 1.1 1.2 1.9 2.2 1.1 1.7 Asia 18.8 26.9 23.7 22.7 23.6 24.4 28.2 23.4 4.6 0.7 China 5.3 7.7 5.8 5.6 4.3 1.8 3.9 4.3 -1.o -1.3 Turkey 2.8 4.7 5.5 4.8 6.0 4.3 6.9 3.9 1.1 -0.9 178 StatisticalAnnex Africa 1.5 3.3 4.4 4.5 5.0 3.9 5.9 5.4 4.0 0.9 Egypt 0.7 I.3 1.5 1.3 1.5 1.o 1.8 1.3 0.6 0.0 -* America 4.2 4.6 6.8 4.5 8.4 6.2 5.2 5.3 1.1 0.8 2.6 -2;t- --4;Q~---- 2.9 -----S7Q 7 ~ 3.5 L.9 -I a.1 n: 0.2 Australia and Oceania 0.1 0.1 0.1 0.3 0.0 0.0 0.0 0.0 -0.1 -0.3 Source: SSC 179 StatisticalAnnex Table A5: Geographic structure of merchandise imports in 1996 - 2003, % Change Change (1996- (1999- m, Lac.- Lnc"- ZKB--t0133) Total, US$million 17603 17128 14676 10385 13956 15775 16977 23021 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 CIS 63.5 57.7 53.8 57.8 57.6 56.0 52.8 50.0 -13.5 -7.8 Belarus 2.2 2.3 2.4 2.9 4.3 2.6 1.5 1.5 -0.7 -1.4 Kazakhstan 1.4 2.4 2.4 1.3 3.0 4.2 2.3 2.1 0.8 0.8 Moldova 0.4 0.4 0.3 0.2 0.3 0.4 0.3 0.2 -0.2 0.0 Russia 50.1 45.8 48.1 48.0 41.7 36.9 37.2 37.6 -12.5 -10.5 Turkmenistan 8.8 5.7 0.0 4.6 6.8 10.5 11.1 7.6 -1.2 3.0 Uzbekistan 0.3 0.7 0.2 0.3 1.3 1.2 0.2 0.7 0.4 0.4 ROW 36.5 42.3 46.2 42.2 42.4 44.0 47.2 50.0 13.5 7.8 Europe 24.8 29.5 31.5 34.2 29.3 30.2 33.9 35.5 10.6 1.3 EU 15.4 19.4 21.6 23.1 20.6 21.7 23.8 25.2 9.8 2.1 Austria 1.o 1.3 1.3 0.5 1.3 1.3 1.3 1.4 0.4 0.9 Belgium 0.7 0.6 0.9 0.4 1.o 1.o 1.1 1.o 0.3 0.6 Denmark 0.4 0.6 0.5 0.2 0.5 0.2 0.6 0.7 0.3 0.5 Finland 0.9 0.7 0.8 0.2 0.7 0.8 1.o 1.3 0.4 1.1 France 0.8 1.8 2.0 0.5 1.7 1.9 2.1 2.3 1.5 1.8 Germany 6.1 7.6 8.6 2.1 8.1 3.4 9.8 9.9 3.8 7.8 Great Britain 1.1 1.4 1.4 0.3 1.5 0.4 1.5 2.5 1.3 2.1 Greece 0.3 0.4 0.2 0.2 0.3 1.1 0.2 0.2 -0.1 0.0 Ireland 0.3 0.3 0.3 0.1 0.2 0.5 0.1 0.1 -0.2 0.0 Italy 1.9 2.3 2.8 0.9 2.5 1.1 2.7 2.8 0.9 1.9 Luxembourg 0.1 0.0 0.0 0.0 0.1 0.0 0.1 0.1 0.0 0.1 Netherlands 1.1 1.1 1.1 0.3 1.1 0.3 1.3 1.2 0.1 0.9 Portugal 0.0 0.0 0.0 0.0 0.1 2.0 0.1 0.1 0.1 0.1 Spain 0.3 0.5 0.5 0.2 0.7 0.2 0.6 0.7 0.3 0.5 Sweden 0.3 0.8 1.o 0.3 1.1 1.1 1.3 1.1 0.8 0.8 EUAccession 7.4 9.6 10.3 10.1 7.5 6.1 8.1 8.5 1.1 -1.5 Cyprus 0.1 0.1 0.1 0.1 0.2 0.0 0.1 0.1 0.0 0.0 Czech Republic 0.9 1.3 1.4 0.3 1.2 1.3 1.3 1.4 0.4 1.1 Estonia 0.2 0.4 0.7 0.5 0.3 0.4 0.3 0.3 0.1 -0.2 Hungary 0.3 1.2 1.3 0.3 1.2 1.1 1.1 1.2 0.9 0.9 Latvia 0.5 0.5 0.3 0.4 0.3 0.2 0.2 0.2 -0.3 -0.2 Lithuania 0.9 1.4 1.6 0.7 1.o 0.7 0.7 0.6 -0.3 -0.1 Malta 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 Poland 2.9 3.2 3.3 0.6 2.2 1.1 3.2 3.5 0.6 2.9 Slovakia 0.2 1.2 1.2 0.3 0.9 0.9 0.8 0.9 0.7 0.6 Slovenia 1.4 0.3 0.4 0.1 0.2 0.3 0.4 0.4 -1.0 0.3 Bulgaria 0.7 0.9 0.7 0.2 0.4 0.4 0.3 0.3 -0.5 0.0 Romania 0.5 0.5 0.3 0.1 0.3 0.1 0.2 0.2 -0.3 0.1 Asia 3.8 4.9 6.0 4.5 6.0 6.2 6.9 8.6 4.8 4.0 Africa 0.8 0.8 0.8 0.4 1.0 1.3 1.0 1.1 0.3 0.7 America 5.3 4.7 5.1 1.2 4.2 4.7 5.0 4.7 -0.6 3.4 USA 3.2 3.8 4.0 0.8 2.6 2.9 2.8 2.2 -1.1 1.4 Australia and Oceania 0.1 0.1 0.1 0.0 0.4 0.3 0.3 0.2 0.1 0.2 Source: SSC 180 StatisticalAnnex Table A6: Geographic structure of net merchandise exports in 1996-2003, $ mln Change Change (1996- (1999- 1996 1997 1998 1999 2000 2001 2002 2003 2003) 2003) ~~ Total -3203 -2896 -2038 -53 617 490 980 59 3262 112 CIS -3771 -4294 -3695 -3147 -3542 -4157 -4591 -5460 -1689 -2313 Belarus 338 434 195 2 -330 -163 -2 -3 -341 -6 Kazakhstan -153 -310 -256 -93 -336 -549 -183 -186 -33 -93 Moldova 165 221 129 84 141 210 246 429 264 345 Russia -3239 -4115 -4159 -2873 -2309 -2134 -3128 -4334 -1095 -1461 Turkmenistan -1267 -796 120 -397 -798 -1548 -1773 -1569 -302 -1172 Uzbekistan 118 110 110 40 -64 -84 40 -77 -195 -117 ROW 568 1398 1657 3094 4159 4646 5571 5519 4951 2425 Europe -1181 -1603 -860 243 289 505 765 990 2171 747 EU -1106 -1573 -1051 -280 -527 -612 -508 -1240 -133 -959 Austria -74 -117 -59 43 -21 -28 13 -66 8 -109 Belgium -46 -20 -53 106 -28 -72 -66 -90 -44 -196 Denmark -61 -90 -39 -3 -43 -1 -65 -94 -32 -91 Finland -133 -83 -89 -8 -72 -89 -137 -268 -135 -260 Denmark -30 -211 -181 11 -124 -193 -235 -373 -342 -383 Germany -647 -740 -625 204 -393 -6 -903 -850 -203 -1054 Great Britain -65 -145 -97 49 -65 226 274 -255 -189 -304 Greece 37 16 26 47 10 -56 65 105 68 59 Ireland 12 -18 45 161 1 -74 -23 -22 -34 -183 Italy 3 -5 142 240 293 447 367 623 621 383 Luxembourg -11 1 -1 2 -8 -2 -8 -11 0 -13 Netherlands -98 -72 -44 29 -9 279 71 201 299 171 Portugal 8 12 13 11 12 -219 73 28 20 18 Spain 33 32 51 61 63 334 271 58 24 -3 Sweden -33 -133 -141 -23 -142 -152 -203 -226 -193 -203 EUAccession 116 -216 -141 -201 610 1023 869 1351 1236 1552 Cyprus 24 25 91 21 147 291 184 255 231 234 Czech Republic -21 -46 -37 74 26 -9 -50 -98 -77 -172 Estonia 15 -29 -45 -11 9 -12 35 296 281 307 Hungary 323 121 69 166 162 165 336 580 257 414 Latvia -15 -4 32 -1 123 215 200 210 225 211 Lithuania -25 -140 -138 -11 -52 31 76 101 126 112 Malta -5 0 27 18 4 4 20 26 31 8 Poland -148 -170 -173 135 105 192 -3 1 -39 109 -174 Slovakia 196 75 75 111 107 53 156 88 -107 -22 Slovenia -229 -48 -42 -1 -21 92 -57 -69 161 -68 Bulgaria 11 1 105 187 322 233 216 266 255 79 Romania 77 62 113 35 116 174 309 45 1 374 416 Asia -531 -682 -674 -259 -449 -672 -897 -1646 -1114 -1387 Africa 19 12 42 9 28 -11 160 249 229 239 America 1780 3031 2242 2220 2857 3229 4211 4329 2549 2109 USA -360 -178 -28 379 371 183 582 752 1113 373 Australiaand Oceania 574 631 845 459 1163 961 885 1166 592 706 Source: SSC 181 StatisticalAnnex CommoditystructureinH S (1996-2003) Table A7: Commoditystructure of merchandiseexports in1996 -2003, % HS 1996 1997 1998 1999 2000 2001 2002 2003 2003- 2003- code 1996 1999 change change Total, US$million 14401 14232 12637 10333 14573 16265 17957 23080 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculturalproduce 01-15 11.4 7.8 8.3 9.6 6.7 8.4 10.3 7.9 -3.5 -1.7 Food 16-24 9.7 4.8 2.6 2.6 2.8 2.8 3.0 3.9 -5.8 1.3 Mineralproducts 25-27 8.6 9.0 9.2 10.1 9.6 10.8 12.5 15.2 6.5 5.0 Chemicals 28-38 11.6 10.6 10.1 9.3 10.6 9.1 7.8 8.4 -3.2 -0.9 Woodandpulp&paper 44-49 0.4 0.4 0.8 1.3 1.5 1.4 1.6 1.7 1.4 0.4 Textile and apparel 50-63 2.7 3.2 4.0 3.9 3.7 3.8 3.6 3.3 0.7 -0.6 Ferrousmetalsand ferroproducts 72-73 30.7 38.3 38.4 37.2 39.0 33.3 33.0 33.8 3.1 -3.3 Non-ferrousmetals 74-83 2.3 3.2 3.8 5.0 5.4 8.1 6.7 3.0 0.7 -2.0 Machineryand equipment 84-85 9.8 9.6 8.7 7.8 9.3 10.5 9.8 10.1 0.3 2.3 Vehicles 86-89 4.4 3.8 4.9 3.6 3.0 3.4 3.8 4.3 -0.1 0.7 Other 8.3 9.3 9.2 9.5 8.5 8.5 7.8 8.4 0.1 -1.2 Source: SSC Table AS: Growthratesof merchandiseexportsby commodity groups in 1997 -2003, % HS 1997 1998 1999 2000 2001 2002 2003 average min max code change change change rate rate rate Total -1.2 -11.2 -18.2 41.0 11.6 10.4 28.5 7.0 -18.2 41.0 Agricultural commodities 01-15 -32.4 -6.0 -5.3 -1.8 41.0 34.2 -0.8 1.5 -32.4 41.0 Food 16-24 -51.0 -51.7 -18.7 49.5 11.8 21.3 65.5 -6.1 -51.7 65.5 Mineralproducts 25-27 3.1 -9.3 -10.1 33.8 25.0 28.3 55.9 15.9 -10.1 55.9 Chemicals 28-38 -10.2 -15.0 -24.6 60.0 -4.1 -5.5 39.1 2.1 -24.6 60.0 Wood andpulp&paper 44-49 10.4 63.7 38.2 57.0 5.7 26.0 38.2 32.6 5.7 63.7 Textile and apparel 50-63 17.5 11.5 -20.1 34.1 14.2 6.6 16.9 10.4 -20.1 34.1 Ferrousmetals andferroproducts 72-73 26.6 -11.1 -20.8 48.1 -4.8 9.6 31.7 8.4 -20.8 48.1 Non-ferrous metals 74-83 33.4 7.9 6.1 51.9 67.3 -8.6 -42.2 10.8 -42.2 67.3 Machinery and equipment 84-85 -2.6 -19.4 -26.9 68.1 26.2 2.6 32.3 7.4 -26.9 68.1 Vehicles 86-89 -15.0 14.2 -39.7 17.8 25.3 25.6 42.8 6.4 -39.7 42.8 Source: SSC 182 StatisticalAnnex Table A9: Contributionsto exports growthby commodity groups in 1997-2003 HS 1996- 1999- code 1997 1998 1999 2000 2001 2002 2003 2003 2003 Total, % change -1.2 -11.2 -18.2 41.0 11.6 10.4 28.5 60.3 82.6 Agricultural produce 01-15 -3.7 -0.5 -0.4 -0.2 2.7 2.9 -0.1 0.6 5.0 Food 16-24 -5.0 -2.5 -0.5 1.3 0.3 0.6 2.0 -3.9 3.7 Mineral products 25-27 0.3 -0.8 -0.9 3.4 2.4 3.0 7.0 15.0 15.7 Chemicals 28-38 -1.2 -1.6 -2.5 5.6 -0.4 -0.5 3.0 2.2 5.1 Wood and pulp&paper 44-49 0.0 0.3 0.3 0.8 0.1 0.4 0.6 2.5 2.2 Textile and apparel 50-63 0.5 0.4 -0.8 1.3 0.5 0.2 0.6 2.8 1.9 Ferrousmetalsand ferroproducts 72-73 8.2 -4.2 -8.0 17.9 -1.9 3.2 10.5 25.6 21.3 Non-ferrous metals 74-83 0.8 0.3 0.2 2.6 3.6 -0.7 -2.8 3.9 2.8 Machinery and equipment 84-85 -0.3 -1.9 -2.3 5.3 2.4 0.3 3.2 6.7 9.0 Vehicles 86-89 -0.7 0.5 -1.9 0.6 0.8 0.9 1.6 1.8 1.9 Other -0.1 -1.1 -1.4 2.4 1.o 0.1 2.9 3.0 5.2 Source: SSC Table A10: Contributionsto exports growthby commoditygroupsin 1997-2003, % HS code 1997 1998 1999 2000 2001 2002 2003 1996-2003 1999-2003 Total 100 100 100 100 100 100 100 100 100 Agricultural produce 01-15 315 4 2 0 24 28 0 1 6 Food 16-24 424 22 3 3 3 6 7 -6 5 Mineral products 25-27 -23 7 5 8 21 29 24 25 19 Chemicals 28-38 101 14 14 14 -4 -5 11 4 6 Wood and pulp&paper 44-49 -3 -2 -2 2 1 4 2 4 3 Textile and apparel 50-63 -40 -3 4 3 5 2 2 5 2 Ferrousmetalsandferroproducts 72-73 -696 38 44 44 -16 31 37 42 26 Non-ferrousmetals 74-83 -67 -2 -1 6 31 -7 -10 6 3 Machinery and equipment 84-85 22 17 13 13 21 3 11 11 11 Vehicles 86-89 56 -5 11 2 7 8 6 3 2 Other 11 10 7 6 9 1 10 5 17 Source: SSC 183 StatisticalAnnex Table All: Commodity structureof merchandiseimportsin 1996-2003, YOof total HS 2003-1996 2003-1999 2 0 0 0 2 0 0 1 2 0 0 2 ~- 2 n h a n g e change ~ ~~~~ code ~~~ 1996 1997 1998 1999 ~ Total, US$ million 17603 17128 14676 10385 13956 15775 16977 23021 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agricultural produce 01-15 3.4 2.3 3.4 3.5 3.4 3.4 2.8 4.7 1.3 1.2 Food 16-24 4.8 2.9 3.8 3.7 3.2 3.7 3.8 4.8 0.0 1.1 Mineral products 25-27 49.9 47.6 43.1 48.3 46.9 42.6 41.5 36.8 -13.1 -11.4 Gas 2711 35.7 32.1 26.7 29.6 26.1 21.8 21.4 13.9 -21.9 -15.8 2709, Oil and oil products 2710 9.8 12.1 14.0 13.6 16.6 19.1 19.8 18.3 8.5 4.6 Chemicals 28-38 5.8 7.3 6.8 6.6 6.4 7.1 8.1 7.7 1.9 1.1 Wood and pulp&paper 44-49 2.9 2.9 3.2 3.4 3.1 3.9 4.5 4.1 1.2 0.7 Textile and apparel 50-63 2.8 2.9 3.7 3.9 4.0 4.1 4.0 3.7 0.9 -0.2 Ferrousmetals and ferroproducts 72-73 2.5 3.5 3.8 2.3 3.6 4.1 3.8 4.3 1.8 2.0 Non-ferrous metals 74-83 2.0 0.4 0.5 1.2 1.3 1.1 0.9 0.9 -1.1 -0.3 Machinery and equipment 84-85 13.7 15.2 15.6 12.5 13.9 15.1 14.7 15.1 1.4 2.6 Vehicles 86-89 3.2 5.0 6.0 4.6 3.6 4.7 6.0 8.1 4.9 3.5 Other 8.9 10.1 10.2 10.1 10.7 10.1 9.8 9.8 0.8 -0.3 Table A12: Growthratesof merchandiseimports by commoditygroupsin 1997-2003, YO average min max change change change HScode 1997 1998 1999 2000 2001 2002 2003 rate rate rate Total -2.7 -14.3 -29.2 34.4 13.0 7.6 35.6 3.9 -29.2 35.6 Agricultural produce 01-15 -33.7 25.6 -28.1 30.5 14.2 -11.6 127.2 8.7 -33.7 127.2 Food 16-24 -41.0 10.3 -30.2 14.2 34.3 8.5 71.5 3.8 -41.0 71.5 Mineral products 25-27 -7.2 -22.5 -20.7 30.5 2.8 4.8 20.3 -0.5 -22.5 30.5 Gas 2711 -12.8 -30.0 -7.9 2.1 -1.3 7.1 -9.4 -8.2 -30.0 7.I 2709, Oil and oil products 2710 16.6 -16.1 -8.4 38.9 10.4 7.8 34.2 12.1 -16.1 38.9 Chemicals 28-38 21.1 -19.9 -31.5 31.7 25.5 22.0 28.8 8.1 -31.5 31.7 Woodandpulp&paper 44-49 -2.3 -5.4 -24.5 22.1 40.1 25.5 23.8 9.2 -24.5 40.1 Textile and apparel 50-63 -0.9 10.2 -25.1 38.0 15.5 4.0 26.6 8.0 -25.1 38.0 Ferrous metals and ferroproducts 72-73 -12.0 -10.0 -53.9 131.8 23.8 2.4 71.7 2.0 -53.9 131.8 Non-ferrous metals 74-83 -25.6 -0.6 -26.9 47.4 22.2 -27.2 23.7 -1.9 -27.2 47.4 Machinery and equipment 84-85 7.8 -12.0 -43.0 49.2 22.5 5.2 39.0 5.4 -43.0 49.2 Vehicles 86-89 50.9 3.1 -46.2 5.4 48.1 36.9 83.5 18.5 -46.2 83.5 Source: SSC 184 StatisticalAnnex Table A13: Contributionsto importsgrowthby commodity groups in1997- 2003 HS 1996- 1999- code 1997 1998 1999 2000 2001 2002 2003 2003 2003 Total, % change -2.7 -14.3 -29.2 34.4 13.0 7.6 35.6 30.8 56.9 Agricultural produce 01-15 -1.1 0.6 -1.0 1.1 0.5 -0.4 3.5 -0.4 3.7 Food 16-24 -2.0 0.3 -1.1 0.5 1.1 0.3 2.7 -0.9 3.5 Mineral products 25-27 -3.6 -10.7 -8.9 14.7 1.3 2.0 8.4 -7.0 17.1 Gas 2711 -4.6 -9.6 -2.1 0.6 -0.3 1.5 -2.0 -14.0 -2.3 2709, Oil and oil products 2710 1.6 -2.0 -1.2 5.3 1.7 1.5 6.8 7.1 14.7 Chemicals 28-38 1.2 -1.4 -2.1 2.1 1.6 1.6 2.3 2.9 5.5 Wood and pulp&paper 44-49 -0.1 -0.2 -0.8 0.8 1.3 1.0 1.1 2.0 3.3 Textile and apparel 50-63 0.0 0.3 -0.9 1.5 0.6 0.2 1.1 1.6 2.4 Ferrousmetals and ferroproducts 72-73 -0.3 -0.4 -2.0 3.0 0.9 0.1 2.8 1.2 4.6 Non-ferrous metals 74-83 -0.5 0.0 -0.1 0.6 0.3 -0.3 0.2 -0.1 0.6 Machinery and equipment 84-85 1.1 -1.8 -6.7 6.2 3.1 0.8 5.8 2.2 8.9 Vehicles 86-89 1.7 0.2 -2.8 0.3 1.7 1.7 5.0 2.7 5.9 Other 3.9 10.4 0.6 -2.1 -0.8 -2.4 -2.0 33.6 -6.6 Source: SSC Table A14: Contributionsto importsgrowthby commoditygroups in1997-2003, YOof total 1996- 1999- 1997 1998 1999 2000 2001 2002 2003 2003 2003 Total 100 100 100 100 100 100 100 100 100 Agricultural produce 01-15 43 -4 3 3 4 -5 10 -1 7 Food 16-24 73 -2 4 2 8 4 8 -3 6 Mineral products 25-27 132 75 31 43 10 27 24 -23 30 Gas 2711 170 67 7 2 -3 20 -6 -46 -4 2709, Oil and oil products 2710 -60 14 4 15 13 20 19 23 26 Chemicals 28-38 -45 I O 7 6 13 21 7 9 10 Wood and pulp&paper 44-49 2 1 3 2 10 13 3 6 6 Textile and apparel 50-63 1 -2 3 4 5 2 3 5 4 Ferrousmetals and ferroproducts 72-73 11 2 7 9 7 1 8 4 8 Nonferrousmetals 74-83 19 0 0 2 2 -4 1 0 1 Machinery and equipment 84-85 -39 13 23 18 24 10 16 7 16 Vehicles 86-89 -61 -1 10 1 13 23 14 9 10 Other -145 -72 -2 -6 -6 -32 -6 109 -20 Source: SSC 185 StatisticalAnnex Table A15: Commoditystructureof netmerchandiseexports in 1996-2003, $ mln HS code 1996 1997 1998 1999 2000 2001 2002 2003 Total -3203 -2896 -2038 -53 617 490 980 59 Agricultural produce 01-15 1047 716 548 634 506 838 1369 753 Food 16-24 554 186 -220 -116 -37 -140 -94 -195 Mineral products 25-27 -7537 -6870 -5157 -3965 -5140 -4976 -4802 -4979 Oil and oil products 2711 -5947 -5 185 -3671 -2821 -3258 -2822 -2701 -1038 2709, Gas 2710 -1649 -1950 -1961 -1336 -2185 -2866 -3174 -2884 Chemicals 28-38 649 263 284 282 644 352 22 171 Wood andpulp&paper 44-49 -456 -439 -373 -218 -219 -381 -477 -548 Textile and apparel 50-63 -1 13 -42 -40 -5 -22 -33 -18 -87 Ferrousmetalsand ferroproducts 72-73 3984 4852 4292 3605 5186 4764 5276 6821 Non-ferrousmetals 74-83 -13 387 415 393 601 1136 1038 483 Machineryand equipment 84-85 -1001 -1225 -1180 -493 -583 -664 -743 -1152 Vehicles 86-89 65 -321 -270 -106 -66 -197 -332 -890 Other -732 -1165 -945 -508 -834 -1176 -1701 -4685 Source: SSC CommodityStructure in SITC (1996-2002) Table A16: Merchandiseexports analyticalrepresentation,1996-2002, $ mln SITC code 1996 1997 1998 1999 2000 2001 2002 Total, US$ million 14400.3 14217.5 12637.4 11581.6 14572.6 16264.7 17927.4 Foodproducts (0+1+22+4) 2731.O 1730.8 1342.3 1390.2 1338.9 1777.6 2340.7 (2-22-26-27- Agricultural Materials 28) 130.5 136.3 130.4 180.6 242.0 239.7 316.6 Textiles fibers (26) 13.3 9.4 7.5 5.8 4.0 3.0 7.6 Ores, minerals& metals (27+28+68) 1174.4 1477.9 1584.4 1479.5 2058.4 1698.1 1546.1 Energy (31 648.2 614.4 521.1 701.6 811.1 1188.5 1647.9 Manufacturing (5 to 8-67-68) 5321.1 4799.2 4290.9 3474.2 4609.6 5846.5 6394.6 Iron & steel (67) 4213.6 5099.7 4435.1 3929.2 5161.0 5195.0 5468.0 Other 168.3 349.7 325.7 420.5 347.6 316.2 206.0 Source: WITS, COMTRADE 186 StatisticalAnnex I 1 - S I I U vl L 0 a a, X 8 .I 51 3mL C i L 0 23 U V 2 Y vl Y h F u BE s4 .. za, 187 StatisticalAnnex Y U I 188 StatisticalAnnex P p: 189 StatisticalAnnex 4 9 190 StatisticalAnnex I I - 191 StatisticalAnnex I sN' 0 0 c1 I c1 I- 0 s QI e4 0 .-e8ea> I I- Q\ a s.-8ea C .-m U 2E8> bl 2 Uh E P E vl 8 U L 0 E Ph a, F s 5L ebl 5mL e U vl L 0 2 n c 0 0 Y M c) E .-20 U 5 a s 2 e L C U .. 8e 00 .. I- 2 2 Ba, G s Q) G 192 StatisticalAnnex 193 StatisticalAnnex 194 StatisticalAnnex - c) a 0 c) r, s 0 mi 0 0 mI t.o\ o\ c .-E a 2M a .-h * BEE8 P h c ; M e m c)L .-2 0 0 c) .-3 .-P c)a c)L 6E azE3m cr) .. 8 195 StatisticalAnnex Table A34: Export SpecializationIndicesin 1996-2002,2-digit SITC level ~-~ SITC code Product Description 1996 1997 1998 1999 2000 2001 2002 00 -or4 0.w -0.1 - 0 7El 0.2 01 Meat and meat preparations 2.6 2.9 1.9 2.0 2.0 1.3 1.5 02 Dairy products and birds' eggs 2.2 1.3 0.9 1.o 2.1 3.2 1.6 03 Fish,crustaceans, mollusks, preparations thereof 0.6 0.7 0.5 0.5 0.2 0.2 0.2 04 Cereals and cereal preparations 3.1 1.4 2.6 4.6 1.2 3.3 5.9 05 Vegetables and h i t 0.4 0.4 0.4 0.4 0.4 0.4 0.5 06 Sugar, sugar preparations and honey 12.7 6.6 2.8 3.2 3.2 1.9 2.5 07 Coffee, tea, cocoa, spices, manufactures thereof 0.2 0.3 0.3 0.6 1.o 1.5 1.5 08 Feedingstufffor animals, not incl. unmil.cereals 1.o 0.3 0.4 0.5 0.9 1.o 1.2 09 Miscel. edible products andpreparations 0.4 0.1 0.1 0.1 0.1 0.3 0.3 11 Beverages 1.6 0.7 0.4 0.2 0.3 0.5 0.5 12 Tobacco and tobacco manufactures 0.5 0.4 0.5 1.3 1.6 0.7 0.8 21 Hides, skins and furskins, raw 3.4 3.5 1.9 2.3 1.9 1.5 2.7 22 Oil seeds and oleaginous h i t 5.1 5.8 6.2 4.5 5.3 3.2 0.5 23 Crude rubber (including synthetic and reclaimed) 0.0 0.0 0.1 0.1 0.3 0.1 0.0 24 Cork and wood 0.4 0.5 1.1 2.0 2.3 2.1 2.3 25 Pulp and waste paper 0.0 0.0 0.0 0.0 0.0 0.0 0.0 26 Textile fibres (except wool tops) andtheir wastes 0.2 0.1 0.2 0.2 0.1 0.1 0.1 27 Crude fertilizers and crude materials (excl. coal) 3.0 3.4 3.6 3.3 3.5 3.6 3.7 28 Metalliferous ores and metal scrap 6.7 8.7 11.0 10.9 10.9 7.5 6.5 29 Crude animal and vegetable materials, n.e.s. 0.4 0.4 0.4 0.3 0.4 0.4 0.4 32 Coal, coke and briquettes 1.7 1.7 1.7 2.2 2.5 2.8 2.3 Petroleum, petroleum products and related 33 materials 0.4 0.3 0.4 0.7 0.4 0.7 1.1 34 Gas, natural and manufactured 0.5 0.8 0.5 0.6 0.9 0.5 0.7 35 Electric current 4.3 7.7 7.2 4.5 3.8 2.4 2.2 41 Animal oils and fats 0.2 0.5 0.3 0.1 0.3 0.3 0.2 42 Fixedvegetable oils and fats 3.3 2.0 2.3 2.7 6.6 5.5 5.8 43 Animal-vegetable oils-fats, processed, and waxes 0.6 0.6 0.6 0.5 0.4 0.3 0.1 51 Organic chemicals 1.5 0.9 0.6 0.5 0.6 0.6 0.6 52 Inorganic chemicals 4.3 3.9 4.1 4.1 3.9 3.5 2.6 53 Dyeing, tanning and coloring materials 1.o 0.8 0.9 1.1 1.3 1.3 0.8 54 Medicinal and pharmaceuticalproducts 0.3 0.4 0.3 0.1 0.2 0.1 0.1 Essential oils & perhmemat.; toilet-cleansing 55 mat 0.4 0.2 0.3 0.2 0.3 0.2 0.2 56 Fertilizers, manufactured 11.5 10.3 8.6 9.2 11.7 9.0 10.6 57 Explosives and pyrotechnic products 1.1 2.6 0.8 0.4 1.9 0.7 2.5 58 Artif. Resins,plastic mat., cellulose esterdethers 0.3 0.2 0.3 0.2 0.2 0.3 0.3 59 Chemical materials and products, n.e.s. 0.7 0.7 0.8 0.8 0.9 0.9 0.7 61 Leather, leather manuf., n.e.s.and dressedfurskisg 0.9 1.4 1.8 1.8 1.8 1.7 1.7 62 Rubbermanufactures, n.e.s. 2.6 2.7 2.2 1.4 1.5 1.1 0.7 63 Cork and wood manufactures (excl. furniture) 0.2 0.1 0.2 0.3 0.4 0.5 0.5 Paper, paperboard, artic. o f paper, paper- 64 pulphoard 0.4 0.4 0.5 0.6 0.7 0.9 0.8 Textile yarn, fabrics, made-upart., related 65 products 0.2 0.3 0.3 0.3 0.3 0.3 0.4 66 Non-metallic mineral manufactures, n.e.s. 0.6 0.5 0.5 0.4 0.4 0.4 0.4 67 Iron and steel 5.0 6.3 6.2 7.1 7.3 6.8 6.3 68 Non-ferrous metals 0.9 0.9 1.3 2.1 2.4 2.1 1.6 196 StatisticalAnnex 69 Manufactures o f metal, n.e.s. 0.6 0.5 0.4 0.3 0.5 1.7 2.2 71 Power generatingmachinery andequipment 0.8 0.7 0.8 0.5 0.7 0.7 1.o 72 Machinery specialized for particular industries 0.6 0.5 0.4 0.5 0.4 0.7 0.4 73 Metalworking machinery 0.9 0.9 0.8 0.9 1.1 1.5 1.6 -Generalindustrialmachinery &_equipment+and ~ ~~ ~_~ ~ ~ ~ 74 parts 0.5 0.6 0.5 0.5 0.7 0.8 0.7 Office machines & automatic data processing 75 equip. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 76 Telecommunications & sound recordingapparatus 0.1 0.1 0.1 0.2 0.1 0.1 0.1 Electrical machinery, apparatus & appliances 77 n.e.s. 0.3 0.3 0.2 0.2 0.3 0.2 0.3 78 Roadvehicles (incl. air cushionvehicles 0.2 0.1 0.1 0.1 0.1 0.1 0.1 79 Other transport equipment 1.1 0.9 1.2 0.9 0.7 0.8 1.o 81 Sanitary, plumbing, heating and lightingfixtures 0.7 0.6 0.6 0.4 0.3 0.3 0.3 82 Furniture andparts thereof 0.2 0.2 0.2 0.2 0.3 0.3 0.3 83 Travel goods, handbagsand similar containers 0.0 0.0 0.1 0.1 0.1 0.1 0.1 84 Articles o f apparel andclothing accessories 0.6 0.7 0.9 0.9 1.o 1.o 0.9 85 Footwear 0.5 0.4 0.5 0.6 0.6 0.6 0.5 87 Professional, scientific & controlling instruments 0.2 0.2 0.3 0.2 0.2 0.2 0.3 88 Photographicapparatus, optical goods, watches 0.0 0.0 0.0 0.0 0.0 0.0 0.1 89 Miscellaneousmanufactured articles, n.e.s. 0.1 0.2 0.1 0.1 0.1 0.2 0.2 93 UNSpecial Code 0.5 0.9 0.9 1.4 0.9 0.7 0.4 94 Animals, live, zoo animals, dogs, cats etc. 0.1 0.2 0.2 0.2 0.2 0.2 0.1 Source: WITS, COMTRADE 197 StatisticalAnnex Table A35: Export Specialization Indices in 1996-2002, Exportsto CIS, 2-digit SITC level SITC code Product description 1996 1997 1998 1999 2000 2001 2002 00 Live animals 5.9 5.6 0.5 2.6 4.4 2.1 2.7 01 Meatandmeatp q x x a t " 5.4 5.2 ~ # &I- 4.4 AT 4.Q- 02 Dairyproducts and birds' eggs 4.9 4.8 1.9 2.6 3.5 4.1 2.8 03 Fish, crustaceans, mollusks, preparations thereof 1.8 1.5 1.o 1.3 0.6 0.5 0.3 04 Cereals and cereal preparations 3.5 1.7 3.0 4.5 1.6 3.3 3.4 05 Vegetables and fruit 1.9 2.2 1.6 1.6 1.7 2.1 2.3 06 Sugar, sugar preparations and honey 5.5 5.5 2.7 3.2 3.5 2.6 2.3 07 Coffee, tea, cocoa, spices, manufactures thereof 1.o 1.4 1.8 3.0 3.8 4.1 3.6 08 Feeding stuff for animals, not incl. unmil. cereals 5.7 3.3 3.1 4.1 5.6 5.1 5.0 09 Miscel. edible products and preparations 2.9 1.2 0.6 1.o 0.5 1.1 1.2 11 Beverages 2.1 1.o 0.8 0.6 0.8 1.1 1.o 12 Tobacco and tobacco manufactures 1.7 1.6 1.6 2.8 4.0 1.9 1.7 21 Hides, skins and furskins, raw 1.1 1.1 0.5 0.9 1.1 1.3 1.8 22 Oil seeds and oleaginous fruit 2.5 3.9 3.8 5.3 4.4 5.3 2.8 Crude rubber (including synthetic and 23 reclaimed) 0.0 0.0 0.1 0.0 0.2 0.1 0.0 24 Cork and wood 0.2 0.2 0.4 0.6 0.8 0.7 0.6 25 Pulp and waste paper 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Textile fibres (except wool tops) and their 26 wastes 0.4 0.2 0.1 0.1 0.1 0.1 0.2 27 Crude fertilizers and crude materials (excl. coal) 1.8 1.8 1.4 1.8 2.3 2.5 2.4 28 Metalliferous ores and metal scrap 2.9 2.6 2.5 3.1 4.2 3.5 3.7 29 Crude animal and vegetable materials, n.e.s. 3.8 4.1 3.4 3.0 3.1 3.1 3.7 32 Coal, coke and briquettes 0.5 0.6 0.6 1.o 0.8 0.9 0.8 Petroleum, petroleumproducts and related 33 materials 0.1 0.1 0.1 0.2 0.1 0.2 0.2 34 Gas, natural and manufactured 0.0 0.1 0.0 0.1 0.1 0.0 0.1 35 Electric current 1.3 1.7 1.8 1.8 2.2 1.9 1.4 41 Animal oils and fats 2.4 2.7 3.4 2.9 5.6 4.2 2.5 42 Fixed vegetable oils and fats 6.4 5.8 6.1 7.0 7.0 6.4 6.0 Animal-vegetable oils-fats, processed, and 43 waxes 4.2 3.8 4.2 3.2 3.4 2.o 1.8 51 Organic chemicals 2.3 1.5 1.5 1.2 1.2 1.3 1.3 52 Inorganic chemicals 1.5 1.7 1.7 1.8 2.o 1.9 1.8 53 Dyeing, tanning and coloring materials 3.9 4.0 2.5 2.7 3.8 3.3 3.5 54 Medicinal and pharmaceutical products 2.8 3.3 1.8 1.3 1.9 2.0 1.4 Essential oils & perfume mat.; toilet-cleansing 55 mat 3.2 2.1 2.0 1.3 1.2 1.1 1.o 56 Fertilizers, manufactured 1.7 1.6 1.1 1.1 1.6 1.2 1.1 57 Explosives and pyrotechnic products 0.3 0.6 0.4 0.2 0.9 0.3 1.5 58 Artif. resins, plastic mat., cellulose esterdethers 1.o 0.9 0.9 0.6 0.8 1.o 1.1 59 Chemical materials and products, n.e.s. 2.2 2.4 1.8 2.7 3.1 3.1 2.4 Leather, leather manuf.,n.e.s. and dressed 61 furskins 4.0 5.3 4.0 5.6 4.8 4.7 3.2 62 Rubber manufactures, n.e.s. 3.4 3.7 2.6 2.6 2.8 2.0 1.6 63 Cork and wood manufactures (excl. fiuniture) 0.4 0.3 0.3 0.4 0.6 0.7 0.7 Paper, paperboard, artic. o f paper, paper- 64 pulpiboard 0.9 1.o 0.9 1.2 1.4 1.6 1.4 Textile yarn, fabrics, made-upart., related 65 products 1.2 1.7 1.o 1.1 1.1 1.2 1.2 66 Non-metallic mineral manufactures, n.e.s. 2.4 2.1 0.5 1.4 1.8 1.8 1.4 198 StatisticalAnnex 67 Iron and steel 2.6 3.0 3.2 3.6 3.9 3.6 3.2 68 Non-ferrous metals 0.2 0.2 0.2 0.5 0.6 0.6 0.5 69 Manufactures o f metal, n.e.s. 1.9 1.7 0.9 0.4 0.6 2.6 3.3 71 Power generating machinery and equipment 1.5 1.4 1.2 0.9 1.4 1.3 1.6 72 Tvlachmery specialized for particular industries 2.8- 3.O 1.6 14- l-5 ZL 1.4 73 Metalworkmg machinery 3.5 3.3 2.1 2.3 2.4 4.4 3.8 General industrial machinery & equipment, and 74 parts 2.1 2.2 1.9 1.7 2.3 2.0 2.3 Office machines & automatic data processing 75 equip. 1.o 1.3 1.o 1.o 1.8 2.9 0.5 Telecommunications & sound recording 76 apparatus 1.1 0.8 1.4 1.9 2.2 1.7 1.5 Electrical machinery, apparatus & appliances 77 n.e.s. 2.6 2.6 1.8 1.4 2.4 1.9 1.9 78 Road vehicles (incl. air cushion vehicles 1.2 1.4 0.6 0.7 0.9 0.8 0.6 79 Other transport equipment 1.5 4.1 1.6 1.9 1.5 2.3 2.4 81 Sanitary, plumbing, heating and lightingfixtures 3.4 3.6 2.1 2.3 1.9 1.6 1.4 82 Furniture and parts thereof 1.9 2.4 0.7 1.o 1.6 1.5 1.3 83 Travel goods, handbags and similar containers 1.4 1.3 1.3 1.7 1.7 1.5 1.o 84 Articles o f apparel and clothing accessories 3.4 3.8 2.9 2.9 3.8 3.7 3.3 85 Footwear 3.2 2.4 1.4 2.0 3.0 2.9 3.2 87 Professional, scientific & controlling instruments 1.4 1.3 0.8 0.7 0.7 0.5 1.o 88 Photographic apparatus, optical goods, watches 1.1 1.o 0.5 0.4 0.6 1.o 1.5 89 Miscellaneous manufactured articles, n.e.s. 0.8 0.9 0.6 0.5 0.7 0.9 1.1 93 UNSpecialCode 0.1 0.2 0.3 0.3 0.3 0.2 0.1 94 Animals, live, zoo animals, dogs, cats etc. 1.1 2.0 1.7 1.o 2.4 1.6 1.2 .................................. .....,,,.. .......................................................... Note: Uzbekistanexports data are not included. Besides, data for the following countries were not included for ................................................. Source: WITS, COMTRADE . some years: 1996 1997 1998 1999 2000 2001 2002 Armenia, Beloms, Armenia, Georgia, Kyrgyzstan Armenia, Georgia, Beloms, Georgia, Georgia, Tajikistan Kyrgyzstan, Kazakhstan, Georgia, Kyrgyzstan, Tajikistan TajIkistan, Tajikistan, Tajikistan, Tajikistan Turkmenistan Turkmenistan Turkmenistan 199 StatisticalAnnex Table A36: Export Specialization Indices in 1996 -2002, Exports to the EU, 2-digit SITC level SITC code Product description 1996 1997 1998 1999 2000 2001 2002 QQ 1 2 n ? nn n i n - n i 4 7%- 01 Meat and meat preparations 2.2 2.3 1.6 1.6 1.5 1.1 1.3 02 Dairyproducts andbirds' eggs 1.2 0.8 0.5 0.6 1.1 1.9 1.o 03 Fish, crustaceans, mollusks, preparationsthereof 1.2 1.2 0.9 0.9 0.4 0.4 0.2 04 Cereals andcerealpreparations 3.5 1.6 3.0 4.8 1.1 3.5 6.3 05 Vegetables and fruit 0.4 0.4 0.4 0.3 0.3 0.3 0.4 06 Sugar, sugar preparationsandhoney 15.0 7.5 3.1 3.5 3.1 2.2 2.7 07 Coffee, tea, cocoa, spices, manufacturesthereof 0.2 0.4 0.4 0.8 1.1 1.5 1.6 08 Feedingstuff for animals, not incl. unmil. cereals 1.3 0.4 0.4 0.5 1.0 1.2 1.4 09 Miscel. edible products andpreparations 0.3 0.1 0.1 0.1 0.1 0.2 0.2 11 Beverages 0.8 0.4 0.2 0.1 0.2 0.3 0.3 12 Tobacco andtobacco manufactures 0.6 0.5 0.6 1.3 1.4 0.7 0.6 21 Hides, skins andfurskins, raw 3.2 3.5 1.8 2.1 1.7 1.5 2.7 22 Oil seeds andoleaginous h i t 21.4 21.5 19.4 14.6 21.5 14.5 2.3 23 Crude rubber (including synthetic and reclaimed) 0.0 0.0 0.2 0.2 0.6 0.1 0.1 24 Cork and wood 0.7 0.8 1.6 3.5 4.0 3.2 3.5 25 Pulp and waste paper 0.0 0.0 0.0 0.0 0.0 0.0 0.0 26 Textile fibres (except wool tops) andtheir wastes 0.4 0.3 0.3 0.3 0.2 0.1 0.3 27 Crude fertilizers andcrude materials(excl. coal) 3.3 3.9 4.1 3.7 3.7 4.0 4.0 28 Metalliferous ores andmetal scrap 13.5 16.5 23.9 22.7 20.5 14.6 12.6 29 Crude animal andvegetablematerials, n.e.s. 0.3 0.3 0.3 0.2 0.3 0.3 0.3 32 Coal, coke and briquettes 13.0 15.4 14.3 15.9 15.1 17.9 17.0 Petroleum,petroleumproductsandrelated 33 materials 1.1 0.7 1.1 2.0 0.9 1.7 2.5 34 Gas, natural and manufactured 1.2 2.1 1.3 2.0 2.7 2.3 2.6 35 Electric current 2.4 4.9 4.8 3.0 3.1 1.9 1.5 41 Animal oils and fats 0.3 0.7 0.4 0.2 0.3 0.3 0.2 42 Fixedvegetable oils and fats 4.0 2.7 3.4 3.6 7.8 6.5 7.6 43 Animal-vegetable oils-fats, processed, andwaxes 0.6 0.6 0.6 0.5 0.4 0.2 0.2 51 Organic chemicals 1.2 0.7 0.5 0.4 0.4 0.5 0.5 52 Inorganic chemicals 4.8 4.3 4.6 4.7 4.0 3.8 3.0 53 Dyeing, tanning and coloring materials 0.7 0.6 0.7 0.8 0.9 0.9 0.6 54 Medicinal andpharmaceuticalproducts 0.2 0.3 0.2 0.1 0.1 0.1 0.0 55 Essentialoils & perfumemat.; toilet-cleansing mat 0.2 0.2 0.2 0.1 0.2 0.1 0.1 56 Fertilizers, manufactured 21.4 19.6 17.8 18.7 19.6 15.9 16.3 57 Explosives andpyrotechnic products 1.5 3.9 1.2 0.8 3.9 1.4 5.2 58 Artif. resins, plastic mat., cellulose estersiethers 0.2 0.2 0.2 0.2 0.2 0.2 0.2 59 Chemical materials andproducts, n.e.s. 0.5 0.5 0.6 0.6 0.7 0.7 0.5 61 Leather, leather manuf., n.e.s. and dressedfurskins 0.9 1.4 1.7 1.6 1.7 1.7 1.6 62 Rubber manufactures,n.e.s. 2.2 2.2 1.9 1.2 1.2 1.0 0.7 63 Cork and wood manufactures(excl. funiture) 0.2 0.1 0.2 0.3 0.4 0.5 0.5 Paper, paperboard, artic. ofpaper, paper- 64 pulphoard 0.3 0.3 0.3 0.5 0.5 0.6 0.6 65 Textile yam, fabrics, made-upart., relatedproducts 0.3 0.3 0.4 0.4 0.4 0.3 0.4 66 Non-metallic mineral manufactures,n.e.s. 0.6 0.5 0.5 0.4 0.4 0.4 0.4 67 Ironand steel 9.5 12.1 12.0 13.2 12.6 12.0 11.5 68 Non-ferrous metals 1.1 1.1 1.6 2.8 2.8 2.5 1.9 69 Manufactures of metal, n.e.s. 0.4 0.4 0.3 0.3 0.4 1.5 1.9 71 Power generatingmachinery and equipment 0.6 0.6 0.7 0.4 0.6 0.6 0.9 200 StatisticalAnnex 72 Machinery specialized for particular industries 0.4 0.4 0.3 0.3 0.3 0.5 0.3 73 Metalworking machinery 0.8 0.8 0.7 0.8 1.o 1.3 1.4 74 General industrial machinery & equipment, and parts 0.4 0.4 0.4 0.3 0.5 0.6 0.5 75 Office machines & automatic data processing equip. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 76 Telecommunications & sound recording apparatus 0.2 0.2 0.1 0.2 0.1 0.1 0.1 77 Electrical machinery, apparatus & appliances n.e.s. 0.4 0.3 0.3 0.3 0.4 0.3 0.4 78 Road vehicles (incl. air cushion vehicles 0.1 0.1 0.1 0.1 0.1 0.1 0.1 79 Other transport equipment 1.1 0.9 1.3 0.9 0.6 0.8 1.o 81 Sanitary, plumbing, heating and lighting fixtures 0.5 0.4 0.4 0.2 0.2 0.2 0.3 82 Furniture and parts thereof 0.1 0.2 0.1 0.2 0.2 0.3 0.3 83 Travel goods, handbags and similar containers 0.0 0.0 0.1 0.1 0.1 0.1 0.1 84 Articles o f apparel and clothng accessories 0.7 0.8 1.2 1.3 1.4 1.4 1.3 85 Footwear 0.4 0.3 0.4 0.5 0.5 0.5 0.4 87 Professional, scientific & controlling instruments 0.2 0.2 0.2 0.2 0.2 0.2 0.3 88 Photographic apparatus, optical goods, watches 0.1 0.1 0.0 0.0 0.0 0.0 0.1 89 Miscellaneous manufactured articles, n.e.s. 0.1 0.2 0.1 0.1 0.1 0.1 0.2 93 UNSpecial Code 0.5 1.1 0.9 1.2 0.7 0.6 0.5 94 Animals, live, zoo animals, dogs, cats etc. 0.2 0.3 0.4 0.3 0.2 0.2 0.1 Source: WITS, COMTRADE Note: Data for Luxembourg exports are only for years 1999 - 2002 201 StatisticalAnnex Table A37: Export SpecializationIndices in 1996-2002,3-digit SITC level ~~ SITC code Product Description 1996 1997 1998 1999 2000 2001 2002 001 Live animals chiefly for food 1.4 0.4 0.0 0.1 0.3 0.1 0.2 011 Meat,edible meat offals, fresh, chi 2.5 2.4 1.8 2.1 ~~ 2.1 1.4 1.7 012 Meat & edible offals,salted,in brin 0.0 0.0 0.0 0.0 0.0 0.0 1.1 014 Meat & edib.offals,prep./pres.,fish 3.2 5.7 2.6 1.8 1.o 0.3 2.9 022 Milkand cream 2.2 1.6 1.2 1.4 2.3 3.4 0.5 023 Butter 6.7 1.2 2.2 2.0 6.3 8.6 7.2 024 Cheese and curd 0.4 0.3 0.2 0.3 0.7 1.7 0.0 025 Eggs andyolks,fiesh,dried or other 3.0 6.3 0.1 0.1 0.1 0.0 2.7 034 Fish,fresh (live or dead),chilled o 0.9 0.9 0.8 0.8 0.4 0.2 0.0 035 Fish,dried,salted or inbrine ;smo 0.1 0.1 0.1 0.0 0.1 0.1 0.1 036 Crustaceansand molluscs,fresh,chil 0.1 0.2 0.1 0.1 0.0 0.1 0.2 037 Fish,crustaceans and molluscs,prepa 0.9 1.o 0.6 0.8 0.2 0.3 - 041 Wheat (including spelt) and meslin, 3.2 1.1 5.3 11.6 0.5 5.3 0.0 042 Rice 0.0 0.0 0.0 0.0 0.0 0.0 17.2 043 Barley,unmilled 9.9 5.5 7.3 14.9 11.4 28.7 5.6 044 Maize (corn), unmilled 0.7 0.3 2.2 1.2 0.8 1.5 1.1 045 Cereals,unmilled( no wheat,rice,ba 5.5 1.9 2.6 7.6 1.2 2.1 0.2 046 Meal and flour of wheat and flour o 17.6 8.7 3.5 2.4 0.1 0.1 0.9 047 Other cerealmeals and flours 17.5 14.8 20.6 9.7 3.2 2.8 23.1 048 Cerealprepar. & preps.of flour of 0.5 0.4 0.3 0.5 0.6 0.6 0.4 054 Vegetab.,fresh,chilled,frozedpres. 0.4 0.5 0.4 0.3 0.3 0.3 0.1 056 Vegetab.,roots & tubers,prepared/pr 0.6 0.6 0.5 0.6 0.4 0.5 1.1 057 Fruit & nuts (not includ. oil nuts), 0.1 0.1 0.1 0.1 0.2 0.1 0.5 058 Fruit,preserved,and fruit preparati 0.9 0.9 0.8 0.9 0.9 1.o 2.3 061 Sugar andhoney 14.9 7.2 2.0 1.7 0.7 0.6 0.7 062 Sugar confectionery and other sugar 3.1 3.4 4.8 6.4 8.7 5.4 0.0 071 Coffee and coffee substitutes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 072 Cocoa 0.0 0.0 0.0 0.0 0.0 0.0 6.2 073 Chocolate & other food preptns. con 0.4 0.9 1.2 1.4 3.5 4.5 0.0 074 Tea and mate 0.0 0.1 0.0 0.1 0.0 0.0 0.1 075 Spices 0.3 0.5 0.4 2.9 0.1 0.1 11.7 081 Feedstuff for animals (not incl.unm 0.9 0.3 0.4 0.5 0.8 1.o 0.0 091 Margarine and shortening 0.8 0.1 0.2 0.1 0.1 0.1 2.9 098 Edible productsandpreparationsn. 0.3 0.1 0.1 0.1 0.1 0.3 0.0 111 Nonalcoholic beverages,n.e.s. 0.9 0.2 0.2 0.1 0.1 0.1 2.9 112 Alcoholic beverages 1.6 0.7 0.5 0.2 0.4 0.6 0.0 121 Tobacco,unmanufactured; tobacco r e f 0.1 0.0 0.1 0.2 0.4 0.2 2.7 122 Tobaccomanufactured 0.7 0.5 0.7 1.7 1.9 0.9 1.1 211 Hides and skins (except furskins), 4.0 4.0 2.1 2.7 2.1 1.7 0.0 212 Fursluns,raw (includ.astrakhan,cara 0.8 0.6 0.7 0.2 0.1 0.1 5.5 222 Oil seeds and oleaginous fruit,whol 4.4 5.1 5.7 3.8 4.3 2.6 0.1 223 Oils seeds and oleaginousfruit, wh 13.2 13.4 9.0 12.6 17.8 11.3 0.0 232 Natural rubber latex; natmbber & 0.0 0.0 0.0 0.1 0.0 0.0 0.0 233 Synth.rubb.lat.;synth.rubb.& reclai 0.0 0.0 0.1 0.1 0.5 0.1 0.1 245 Fuelwood (excluding wood waste) an 1.4 0.4 1.3 2.3 1.5 2.4 3.5 246 Pulpwood(including chips and wood 0.0 0.0 0.0 0.1 0.1 0.0 0.0 247 Other wood inthe roughor roughly 0.7 1.o 3.0 4.9 3.9 3.2 3.1 248 Wood,simply worked,and railway slee 0.3 0.4 0.7 1.2 1.9 1.9 2.1 251 Pulp andwaste paper 0.0 0.0 0.0 0.0 0.0 0.0 0.0 202 StatisticalAnnex 261 Silk 0.1 0.1 0.1 0.0 0.0 0.0 0.0 263 Cotton 0.0 0.0 0.0 0.1 0.0 0.0 0.0 264 Jute & other textile bast fibres,ne 0.0 0.0 0.0 0.0 0.0 0.0 0.0 265 Vegetable textile fibres and waste 5.4 2.5 3.3 3.0 1.7 1.7 3.9 266 Syntheticfibres suitable for spinn 0.0 m 0.0 _O,(L O_Q- 0,Q -03,- , 267 Other man-madefibres suitabl.for s 0.1 0.0 0.0 0.1 0.1 0.1 0.0 268 Wool and other animal hair (excludi 0.5 0.4 0.4 0.2 0.1 0.0 0.1 269 Old clothing and other old textile 0.0 0.0 0.0 0.0 0.0 0.0 0.0 271 Fertilizers,crude 0.7 0.5 0.4 0.4 0.6 0.4 0.3 273 Stone,sand andgravel 3.0 3.0 3.8 1.6 1.8 2.3 2.4 274 Sulphur andunroastedironpyrites 1.6 1.7 1.9 1.7 1.8 1.4 0.9 277 Natural abrasives,n.e.s (incl.indus 0.3 0.1 0.1 0.0 0.0 0.0 0.0 278 Other crude minerals 3.6 4.5 4.6 5.2 5.3 5.2 5.4 281 Ironore andconcentrates 15.7 16.4 16.8 15.9 17.4 13.2 11.1 282 Waste and scrap metal of iron or st 4.2 10.5 19.5 22.9 23.0 14.9 11.6 286 Ores and concentrates ofbase metal 21.0 18.9 26.1 15.6 0.0 0.0 0.0 287 Non-ferrous base metal waste and sc 4.4 4.4 5.7 6.0 7.1 5.1 4.3 288 non-ferrousbase metal waste and scrap, not elsewherespecified 2.6 6.7 8.0 7.0 4.4 0.3 0.4 291 Crude animal materials,n.e.s. 0.3 0.3 0.2 0.3 0.5 0.5 0.7 292 Crude vegetablematerials, n.e.s. 0.4 0.4 0.4 0.3 0.4 0.4 0.3 322 Coa1,lignite and peat 1.3 1.4 1.3 1.8 1.5 1.8 1.4 323 Briquettes;coke and semi-coke of co 5.0 4.2 3.9 5.1 9.3 11.1 8.2 333 Petrol.oils,crude,& c.o.obtain.fiom 0.0 0.0 0.0 0.3 0.0 0.0 0.1 334 Petroleumproducts,refined 1.o 0.6 0.8 1.2 0.8 1.8 2.6 335 Residualpetroleumproducts,nes.& r 3.0 2.3 3.0 2.6 2.3 2.9 2.5 341 Gas,natural and manufactured 0.5 0.8 0.4 0.6 0.8 0.5 0.7 351 Electric current 4.1 7.4 6.9 4.3 3.6 2.3 2.1 411 Animaloils and fats 0.2 0.5 0.3 0.1 0.2 0.3 0.2 423 Fixedvegetable oils,soft,crude,ref 5.4 3.3 3.9 4.6 11.8 9.2 10.3 424 Other fixed vegetable oils,fluid or 0.0 0.0 0.0 0.0 0.0 0.0 0.0 43 1 Animal & vegetable oils and fats,pr 0.6 0.6 0.6 0.5 0.4 0.2 0.1 511 Hydrocarbonsnes,& their halogen.& 1.2 2.2 2.0 1.3 1.2 1.7 1.9 5 12 Alcohols,phenols,phenol-alcohols,& 7.7 1.4 0.6 0.6 0.7 0.7 0.7 513 Carboxylic acids,& their anhydrides 1.3 1.7 1.5 1.8 1.9 1.4 1.3 514 Nitrogen-function compounds 0.1 0.0 0.0 0.1 0.0 0.0 0.0 515 Organo-inorganicandheterocyclic c 0.2 0.1 0.2 0.1 0.1 0.2 0.2 516 Other organic chemicals 0.2 0.4 0.3 0.2 0.1 0.1 0.1 522 Inorganic chemical elements,oxides 6.7 6.4 6.5 6.4 6.4 5.8 4.3 523 Other inorganic chemicals 2.1 1.6 1.8 2.2 1.5 1.4 1.3 524 Radio-active and associatedmateria 0.0 0.0 0.0 0.0 0.0 0.0 0.0 53 1 Synth.org.dyestuffs,etc.nat.indigo 0.3 0.3 0.1 0.1 0.1 0.1 0.1 532 Dyeing & tanning extracts;synth.tan 0.0 0.0 0.0 0.0 0.0 0.0 1.2 533 Pigments,paints,varnishes & related 1.3 1.o 1.2 1.5 1.7 1.6 1.o 541 Medicinal andpharmaceuticalproduc 0.3 0.4 0.3 0.1 0.2 0.1 0.1 551 Essentialoils,perfume and flavour 0.2 0.2 0.2 0.2 0.2 0.1 0.1 553 Perfumery,cosmetics andtoilet prep 0.2 0.3 0.3 0.2 0.3 0.2 0.2 554 Soap,cleansing andpolishing prepar 0.7 0.2 0.2 0.1 0.2 0.2 0.2 562 Fertilizers,manufactured 11.1 9.9 8.2 8.8 11.2 8.6 10.1 572 Explosivesandpyrotechnic products 1.1 2.5 0.7 0.4 1.8 0.7 2.4 582 Condensation,polycondensation& pol 0.1 0.0 0.1 0.1 0.1 0.0 0.0 583 Polymerization and copolymerization 0.3 0.3 0.3 0.2 0.3 0.4 0.4 584 Regeneratedcellu1ose;cellulose nit 0.0 0.0 0.1 0.2 0.0 0.0 0.0 203 StatisticalAnnex 585 Other artificial resins andplastic 0.0 0.0 0.0 0.0 0.0 0.0 0.0 591 Disinfectants,insecticides,fungicid 0.2 0.2 0.2 0.3 0.1 0.1 0.1 592 Starches,inulin & wheat g1uten;albu 2.8 2.4 3.2 3.0 4.2 4.0 2.3 598 Miscellaneous chemicalproducts,n.e 0.3 0.4 0.5 0.4 0.4 0.4 0.4 4 u L e a t h e r ap l.5 xi 2.Q L L UL 612 Manufactures o f leather/of composit 0.8 1.2 1.4 1.2 0.9 1.2 1.1 613 Furskins,tanned/dressed,pieces/cutt 0.6 0.7 1.3 0.6 1.5 2.4 2.2 621 Materials o f rubber(e.g.,pastes,pla 0.4 0.3 0.3 0.3 0.1 0.5 0.4 625 Rubber tyres,tyre cases,etc.for whe 3.8 3.9 3.2 2.1 2.2 1.5 0.9 628 Articles o frubber,n.e.s. 0.8 0.7 0.9 0.4 0.4 0.4 0.4 633 Cork manufactures 0.0 0.0 0.0 0.0 0.0 0.0 0.0 634 Veneers,plywood,improved or reconst 0.2 0.1 0.3 0.4 0.6 0.8 0.9 635 Wood manufactures,n.e.s. 0.2 0.1 0.1 0.2 0.2 0.2 0.2 641 Paper andpaperboard 0.3 0.4 0.5 0.7 0.8 1.o 0.8 642 Paper and paperboard,cut to size or 0.5 0.4 0.3 0.3 0.5 0.5 0.5 651 Textile yam 0.3 0.6 0.8 0.7 0.7 0.6 0.6 652 Cotton fabrics,woven 0.2 0.1 0.2 0.0 0.0 0.0 0.0 653 Fabrics,woven,of man-made fibres 0.1 0.1 0.1 0.0 0.0 0.0 0.2 654 Textil.fabrics,woven,oth.than cotto 0.3 0.5 0.3 0.4 0.3 0.4 0.4 655 Knittedor crocheted fabrics 0.0 0.0 0.0 0.0 0.0 0.0 0.0 656 Tulle,lace,embroidery,ribbons,& 0th 0.0 0.0 0.0 0.0 0.0 0.0 0.0 657 Special textile fabrics and related 0.6 0.6 0.6 0.6 0.7 0.6 0.7 658 Made-up articles,wholly/chiefly o f 0.3 0.2 0.3 0.5 0.4 0.4 0.5 659 Floor coverings,etc. 0.1 0.1 0.1 0.2 0.3 0.3 0.2 661 Lime,cement,and fabricated construc 1.2 1.5 1.6 1.2 1.1 0.8 1.1 662 Clay construct.materia1s & refract0 1.o 0.9 1.o 0.7 1.1 0.9 0.7 663 Mineral manufactures,n.e.s 1.o 0.7 0.6 0.3 0.4 0.5 0.4 664 Glass 0.5 0.4 0.4 0.4 0.4 0.5 0.7 665 Glassware 1.o 0.6 0.5 0.7 1.o 0.9 0.7 666 Pottery 0.9 0.7 0.7 0.6 0.8 0.9 0.8 671 Pig iron,spiegeleisen,spongeiron,i 16.2 21.4 30.0 24.5 22.6 18.3 21.1 672 Ingots and other primary forms,of i 14.7 20.9 22.5 31.3 28.5 27.1 24.9 673 Ironand steel bars,rods,angles,sha 13.4 16.4 15.3 18.2 20.3 20.3 16.2 674 Universals,plates and sheets,of iro 4.4 5.7 6.6 6.1 6.0 6.8 6.7 676 Rails and railway track constructio 19.4 18.2 21.6 8.7 10.6 4.9 5.6 677 Irodsteelwire,whetWnot coated,bu 5.3 5.8 3.7 4.0 4.0 3.2 3.1 678 Tubes,pipes and fittings,of ironor 10.3 10.0 6.6 6.5 9.3 6.9 4.9 679 Iron& steel castings,forgings & st 1.2 0.9 1.3 0.7 0.3 0.3 0.3 682 Copper 0.2 0.1 0.3 1.1 1.8 1.9 1.3 683 Nickel 0.0 0.0 0.7 0.1 0.2 0.3 0.1 684 Aluminium 1.2 1.6 2.2 3.5 3.6 2.7 2.0 685 Lead 1.3 0.9 0.7 0.8 1.1 0.5 0.8 686 Zinc 0.0 0.0 0.0 0.1 0.1 0.0 0.0 687 Tin 0.0 0.0 0.0 0.0 0.4 0.0 0.6 689 Miscelhon-ferrous base metals emp 5.3 3.2 3.0 4.1 5.2 5.6 5.4 691 Structures & parts o f struc.;iron,s 1.o 0.9 0.5 0.6 0.7 1.2 0.9 692 Metalcontainers for storage and tr 0.6 0.4 0.6 0.4 0.6 0.6 0.7 693 Wire products and fencing grills 1.5 1.1 1.6 1.1 2.2 2.1 1.4 694 Nails,screws,nuts,bolts etc.of iron 0.5 0.5 0.4 0.2 0.3 0.3 0.4 695 Tools for use inhand or inmachine 0.3 0.2 0.3 0.3 0.6 6.3 9.5 696 Cutlery 0.1 0.0 0.0 0.0 0.0 0.0 0.1 697 Householdequipment o fbase meta1,n 0.5 0.4 0.3 0.2 0.3 0.4 0.4 699 Manufactures o fbase meta1,n.e.s. 0.4 0.4 0.3 0.3 0.3 0.7 0.8 204 StatisticalAnnex 711 Steam & other vapour generatingboi 0.9 0.8 0.6 0.5 0.6 1.2 0.4 712 Steam & other vapour power units$ 2.3 3.3 2.7 3.3 2.3 1.3 0.8 713 Internalcombustion piston engines 0.4 0.3 0.3 0.3 0.2 0.2 0.2 714 Engines & motors,non-electric 1.3 0.9 1.3 0.7 1.1 1.1 1.3 2- ' pk"4&p ns fu0.5 Q-5 Q-fi ILd 0.4 718 Other power generating machinery an 1.1 1.5 1.4 0.5 1.o 2.3 9.3 721 Agricultural machinery andparts 1.3 0.9 0.6 0.8 0.7 0.6 0.6 722 Tractors fitted or not withpower t 0.7 0.4 0.4 0.7 1.2 0.8 0.8 723 Civil engineering & contractors pla 0.6 0.6 0.6 0.5 0.4 0.5 0.3 724 Textile & leather machinery andpar 0.1 0.1 0.1 0.1 0.1 0.2 0.0 725 Paper & pulp mill mach.,mach for ma 0.1 0.0 0.0 0.0 0.1 0.4 0.1 726 Printing & bookbinding mach.and par 0.0 0.0 0.0 0.0 0.1 2.9 0.3 727 Foodprocessing machines andparts 1.o 1.9 1.3 1.6 2.3 1.2 0.9 728 Mach.& equipment specialized for pa 0.7 0.6 0.3 0.4 0.3 0.3 0.4 736 Mach.tools for working metal or met 0.4 0.4 0.4 0.4 0.4 0.7 0.8 737 Metalworking machinery andparts 2.4 2.5 2.1 2.6 3.1 4.1 3.9 741 Heating & cooling equipment andpar 0.3 0.4 0.3 0.3 0.8 0.5 0.6 742 Pumps for liquids,liq.elevators and 1.1 1.1 1.o 1.1 1.5 1.o 0.9 743 Pumps & compressors,fans &blowers, 0.5 0.6 0.5 0.5 0.6 1.1 1.1 744 Mechanical handling equip.and parts 0.8 0.8 0.7 0.5 0.5 0.5 0.5 745 Other non-electrical mach.tools,app 0.3 0.3 0.2 0.3 0.3 0.2 0.1 749 Non-electric parts and accessories 0.4 0.4 0.5 0.4 0.6 0.9 0.6 751 Office machines 0.1 0.0 0.0 0.0 0.0 0.0 0.0 752 Automatic data processing machines 0.0 0.0 0.0 0.0 0.0 0.0 0.0 759 Parts o f and accessories suitable f 0.0 0.0 0.0 0.0 0.0 0.0 0.0 761 Televisionreceivers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 762 Radio-broadcast receivers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 763 Gramophones,dictating,sound recorde 0.0 0.0 0.0 0.0 0.0 0.0 0.0 764 Telecommunications equipment andpa 0.2 0.2 0.2 0.2 0.1 0.1 0.1 771 Electric power machinery andparts 1.3 1.1 1.o 0.9 0.7 0.7 0.7 772 Elect.app.such as switches,relays,f 0.3 0.2 0.2 0.2 0.2 0.4 0.4 773 Equipment for distributing electric 0.8 0.8 0.8 0.5 0.5 0.6 0.7 774 Electric apparatus for medical purp 0.0 0.0 0.0 0.0 0.1 0.0 0.8 775 Householdtype,elect.& non-electric 0.4 0.4 0.4 0.3 0.4 0.4 0.4 776 Thermionic,cold & photo-cathode Val 0.0 0.0 0.0 0.0 0.0 0.0 0.0 778 Electricalmachinery and apparatus, 0.4 0.3 0.3 0.3 0.7 0.3 0.3 781 Passenger motor cars,for transport 0.0 0.0 0.0 0.0 0.0 0.0 0.0 782 Motor vehicles for transport o f goo 0.6 0.4 0.3 0.2 0.3 0.3 0.3 783 Road motor vehicles,n.e.s. 0.6 0.7 0.3 0.3 0.5 0.4 0.2 784 Parts & accessories o f 722--,781--, 0.2 0.2 0.2 0.2 0.2 0.2 0.1 785 Motorcycles,motor scooters,invalid 0.0 0.0 0.0 0.0 0.0 0.0 0.0 786 Trailers & other vehcles,not motor 0.4 0.3 0.4 0.3 0.3 0.4 0.2 791 Railway vehicles & associated equip 9.6 6.2 5.2 4.2 4.1 5.4 9.9 792 Aircraft & associated equipment and 0.2 0.4 0.5 0.5 0.5 0.4 0.3 793 Ships,boats and floating structures 1.2 0.9 1.9 1.o 0.4 0.7 0.8 812 Sanitary,plumbing,heating,lighting 0.7 0.6 0.6 0.4 0.3 0.3 0.3 821 Furniture andparts thereof 0.2 0.2 0.2 0.2 0.3 0.3 0.3 831 Travel goods,handbags,brief-cases,p 0.0 0.0 0.1 0.1 0.1 0.1 0.1 842 Outer garments,men's,of textile fab 0.6 0.8 1.o 1.2 1.2 1.2 1.3 843 Outer garments,women's,of textile f 1.5 1.7 2.2 2.1 2.0 2.0 1.8 844 Under garments o ftextile fabrics 0.3 0.4 0.6 0.5 0.7 0.6 0.4 845 Outer garments and other articles,k 0.1 0.1 0.2 0.2 0.3 0.3 0.3 846 Under garments,knitted or crocheted 0.2 0.2 0.3 0.4 0.5 0.5 0.5 205 StatisticalAnnex 847 Clothing accessories o f textile fab 0.2 0.1 0.2 0.2 0.2 0.1 0.1 848 Art.of apparel & clothing accessori 0.2 0.2 0.2 0.2 0.3 0.3 0.3 851 Footwear 0.5 0.4 0.4 0.5 0.6 0.6 0.5 871 Optical instruments and apparatus 0.2 0.2 0.1 0.1 0.1 0.1 0.3 -872 Medicaliwduments and appliances L2_ ILL (L2 ILL a1 ILL 0-1 873 Meters and counters,n.e.s. 0.4 0.2 0.1 0.1 0.1 0.1 0.1 874 Measuring,checking,analysing instru 0.2 0.2 0.3 0.3 0.3 0.3 0.5 881 Photographic apparatus and equipmen 0.0 0.0 0.0 0.0 0.0 0.1 0.2 882 Photographic & cinematographic supp 0.1 0.1 0.0 0.0 0.0 0.0 0.0 883 Cinematograph filqexposed-develope 0.1 0.0 0.0 0.0 0.0 0.0 0.0 884 Optical goods,n.e.s. 0.0 0.1 0.1 0.0 0.0 0.0 0.0 885 Watches and clocks 0.0 0.0 0.0 0.0 0.0 0.0 0.0 892 Printed matter 0.5 0.6 0.5 0.4 0.3 0.4 0.3 893 Articles o f materials described in 0.1 0.1 0.1 0.1 0.1 0.1 0.2 894 Baby carriages,toys,games and sport 0.1 0.1 0.1 0.2 0.2 0.3 0.3 895 Office and stationery supplies,n.e. 0.1 0.0 0.0 0.0 0.0 0.0 0.0 896 Works of art,collectors pieces & an 0.0 0.0 0.0 0.0 0.0 0.0 0.0 897 Jewellery,goldsmiths and other art. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 898 Musical instruments,parts and acces 0.1 0.3 0.1 0.1 0.0 0.0 0.0 899 Other miscellaneous manufactured ar 0.1 0.0 0.1 0.0 0.1 0.1 0.1 941 Animals,live,n.e.s.,incl. zoo-anima 0.1 0.2 0.2 0.2 0.2 0.2 0.1 Source: WITS, COMTRADE 206 StatisticalAnnex Table A38: Export SpecializationIndices in 1996-2002, Exportsto CIS, 3-digit SITC level SITC code Product description 1996 1997 1998 1999 2000 2001 2002 001 Live animals chiefly for food 18.5 14.6 0.4 2.8 6.4 2.2 3.4 011 Meat,edible meat offals, fresh, chi 14.3 10.0 8.6 17.7 26.3 10.0 14.1 012 Meat & edible offals,salted,in brin 0.7 0.2 0.9 0.2 9.4 0.0 - 014 Meat & edib.offals,prep./pres.,fish 11.3 18.5 8.1 6.8 3.2 0.8 7.8 022 Milk andcream 6.9 8.4 3.6 6.9 4.4 6.5 1.o 023 Butter 19.0 6.5 2.5 3.0 10.7 10.9 8.3 024 Cheese andcurd 9.1 7.3 0.8 1.7 4.1 7.7 0.0 025 Eggs and yolks,fiesh,dried or other 10.9 23.0 0.0 0.0 0.0 0.0 2.5 034 Fish,fresh (live or dead),chilled o 2.0 1.4 0.9 1.1 0.6 0.3 0.0 035 Fish,dried,salted or inbrine ;smo 0.3 0.7 0.3 0.1 0.3 0.2 0.4 036 Crustaceans and molluscs,fiesh,chil 0.5 0.6 0.4 0.3 0.0 1.2 0.6 037 Fishpustaceans and molluscs,prepa 2.7 3.5 2.2 2.2 0.6 0.8 67.5 041 Wheat (including spelt) and meslin, 2.9 0.7 3.3 7.6 0.3 3.3 0.0 042 Rice 0.1 0.0 0.0 0.0 0.0 0.1 - 043 Barley,unmilled 5.1 1.5 4.8 12.4 7.3 9.0 1.2 044 Maize (com),unmilled 8.2 2.5 13.2 11.0 9.3 26.1 13.0 045 Cereals,unmilled( no wheat,rice,ba 14.5 7.1 5.5 30.2 3.7 9.2 0.4 046 Meal and flour of wheat and flour o 8.9 4.7 1.5 1.0 0.0 0.0 1.5 047 Other cereal meals and flours 34.4 45.4 13.8 20.9 3.2 3.0 54.2 048 Cerealprepar. & preps.of flour of 6.0 4.2 1.4 2.4 3.1 2.6 1.9 054 Vegetab.,fiesh,chilled,frozedpres. 2.0 5.5 2.0 1.2 1.6 2.6 0.6 056 Vegetab.,roots & tubers,preparedpr 4.1 7.8 1.6 2.5 2.4 2.8 5.6 057 Fruit & nuts(not includ. oil nuts), 0.6 0.5 0.4 0.4 0.7 0.8 3.3 058 Fruit,preserved,andfruit preparati 2.4 2.1 2.2 3.4 3.6 4.0 8.8 061 Sugar andhoney 15.0 14.5 2.2 2.0 1.0 1.o 0.7 062 Sugar confectioneryand other sugar 10.1 10.2 6.5 10.2 13.0 8.6 0.1 071 Coffee and coffee substitutes 0.5 0.0 0.1 0.5 0.2 0.7 0.0 072 Cocoa 0.4 0.4 0.4 0.8 0.4 1.1 - 073 Chocolate & other food preptns.con 1.0 2.5 2.7 3.4 6.9 8.0 0.0 074 Tea and mate 0.1 0.1 0.0 0.1 0.0 0.1 0.4 075 Spices 3.8 6.7 4.0 20.5 0.8 0.8 - 081 Feed.stufffor animals(not incl.unm 16.8 4.3 3.9 5.7 10.7 10.4 0.1 091 Margarine and shortening 6.2 0.9 0.4 0.4 0.1 0.3 8.1 098 Edible products andpreparationsn. 3.0 1.1 0.5 0.9 0.6 1.2 0.2 111 Nonalcoholic beverages,n.e.s. 5.2 0.7 0.5 0.3 0.3 0.4 14.6 112 Alcoholic beverages 2.1 0.9 0.6 0.5 0.8 1.o 0.0 121 Tobacco,unmanufactured; tobacco ref 0.3 0.3 0.1 0.2 0.8 0.5 5.7 122 Tobacco manufactured 2.1 1.8 4.5 10.7 10.3 2.8 2.9 211 Hides and skins (exceptfurskins), 1.1 1.0 0.4 0.9 1.3 1.5 0.0 212 Furskins,raw (includ.astrakhan,cara 0.3 0.3 0.4 0.1 0.1 0.1 3.0 222 Oil seeds and oleaginous fruit,whol 2.5 5.3 4.9 8.8 5.5 10.6 0.6 223 Oils seeds and oleaginous fruit, wh 12.1 22.4 30.8 28.8 28.9 20.2 0.0 232 Naturalrubber latex; natmbber & 0.3 0.0 1.1 3.6 0.0 0.0 0.0 233 Synth.rubb.lat.;synth.rubb.& reclai 0.0 0.0 0.0 0.0 0.2 0.0 0.0 245 Fuel wood (excludingwood waste) an 2.4 0.6 2.0 2.6 2.9 5.3 5.8 246 Pulpwood (including chips and wood 0.1 0.0 0.0 0.1 0.2 0.0 0.0 247 Other wood inthe roughor roughly 0.1 0.1 0.3 0.4 0.4 0.3 0.2 248 Wood,simply worked,and railway slee 0.2 0.2 0.4 0.6 1.1 1.1 1.o 207 StatisticalAnnex 251 Pulp and waste paper 0.0 0.0 0.0 0.0 0.0 0.0 0.0 261 Silk 0.1 0.2 0.1 0.0 0.1 0.1 0.1 263 Cotton 0.0 0.0 0.0 0.0 0.0 0.0 0.0 264 Jute & other textile bast fibres,ne 0.0 2.8 0.0 0.0 0.0 0.0 0.0 * * y e ~- w 5.8 7.5 5 s W d k 266 Synthetic fibres suitable for spinn 0.1 0.2 0.0 0.0 0.0 0.0 0.0 267 Other man-madefibres suitabl.for s 0.1 0.0 0.0 0.1 0.2 0.1 0.0 268 Wool and other animal hair (excludi 0.7 0.5 0.8 0.3 0.3 0.1 0.2 269 Old clothmg andother old textile 0.2 0.5 0.3 0.3 0.1 0.1 0.1 271 Fertilizerspude 0.1 0.1 0.1 0.1 0.1 0.1 0.1 273 Stone,sand and gravel 6.8 9.0 7.9 6.5 7.6 7.2 5.9 274 Sulphur and unroastedironpyrites 0.5 0.3 0.6 0.4 0.3 0.4 0.1 277 Natural abrasives,n.e.s (incl.indus - 0.7 0.0 0.1 0.2 0.4 0.0 278 Other crude minerals 3.1 4.0 2.8 4.0 5.2 4.9 6.2 281 Ironore and concentrates 6.5 5.7 5.5 9.3 8.5 7.9 10.2 282 Waste and scrap metal ofiron or st 1.3 2.2 2.3 2.9 5.1 3.8 3.6 286 Ores and concentratesofbasemetal - - - 29.9 - - - 287 Non-ferrous base metal waste and sc 7.4 6.1 6.1 7.6 7.1 4.5 12.2 288 non-ferrousbase metal waste and scrap, not elsewhere specified 0.8 1.1 0.9 1.2 3.2 0.6 0.8 291 Crude animal materials,n.e.s. 2.1 3.2 1.5 1.5 2.2 1.9 4.4 292 Crude vegetable materials, n.e.s. 8.7 8.4 6.0 4.8 4.7 5.6 7.1 322 Coa1,lignite andpeat 0.3 0.4 0.4 0.7 0.4 0.5 0.5 323 Briquettes;coke and semi-cokeof co 2.o 1.8 1.8 1.2 5.7 4.7 2.3 333 Petrol.oils,crude,& c.o.obtain.from 0.0 0.0 0.0 0.1 0.0 0.0 0.0 334 Petroleumproducts,refined 0.2 0.1 0.2 0.3 0.2 0.4 0.5 335 Residualpetroleumproducts,nes.& r 3.6 3.5 3.5 2.7 2.2 3.3 2.9 341 Gaspatural and manufactured 0.0 0.0 0.0 0.0 0.1 0.0 0.1 35 1 Electric current 1.1 1.6 1.8 1.6 2.3 2.0 1.3 411 Animal oils and fats 2.5 3.O 4.4 3.2 10.7 6.6 2.9 423 Fixed vegetable oils,soft,crude,ref 28.4 17.5 19.7 28.9 21.6 22.5 29.3 424 Other fixed vegetable oils,fluid or 0.7 2.7 0.6 0.1 2.4 2.4 1.8 43 1 Animal & vegetable oils and fats,pr 6.8 5.4 6.7 3.8 4.3 2.1 1.9 511 Hydrocarbonsne@ their halogen.& 1.2 2.3 2.3 1.4 1.3 2.1 2.4 512 Alcohols,phenols,phenol-alcohols,& 4.2 0.8 0.7 0.5 0.6 0.6 0.5 513 Carboxylic acids,& their anhydrides 5.5 10.0 8.3 7.8 6.8 4.9 4.6 514 Nitrogen-hnction compounds 0.6 0.6 0.5 0.5 0.2 0.3 0.2 515 Organo-inorganicand heterocyclic c 0.3 0.1 0.3 0.1 0.2 0.5 0.4 516 Other organic chemicals 1.o 1.1 0.7 0.4 0.3 0.2 0.1 522 Inorganic chemical elements,oxides 1.9 1.9 2.3 2.3 3.2 3.2 2.7 523 Other inorganic chemicals 1.5 1.5 1.7 1.8 1.6 1.1 1.2 524 Radio-activeand associatedmateria 0.0 0.0 0.0 0.0 0.0 0.0 0.0 53 1 Synth.org.dyestuffs,etc.nat.indigo 3.7 4.3 0.8 0.2 0.4 0.3 0.8 532 Dyeing & tanning extracts;synth.tan 0.4 0.2 0.1 0.2 0.0 0.7 17.9 533 Pigments,paints,vamishes& related 6.2 6.6 3.1 5.3 7.8 6.1 6.0 541 Medicinal andpharmaceuticalproduc 3.2 4.4 1.8 1.2 1.9 2.0 1.3 55 1 Essentialoils,perfume and flavour 3.4 1.1 3.1 3.8 1.5 1.9 1.1 553 Perhmery,cosmetics andtoilet prep 3.6 4.7 2.8 1.6 1.5 1.5 1.1 554 Soap,cleansing andpolishing prepar 4.6 1.4 1.1 0.5 0.7 0.6 0.7 562 Fertilizers,manufactred 1.6 1.5 1.0 1.0 1.5 1.1 1.0 572 Explosivesand pyrotechnicproducts 0.3 0.5 0.3 0.1 0.8 0.3 1.4 582 Condensation,polycondensation& pol 0.9 1.o 0.4 0.5 0.4 0.4 0.4 583 Polymerization and copolymerization 0.9 0.7 0.9 0.5 0.7 1.0 1.1 208 StatisticalAnnex 584 Regeneratedcellu1ose;cellulose nit 0.5 0.8 2.6 1.6 0.5 0.3 0.2 585 Other artificial resins andplastic 0.0 0.0 0.0 0.0 0.0 1.0 0.0 591 Disinfectants,insecticides,fungicid 1.6 3.3 3.1 6.1 1.9 1.7 0.8 592 Starchesjnulin & wheat g1uten;albu 4.5 4.2 1.6 5.7 7.0 8.5 5.4 -5-98 Miwd-scMalWanTe 3,2-~ -L?---LI -L1.8LL L L 611 Leather 5.4 10.9 4.8 11.0 6.8 7.2 4.0 612 Manufacturesof leathedof composit 11.5 18.6 23.7 23.2 23.8 18.3 10.9 613 Furskins,tanned/dressed,pieces/cutt 5.1 15.8 4.1 1.9 7.4 21.1 4.9 621 Materials ofrubber(e.g.,pastes,pla 1.2 0.8 0.7 1.2 0.5 2.2 1.6 625 Rubbertyres,tyre cases,etc.for whe 6.0 7.5 3.4 3.3 3.7 2.2 1.5 628 Articles ofrubber,n.e.s. 1.5 1.6 1.7 1.4 1.8 1.5 1.8 633 Cork manufactures 0.0 0.0 0.1 0.0 0.1 1.3 0.1 634 Veneers,plywood,improved or reconst 0.2 0.1 0.2 0.3 0.5 0.6 0.6 635 Wood manufactures,n.e.s. 1.1 0.6 0.4 0.6 0.7 0.6 0.6 641 Paper andpaperboard 0.5 0.7 0.6 1.0 1.1 1.4 1.2 642 Paper andpaperboard,cutto size or 3.5 4.3 1.9 1.9 3.4 3.8 4.3 651 Textile yarn 1.2 2.5 1.5 1.1 1.3 1.7 1.6 652 Cotton fabrics,woven 0.4 0.2 0.4 0.1 0.1 0.0 0.1 653 Fabrics,woven,of man-made fibres 0.6 0.7 0.4 0.4 0.5 0.3 1.6 654 Textil.fabrics,woven,oth.thancotto 1.o 1.6 0.4 0.3 0.4 0.5 0.4 655 Knitted or crochetedfabrics 2.4 1.0 0.1 0.1 0.1 0.6 0.4 656 Tulle,lace,embroidery,ribbons,& 0th 0.9 0.5 0.6 0.1 0.2 0.2 0.1 657 Special textile fabrics and related 2.9 4.4 1.5 2.4 2.9 2.1 1.9 658 Made-up articles,wholly/chiefly of 1.6 1.8 1.1 2.1 2.2 2.2 2.3 659 Floor coverings,etc. 0.4 0.6 0.4 0.8 1.1 1.1 0.9 661 Lime,cement,and fabricatedconstruc 3.0 5.0 2.2 2.4 2.7 1.9 2.1 662 Clay construct.materials & refract0 2.6 2.5 2.2 1.5 2.2 1.5 1.2 663 Mineral manufactures,n.e.s 1.7 1.2 1.5 0.9 0.9 1.4 1.0 664 Glass 2.2 2.3 1.4 1.3 1.5 1.6 2.5 665 Glassware 4.8 2.7 1.3 1.2 2.2 2.5 2.4 666 Pottery 7.6 9.2 5.3 1.7 6.3 5.4 4.5 671 Pig iron,spiegeleisen,spongeiron,i 2.9 3.5 4.5 4.1 4.6 3.1 4.6 672 Ingots andother primary forms,of i 1.8 2.6 2.9 3.9 4.5 4.4 4.0 673 Ironand steelbars,rods,angles,sha 4.0 5.6 6.4 9.5 12.1 10.5 8.3 674 Universals,plates and sheets,of iro 1.9 2.5 3.6 3.0 3.1 3.7 4.0 676 Rails and railway track constructio 4.7 3.8 - 1.4 2.9 1.4 1.7 677 Ironhteelwire,wheth/not coated,bu 6.7 12.2 1.5 4.8 3.8 3.0 2.4 678 Tubes,pipes and fittings,of ironor 14.1 22.3 45.2 12.2 12.2 7.9 5.7 679 Iron & steel castings,forgings & st 1.3 1.1 0.5 1.0 0.9 0.6 0.6 682 Copper 0.1 0.0 0.1 0.3 0.6 0.6 0.7 683 Nickel 0.0 0.0 0.0 0.0 0.0 0.0 0.0 684 Aluminium 0.2 0.3 1.3 0.5 0.6 0.6 0.5 685 Lead 0.8 0.4 0.0 0.3 0.5 0.2 5.8 686 Zinc 0.0 0.0 0.0 0.0 0.0 0.0 0.0 687 Tin 0.0 0.0 0.0 0.0 0.9 0.0 1.3 689 Miscell.non-ferrous base metalsemp 0.7 0.4 - 0.6 1.1 1.2 1.6 691 Structures & parts of struc.;iron,s 4.5 5.4 0.2 1.0 0.7 1.8 1.0 692 Metal containersfor storage and tr 2.6 1.9 1.5 1.2 2.6 1.8 1.8 693 Wire productsand fencing grills 2.2 1.9 4.7 0.4 1.5 1.7 1.1 694 Nails,screws,nuts,bolts etc.of iron 3.2 3.0 0.5 1.0 1.4 1.3 1.4 695 Tools for use inhandor inmachine 1.5 0.9 1.3 0.1 0.3 6.8 30.9 696 Cutlery 0.5 0.2 0.0 0.0 0.2 0.1 0.4 697 Householdequipmentofbase metal$ 3.7 3.2 2.4 0.3 1.0 1.2 1.1 209 StatisticalAnnex 699 Manufactures ofbase meta1,n.e.s. 1.1 1.0 5.1 0.4 0.4 1.4 2.0 711 Steam & other vapour generatingboi 0.6 0.3 0.1 0.2 0.4 0.5 0.4 712 Steam& other vapour power units$ 3.4 3.8 0.8 2.7 1.7 3.1 0.3 713 Internalcombustionpiston engines 1.6 1.6 5.3 1.4 1.4 1.4 1.5 714 Engines & motors,non-eIectrk 2.0 2.0 -33 - 1 . 1 2.7 2.0- 2.1 716 Rotating electric plant andparts 2.1 2.0 0.4 1.6 2.0 1.6 1.5 718 Other power generatingmachinery an 0.2 0.3 0.6 0.1 0.2 0.4 1.4 721 Agricultural machinery andparts 3.0 4.5 0.3 1.6 1.7 1.o 1.2 722 Tractors fitted or not with power t 1.3 1.1 0.9 0.3 0.7 0.4 0.5 723 Civil engineering & contractorspla 1.9 2.3 1.1 1.1 1.3 0.9 0.9 724 Textile & leather machinery andpar 0.8 0.7 0.2 0.5 0.7 2.2 0.5 725 Paper & pulp millmach.,mach for ma 0.7 0.4 0.2 0.4 0.9 4.4 1.6 726 Printing& bookbinding mach.andpar 0.7 1.2 1.5 0.8 2.2 - 6.6 727 Foodprocessingmachines andparts 4.6 14.6 28.0 3.1 7.6 6.2 6.1 728 Mach.& equipment specializedfor pa 10.6 6.9 14.3 3.6 1.6 3.2 3.2 736 Mach.tools for working metal or met 2.1 1.6 1.7 0.9 1.0 3.3 3.9 737 Metal working machinery and parts 11.7 14.8 1.6 7.2 8.5 26.5 10.6 741 Heating & cooling equipment and par 1.7 2.9 5.3 1.4 4.5 1.7 2.3 742 Pumps for liquids,liq.elevators and 1.7 1.9 3.7 1.3 4.1 2.8 2.5 743 Pumps & compressors,fans &blowers, 3.0 2.3 1.4 2.5 2.3 4.7 7.6 744 Mechanicalhandling equip.andparts 4.0 4.3 3.1 2.0 2.2 2.5 1.8 745 Other non-electrical mach.tools,app 4.4 2.6 0.6 2.1 1.9 1.7 1.6 749 Non-electric parts and accessories 1.3 1.7 12.3 1.4 1.5 1.5 1.9 751 Office machines 0.9 0.5 0.0 0.5 0.4 0.3 0.2 752 Automatic data processingmachines 0.4 1.1 4.4 0.5 2.2 4.5 0.3 759 Parts of and accessories suitable f 1.9 2.0 0.4 3.7 1.2 1.6 1.6 761 Television receivers 0.2 0.1 0.1 0.0 0.0 0.0 0.0 762 Radio-broadcastreceivers 0.2 0.0 0.0 0.1 1.1 0.0 0.8 763 Gramophones,dictating,sound recorde 0.1 0.0 0.5 1.2 1.5 1.4 0.7 764 Telecommunications equipment andpa 1.3 1.1 35.9 2.3 3.5 2.5 1.8 771 Electric power machineryand parts 16.2 10.4 2.0 6.2 5.4 5.5 4.0 772 Elect.app.such as switches,relays,f 3.4 2.5 2.8 1.5 2.6 3.7 3.5 773 Equipment for distributing electric 3.2 4.0 2.8 2.5 2.7 2.5 3.4 774 Electric apparatusfor medical purp 0.5 0.5 0.0 0.2 0.6 0.9 17.8 775 Householdtype,elect.& non-electric 2.4 1.8 16.0 0.8 1.3 1.2 1.1 776 Thermionic,cold & photo-cathodeVal 0.8 0.5 0.2 0.3 0.3 0.8 0.9 778 Electrical machinery and apparatus, 2.0 2.5 2.7 0.9 4.9 1.3 1.o 781 Passengermotor cars,for transport 0.1 0.0 0.0 0.1 0.1 0.1 0.0 782 Motor vehiclesfor transport of goo 1.9 2.2 0.7 0.3 0.7 0.6 0.5 783 Roadmotor vehicles,n.e.s. 4.3 6.2 0.1 0.8 0.8 0.7 0.3 784 Parts & accessoriesof 722--,78 1--, 1.7 2.7 2.9 1.4 1.8 1.5 1.3 785 Motorcycles,motor scooters,invalid 0.5 0.2 0.0 0.1 0.2 0.1 0.1 786 Trailers & other vehicles,not motor 2.3 1.7 1.7 0.6 0.8 0.9 0.5 791 Railwayvehicles & associatedequip 4.9 3.0 8.4 3.2 3.6 5.3 8.0 792 Aircraft & associatedequipment and 1.0 15.1 3.4 5.3 4.3 2.5 1.5 793 Ships,boats and floating structures 0.7 - 2.0 0.8 0.3 1.4 1.5 812 Sanitary,plumbing,heating,lighting 4.4 5.1 0.1 2.3 1.8 1.6 1.4 821 Furnitureandparts thereof 1.8 2.6 2.2 0.9 1.5 1.5 1.2 831 Travel goods,handbags,brief-cases,p 1.3 1.2 0.0 1.6 1.7 1.5 0.9 842 Outer garments,men's,of textile fab 2.9 3.3 60.5 3.4 5.5 6.3 5.8 843 Outer garments,women's,of textile f 6.5 8.9 8.3 5.4 7.6 7.0 6.7 844 Under garments of textile fabrics 6.6 13.9 0.5 3.5 15.4 14.2 7.3 845 Outer garments and other articles,k 2.4 2.0 5.9 1.3 2.6 2.9 2.6 210 StatisticalAnnex 846 Under garments,knitted or crocheted 2.5 4.1 1.0 1.5 2.4 2.9 2.5 847 Clothing accessories o ftextile fab 3.0 2.2 0.2 2.0 2.1 0.9 0.8 848 Art.of apparel & clothing accessori 4.0 4.7 2.9 1.0 1.6 2.0 2.7 851 Footwear 4.0 2.6 19.2 1.9 3.4 3.6 4.5 n o n & n i nq n 1 n ? n~ 872 Medical instruments and appliances 2.2 2.9 0.7 1.0 0.9 1.0 0.6 873 Meters and counters,n.e.s. 1.6 1.4 0.1 0.3 0.3 0.2 0.3 874 Measuring,checking,analysing instru 1.2 1.2 32.9 0.6 0.6 0.4 1.1 881 Photographic apparatus and equipmen 0.3 0.1 0.0 0.2 2.1 2.9. 7.1 882 Photographc & cinematographic supp 4.9 2.6 0.8 1.5 1.4 1.9 1.5 883 Cinematographfilqexposed-develope 5.2 0.5 0.0 0.2 0.2 0.3 0.3 884 Optical goods,n.e.s. 1.0 1.1 11.1 0.2 0.3 0.4 0.5 885 Watches and clocks 0.0 1.1 0.0 0.1 0.0 0.0 0.0 892 Printed matter 0.5 0.5 13.6 0.4 0.4 0.6 0.5 893 Articles o f materials described in 1.8 1.4 0.1 0.4 0.8 1.3 2.2 894 Baby carriages,toys,games and sport 1.6 3.5 0.8 0.7 1.7 3.3 2.9 895 Office and stationery supplies,n.e. 3.0 2.2 0.0 1.1 0.6 0.8 1.0 896 Works of art,collectors pieces & an 0.1 0.0 0.0 0.2 0.1 0.4 0.0 897 Jewellery,goldsmiths and other art. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 898 Musical instruments,parts and acces 0.4 1.2 1.9 0.3 0.2 0.1 0.1 899 Other miscellaneous manufactured ar 0.8 0.7 0.2 0.4 0.8 0.9 0.8 941 Animals,live,n.e.s.,incl. zoo-anima 0.9 2.0 0.0 0.9 2.5 1.5 1.1 Source: WITS, COMTRADE Note: Uzbekistan exports data are not included. Besides, data for the following countries were not included for some years: 1996 1997 1998 1999 2000 2001 2002 Armenia, Belorus, Armenia, Georgia, Kyrgyzstan Armenia, Georgia, Belorus, Georgia, Georgia, Tajikistan Kyrgyzstan, Kazakhstan, Georgia, Kyrgyzstan, Tajikistan Tajikistan, Tajdustan, Tajikistan, Tajikistan Turkmenistan Turkmenistan Turkmenistan 211 StatisticalAnnex Table A39: Export SpecializationIndices in 1996-2002, Exports to the EU, 3-digit SITC level SITC code Product description 1996 1997 1998 1999 2000 2001 2002 001 Live animals chiefly for food 1.1 0.3 0.0 0.1 0.2 0.1 0.1 011 Meat,edible meat offals, fresh, chi 2.2 2.0 1.5 1.7 1.7 1.3 1.5 012 Meat & edible offals,salted,in brin 0.0 0.0 0.0 0.0 0.0 0.0 0.5 014 Meat & edib.offals,prep./pres.,fish 2.6 4.8 2.2 1.3 0.7 0.2 2.1 022 Milkand cream 1.4 1.o 0.7 0.8 1.3 2.2 0.3 023 Butter 4.5 0.8 1.5 1.2 3.5 5.0 4.4 024 Cheese and curd 0.2 0.1 0.1 0.2 0.3 0.9 0.0 025 Eggs and yolks,fresh,dried or other 2.0 4.5 0.1 0.0 0.0 0.0 1.7 034 Fish,fresh (live or dead),chilled o 1.4 1.3 1.2 1.2 0.7 0.4 0.0 035 Fish,dried,salted or inbrine ;smo 0.1 0.2 0.1 0.1 0.1 0.1 0.1 036 Crustaceans and molluscs,fresh,chil 0.3 0.5 0.4 0.2 0.0 0.4 0.4 037 Fish,crustaceans and molluscs,prepa 1.6 1.7 0.9 1.2 0.3 0.6 37.4 041 Wheat (including spelt) and meslin, 4.9 1.7 8.0 16.9 0.7 8.8 0.0 042 Rice 0.1 0.0 0.0 0.0 0.0 0.0 37.5 043 Barley,unmilled 7.8 4.6 5.2 9.7 6.5 21.5 5.1 044 Maize (com),unmilled 1.8 0.8 4.8 2.6 1.7 3.8 2.9 045 Cereals,unmilled ( no wheat,rice,ba 7.6 3.4 4.4 11.5 1.8 3.3 0.3 046 Meal and flour o f wheat and flour o 15.4 7.4 3.0 1.8 0.1 0.0 0.7 047 Other cereal meals and flours 22.7 18.4 29.5 13.9 4.1 3.5 29.4 048 Cereal prepar. & preps. o f flour o f 0.3 0.2 0.2 0.3 0.3 0.4 0.3 054 Vegetab.,fiesh,chilled,frozedpres. 0.3 0.4 0.3 0.2 0.2 0.2 0.1 056 Vegetab.,roots & tubers,prepared/pr 0.6 0.5 0.4 0.5 0.3 0.4 0.9 057 Fruit & nuts(not includ. oil nuts), 0.1 0.1 0.1 0.1 0.2 0.1 0.5 058 Fruit,preserved,and fruit preparati 1.o 0.9 0.9 0.9 0.8 0.9 2.2 061 Sugar and honey 20.7 9.6 2.4 2.1 0.7 0.8 0.9 062 Sugar confectionery and other sugar 2.5 2.8 4.0 5.0 6.7 4.6 0.0 071 Coffee and coffee substitutes 0.1 0.0 0.0 0.0 0.0 0.0 0.0 072 Cocoa 0.0 0.0 0.0 0.0 0.0 0.0 8.8 073 Chocolate & other food preptns. con 0.2 0.6 0.8 0.8 1.9 2.7 0.0 074 Tea andmate 0.1 0.1 0.0 0.2 0.0 0.0 0.3 075 Spices 0.6 1.1 0.8 7.0 0.3 0.2 22.0 081 Feed.stuff for animals(not incl.unm 1.2 0.4 0.4 0.5 0.9 1.2 0.0 091 Margarine and shortening 0.7 0.1 0.2 0.1 0.1 0.1 2.2 098 Edible products and preparations n. 0.2 0.1 0.1 0.1 0.1 0.2 0.0 111 N o n alcoholic beverages,n.e.s. 0.6 0.2 0.2 0.0 0.0 0.1 1.8 112 Alcoholic beverages 0.8 0.4 0.2 0.1 0.2 0.3 0.0 121 Tobacco,unmanufactured; tobacco ref 0.2 0.1 0.2 0.4 0.9 0.5 5.0 122 Tobacco manufactured 0.7 0.5 0.7 1.4 1.4 0.7 0.8 211 Hides and skins (except furskins), 4.5 4.8 2.4 3.0 2.4 2.2 0.0 212 Furskins,raw (includ.astrakhan,cara 0.5 0.3 0.4 0.1 0.1 0.1 3.4 222 Oil seeds and oleaginous hit,whol 19.4 19.7 18.3 13.4 19.1 12.7 0.3 223 Oils seeds and oleaginous fruit, wh 36.9 34.0 24.4 22.3 29.9 22.2 0.0 232 Natural rubber latex; natmbber & 0.1 0.0 0.2 0.7 0.0 0.0 0.0 233 Synth.rubb.lat.;synth.rubb.& reclai 0.0 0.0 0.2 0.1 0.6 0.1 0.1 245 Fuel wood (excluding wood waste) an 3.8 1.o 3.7 5.5 4.3 6.5 9.2 246 Pulpwood (including chips and wood 0.2 0.0 0.1 0.2 0.2 0.1 0.1 247 Other wood inthe rough or roughly 2.0 2.9 6.1 10.7 8.5 7.1 8.7 248 Wood,simply worked,and railway slee 0.5 0.5 0.9 2.1 3.1 2.6 2.9 212 StatisticalAnnex 251 Pulp and waste paper 0.0 0.0 0.0 0.0 0.0 0.0 0.0 261 Silk 0.2 0.3 0.4 0.1 0.2 0.0 0.0 263 Cotton 0.0 0.1 0.0 0.2 0.0 0.0 0.1 264 Jute & other textile bast fibres,ne 0.0 0.1 0.0 0.0 0.0 0.0 0.0 265 Vegetable textile fibrerand waste 6.5 2.7 3.5 1.8 3.8 -0.9 2-.x 266 Synthetic fibres suitable for spinn 0.0 0.0 0.0 0.0 0.0 0.0 0.0 267 Other man-made fibres suitabl.for s 0.1 0.0 0.0 0.1 0.1 0.0 0.0 268 Wool and other animal hair (excludi 1.4 1.3 1.2 0.4 0.2 0.1 0.2 269 Old clothing and other old textile 0.0 0.0 0.0 0.0 0.0 0.0 0.0 271 Fertilizers,crude 3.9 4.1 3.7 2.3 2.5 2.0 1.6 273 Stone,sand and gravel 2.5 2.4 3.1 1.3 1.3 1.9 2.0 274 Sulphur and unroasted ironpyrites 3.0 3.1 3.1 3.0 3.2 2.0 1.5 277 Natural abrasives,n.e.s (incl.indus 0.4 0.2 0.1 0.0 0.0 0.0 0.0 278 Other crude minerals 3.8 4.9 4.9 5.4 5.6 5.7 5.8 281 Ironore and concentrates 99.7 100.5 114.6 136.2 141.7 139.0 111.8 282 Waste and scrap metal o f iron or st 3.6 9.4 20.3 23.2 19.9 14.5 11.0 286 Ores and concentrates o f base metal - - - - 0.0 0.0 0.0 287 Non-ferrous base metal waste and sc 21.4 19.9 24.7 23.6 28.6 21.7 20.4 288 non-ferrous base metal waste and scrap, not elsewhere specified 2.5 6.3 8.3 6.5 3.6 0.3 0.3 291 Crude animal materia1q.e.s. 0.3 0.4 0.3 0.4 0.6 0.7 0.9 292 Crude vegetable materials, n.e.s. 0.2 0.2 0.3 0.2 0.2 0.3 0.2 322 Coa1,lignite and peat 13.0 16.7 15.4 14.8 11.6 13.7 14.1 323 Briquettes;coke and semi-coke o f co 11.6 11.1 10.5 11.1 20.1 26.4 21.5 333 Petrol.oils,crude,& c.o.obtain.fiom 0.0 0.0 0.1 2.2 0.3 0.1 0.4 334 Petroleum products,refined 1.3 0.7 1.1 1.6 1.o 2.2 3.2 335 Residual petroleum products,nes.& r 3.7 3.5 4.4 3.3 2.1 2.8 2.5 341 Gas,natural and manufactured 1.1 2.1 1.2 2.0 2.5 2.2 2.5 351 Electric current 2.4 4.7 4.6 3.0 2.9 1.8 1.5 411 Animal oils and fats 0.3 0.6 0.3 0.1 0.3 0.3 0.2 423 Fixed vegetable oils,soft,crude,ref 4.4 3.0 3.9 4.1 9.0 7.4 8.5 424 Other fixed vegetable oils,fluid or 0.0 0.1 0.0 0.0 0.1 0.1 0.1 431 Animal & vegetable oils and fats,pr 0.6 0.6 0.6 0.5 0.4 0.2 0.2 511 Hydrocarbons nes,& their halogen.& 1.o 2.4 2.2 1.4 1.3 1.7 2.1 512 Alcohols,phenols,phenol-alcohols,& 8.6 1.4 0.7 0.6 0.8 0.8 0.8 513 Carboxylic acids,& their anhydrides 1.3 1.7 1.5 1.7 1.9 1.4 1.4 5 14 Nitrogen-function compounds 0.1 0.0 0.0 0.0 0.0 0.0 0.0 515 Organo-inorganic and heterocyclic c 0.1 0.1 0.1 0.0 0.0 0.1 0.1 516 Other organic chemicals 0.2 0.3 0.3 0.1 0.1 0.1 0.1 522 Inorganic chemical elements,oxides 9.1 8.4 8.8 8.5 8.4 7.8 6.0 523 Other inorganic chemicals 2.1 1.6 1.8 2.2 1.3 1.4 1.4 524 Radio-active and associated materia 0.0 0.0 0.0 0.0 0.0 0.0 0.0 531 Synth.org.dyestuffs,etc.nat.indigo 0.2 0.2 0.1 0.1 0.1 0.1 0.1 532 Dyeing & tanning extracts;synth.tan 0.0 0.0 0.0 0.0 0.0 0.0 0.8 533 Pigments,paints,vamishes & related 0.9 0.7 0.9 1.o 1.2 1.2 0.7 541 Medicinal and pharmaceutical produc 0.2 0.3 0.2 0.1 0.1 0.1 0.0 55 1 Essentialoils,perfume and flavour 0.1 0.1 0.1 0.1 0.1 0.1 0.1 553 Perfimery,cosmetics and toilet prep 0.1 0.1 0.2 0.1 0.2 0.1 0.1 554 Soap,cleansing and polishing prepar 0.5 0.2 0.2 0.1 0.2 0.2 0.2 562 Fertilizers,manufactured 20.7 19.0 17.2 15.6 18.7 15.1 15.7 572 Explosives andpyrotechnic products 1.4 3.8 1.2 0.7 3.7 1.3 5.0 582 Condensation,polycondensation& pol 0.0 0.0 0.1 0.1 0.0 0.0 0.0 213 StatisticalAnnex 583 Polymerization and copolymerization 0.3 0.2 0.3 0.2 0.2 0.3 0.3 584 Regenerated cellu1ose;cellulose nit 0.0 0.0 0.1 0.1 0.0 0.0 0.0 585 Other artificial resins andplastic 0.0 0.0 0.0 0.0 0.0 0.0 0.0 591 Disinfectants,insecticides, fimgicid 0.2 0.2 0.2 0.2 0.1 0.1 0.0 592 Starckeqinulin &wheaQutengdhu -2-0 L L 2.5 2 3 3.1- 3.2 &.% 598 Miscellaneous chemical products,n.e 0.2 0.3 0.4 0.3 0.3 0.3 0.3 611 Leather 0.9 1.5 1.7 1.9 1.9 1.7 1.7 612 Manufactures o f leather/of composit 0.9 1.4 1.6 1.4 1.o 1.3 1.1 613 Furskins,tanned/dressed,pieces/cutt 0.4 0.4 0.8 0.4 1.o 1.7 1.6 621 Materials o frubber(e.g.,pastes,pla 0.3 0.2 0.2 0.2 0.1 0.4 0.3 625 Rubbertyres,tyre cases,etc.for whe 3.3 3.6 3.1 1.9 2.0 1.4 1.o 628 Articles o frubber,n.e.s. 0.6 0.6 0.7 0.3 0.4 0.4 0.4 633 Cork manufactures 0.0 0.0 0.0 0.0 0.0 0.0 0.0 634 Veneers,plywood,improved or reconst 0.3 0.2 0.4 0.5 0.7 1.o 1.2 635 Wood manufactures,n.e.s. 0.1 0.1 0.1 0.1 0.2 0.2 0.2 641 Paper andpaperboard 0.2 0.3 0.3 0.5 0.5 0.7 0.6 642 Paper andpaperboard,cut to size or 0.4 0.3 0.3 0.2 0.4 0.4 0.4 651 Textile yarn 0.4 0.7 0.8 0.8 0.7 0.7 0.7 652 Cotton fabriqwoven 0.2 0.1 0.2 0.1 0.0 0.0 0.1 653 Fabrics,woven,of man-made fibres 0.1 0.1 0.1 0.0 0.1 0.0 0.2 654 Textil.fabrics,woven,oth.than cotto 0.2 0.3 0.2 0.3 0.2 0.3 0.3 655 Knittedor crocheted fabrics 0.0 0.0 0.0 0.0 0.0 0.0 0.0 656 Tulle,lace,embroidery,ribbons,& 0th 0.0 0.0 0.0 0.0 0.0 0.0 0.0 657 Special textile fabrics and related 0.6 0.6 0.5 0.5 0.6 0.5 0.6 658 Made-up articles,wholly/chiefly o f 0.4 0.3 0.4 0.7 0.6 0.7 0.8 659 Floor coverings,etc. 0.1 0.1 0.2 0.2 0.2 0.2 0.2 661 Lime,cement,and fabricated construc 1.o 1.3 1.4 1.o 0.9 0.7 1.o 662 Clay constructmaterials & refract0 0.5 0.5 0.5 0.4 0.6 0.5 0.4 663 Mineral manufactures,n.e.s 0.8 0.6 0.5 0.3 0.3 0.4 0.3 664 Glass 0.5 0.4 0.4 0.3 0.3 0.5 0.6 665 Glassware 0.7 0.4 0.3 0.5 0.7 0.7 0.5 666 Pottery 0.7 0.6 0.6 0.5 0.7 0.8 0.7 671 Pig iron,spiegeleisen,sponge iron,i 42.4 61.8 80.6 75.8 72.7 53.3 71.7 672 Ingots and other primary fonns,of i 17.2 26.9 30.1 33.1 31.3 29.3 28.9 673 Iron and steel bars,rods,angles,sha 12.0 14.3 13.4 14.7 15.1 16.5 13.9 674 Universals,plates and sheets,of iro 3.9 5.3 6.1 4.9 4.5 5.3 5.3 676 Rails and railway track constructio 17.0 16.3 21.2 7.1 8.8 3.5 4.2 677 Irodsteel wire,whetWnot coated,bu 4.7 5.3 3.4 3.6 3.4 2.7 2.8 678 Tubes,pipes and fittings,of iron or 8.0 8.1 5.4 5.1 7.2 5.8 4.2 679 Iron & steel castings,forgings & st 1.o 0.9 1.2 0.7 0.3 0.3 0.3 682 Copper 0.3 0.2 0.4 1.4 2.1 2.4 1.7 683 Nickel 0.0 0.0 1.o 0.1 0.2 0.3 0.2 684 Aluminium 1.5 1.8 2.6 4.1 4.1 3.1 2.3 685 Lead 2.3 1.3 1.o 1.2 1.5 0.7 1.1 686 Zinc 0.0 0.0 0.0 0.1 0.1 0.0 0.0 687 Tin 0.0 0.0 0.0 0.0 1.5 0.0 1.8 689 Miscelhon-ferrous base metals emp 6.8 4.9 4.6 6.0 6.3 7.4 7.4 691 Structures & parts o f struc.;iron,s 0.7 0.6 0.4 0.4 0.5 0.9 0.7 692 Metal containers for storage and tr 0.4 0.3 0.5 0.2 0.4 0.5 0.5 693 Wire products and fencing grills 1.3 1.o 1.4 0.9 1.9 1.9 1.3 694 Nails,screws,nuts,bolts etc.of iron 0.6 0.5 0.4 0.2 0.3 0.3 0.4 695 Tools for use inhand or inmachine 0.2 0.2 0.2 0.3 0.5 5.8 8.6 696 Cutlery 0.1 0.0 0.0 0.0 0.0 0.0 0.1 214 StatisticalAnnex 697 Household equipment o fbase meta1,n 0.5 0.4 0.3 0.2 0.3 0.4 0.4 699 Manufactures o fbase meta1,n.e.s. 0.3 0.3 0.3 0.2 0.2 0.6 0.7 711 Steam & other vapour generating boi 0.9 0.7 0.7 0.5 0.7 1.4 0.4 712 Steam & other vapour power units$ 2.4 3.6 3.1 3.5 2.4 1.4 0.9 713 Internal combustion piston engines 0.3 0.3 0 3 0.3 o_,2 0.2 0-.2 714 Engines & motors,non-electric 0.9 0.7 1.o 0.5 0.7 0.8 1.1 716 Rotating electric plant and parts 0.7 0.7 0.5 0.5 0.6 0.6 0.4 718 Other power generating machinery an 0.7 1.1 1.o 0.4 0.7 1.7 7.3 721 Agricultural machinery and parts 0.9 0.6 0.4 0.5 0.5 0.4 0.4 722 Tractors fitted or not with power t 0.4 0.3 0.3 0.5 0.7 0.5 0.5 723 Civilengineering & contractors pla 0.6 0.7 0.7 0.5 0.4 0.5 0.3 724 Textile & leather machinery and par 0.1 0.1 0.0 0.1 0.1 0.2 Q.0 725 Paper & pulp millmach.,mach for ma 0.0 0.0 0.0 0.0 0.0 0.2 0.1 726 Printing& bookbinding mach.and par 0.0 0.0 0.0 0.0 0.1 1.8 0.2 727 Foodprocessing machines and parts 0.6 1.1 0.8 0.9 1.3 0.7 0.5 728 Mach.& equipment specialized for pa 0.6 0.5 0.3 0.4 0.3 0.3 0.3 736 Mach.tools for worlung metal or met 0.4 0.4 0.3 0.3 0.4 0.6 0.7 737 Metal working machinery and parts 1.9 1.9 1.6 2.0 2.5 3.2 3.1 741 Heating & cooling equipment and par 0.2 0.3 0.2 0.2 0.7 0.5 0.5 742 Pumps for liquids,liq.elevators and 0.7 0.7 0.6 0.7 1.o 0.7 0.7 743 Pumps & compressors,fans & blowers, 0.4 0.5 0.4 0.4 0.5 0.9 0.9 744 Mechanical handling equip.and parts 0.6 0.6 0.5 0.4 0.4 0.4 0.3 745 Other non-electrical mach.tools,app 0.2 0.2 0.1 0.2 0.2 0.1 0.1 749 Non-electric parts and accessories 0.3 0.3 0.4 0.3 0.5 0.7 0.5 751 Office machines 0.1 0.0 0.0 0.0 0.0 0.0 0.0 752 Automatic data processing machmes 0.0 0.0 0.0 0.0 0.0 0.1 0.0 759 Parts o f and accessories suitable f 0.0 0.0 0.0 0.0 0.0 0.0 0.0 761 Television receivers 0.1 0.1 0.0 0.0 0.0 0.0 0.0 762 Radio-broadcast receivers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 763 Gramophones,dictating,soundrecorde 0.0 0.0 0.0 0.0 0.0 0.0 0.0 764 Telecommunications equipment and pa 0.2 0.2 0.2 0.2 0.1 0.1 0.1 771 Electric power machinery andparts 1.4 1.1 1.1 1.o 0.8 0.8 0.8 772 Elect.app.such as switches,relays,f 0.3 0.2 0.2 0.2 0.2 0.4 0.4 773 Equipment for distributing electric 0.9 0.9 0.9 0.6 0.6 0.7 0.9 774 Electric apparatus for medical purp 0.0 0.0 0.0 0.0 0.1 0.0 0.7 775 Household type,elect.& non-electric 0.3 0.3 0.3 0.2 0.3 0.3 0.3 776 Thermionic,cold & photo-cathode Val 0.0 0.0 0.0 0.0 0.0 0.1 0.1 778 Electrical machinery and apparatus, 0.4 0.4 0.3 0.3 0.9 0.4 0.3 781 Passenger motor cars,for transport 0.0 0.0 0.0 0.0 0.0 0.0 0.0 782 Motor vehicles for transport o f goo 0.6 0.4 0.3 0.2 0.3 0.3 0.3 783 Road motor vehicles,n.e.s. 0.4 0.6 0.2 0.2 0.3 0.3 0.2 784 Parts & accessories o f 722--,781--, 0.2 0.2 0.2 0.2 0.2 0.1 0.1 785 Motorcycles,motor scooters,invalid 0.1 0.0 0.0 0.0 0.0 0.0 0.0 786 Trailers & other vehcles,not motor 0.4 0.2 0.3 0.3 0.3 0.4 0.2 791 Railway vehicles & associated equip 8.9 5.8 5.1 4.3 3.7 4.8 8.0 792 Aircraft & associated equipment and 0.2 0.4 0.5 0.5 0.4 0.3 0.2 793 Ships,boats and floating structures 1.7 1.1 2.9 1.5 0.6 1.o 1.1 812 Sanitary,plumbing, heating,lighting 0.5 0.4 0.4 0.2 0.2 0.2 0.2 821 Furniture and parts thereof 0.1 0.2 0.1 0.2 0.2 0.3 0.2 831 Travel goods,handbags,brief-cases,p 0.0 0.0 0.1 0.1 0.1 0.1 0.1 842 Outer garments,men's,of textile fab 0.9 1.1 1.5 1.7 1.8 1.9 1.9 843 Outer garments,women's,of textile f 1.7 2.0 2.8 2.7 2.7 2.8 2.4 844 Under garments o f textile fabrics 0.7 0.8 1.2 0.9 1.3 1.2 0.7 215 StatisticalAnnex 845 Outer garments and other articles,k 0.1 0.1 0.2 0.3 0.4 0.4 0.4 846 Under garments,knitted or crocheted 0.2 0.2 0.4 0.6 0.7 0.7 0.7 847 Clothing accessories o f textile fab 0.2 0.1 0.2 0.2 0.2 0.1 0.1 848 Art.of apparel & clothing accessori 0.3 0.4 0.3 0.3 0.4 0.4 0.4 851 Fo- _ _ _ ~ 0.4 rxa Q4 Q.5 0.5 0.5 QA 871 Optical instruments and apparatus 0.3 0.3 0.1 0.2 0.2 0.2 0.6 872 Medical instruments and appliances 0.2 0.1 0.1 0.1 0.1 0.1 0.1 873 Meters and c0untersp.e.s. 0.3 0.2 0.1 0.1 0.1 0.1 0.1 874 Measuring,checking,analysing instru 0.2 0.2 0.3 0.3 0.2 0.2 0.4 881 Photographic apparatus and equipmen 0.0 0.0 0.0 0.0 0.0 0.1 0.3 882 Photographic & cinematographic supp 0.1 0.1 0.0 0.0 0.0 0.0 0.0 883 Cinematograph filmexposed-develope 0.2 0.0 0.0 0.0 0.0 0.0 0.0 884 Optical goods,n.e.s. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 885 Watches and clocks 0.0 0.1 0.0 0.0 0.0 0.0 0.0 892 Printedmatter 0.3 0.4 0.4 0.3 0.2 0.3 0.2 893 Articles o f materials described in 0.1 0.0 0.0 0.0 0.1 0.1 0.2 894 Baby carriages,toys,games and sport 0.1 0.2 0.2 0.2 0.3 0.3 0.4 895 Office and stationery supplies,n.e. 0.1 0.0 0.0 0.0 0.0 0.0 0.0 896 Works of art,collectors pieces & an 0.0 0.0 0.0 0.0 0.0 0.0 0.0 897 Jewellery,goldsmiths and other art. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 898 Musical instruments,parts and acces 0.1 0.3 0.1 0.1 0.0 0.0 0.0 899 Other miscellaneous manufactured ar 0.1 0.0 0.1 0.0 0.1 0.1 0.1 941 Animals,live,n.e.s.,incl. zoo-anima 0.2 0.3 0.4 0.2 0.2 0.2 0.1 Source: WITS, COMTRADE Note: Data for Luxembourg exports are only for years 1999 2002 - 216 StatisticalAnnex Table A40: Contribution of commodity groupsto the Grubel-Lloyd index in 1996 -2002, % SITC ~ code 1996 1997 1998 1999 2000 2001 2002 * 51 Organic chemicals 3.57 3.28 3.52 4.36 4.42 3.72 3.33 fnu-, ' `renric6h. 333 2.39 2.i5 2.39 f.i4 1.96 1 . i ~ 53 Dyeing, tanning and coloring materials 2.23 1.89 2.21 3.09 2.48 2.27 1.93 54 Medicinal and pharmaceutical products 1.95 2.61 2.01 1.25 1.22 1.19 0.98 55 Essential oils & perfume mat.; toilet-cleansing mat 1.04 0.75 0.91 0.79 0.76 0.68 0.73 56 Fertilizers, manufactured 0.11 0.21 0.14 0.21 0.19 0.65 1.07 57 Explosives and pyrotechnic products 0.08 0.13 0.07 0.04 0.07 0.05 0.06 58 Artif. resins, plastic mat., cellulose esterslethers 2.04 1.60 2.13 1.83 1.95 2.27 2.49 59 Chemical materials and products, n.e.s. 2.76 2.92 3.86 3.95 4.04 3.80 3.06 61 Leather, leather manuf., n.e.s. and dressed furskins 1.12 1.21 1.32 1.52 1.17 1.21 1.07 62 Rubber manufactures, n.e.s. 7.15 4.82 5.92 4.45 3.89 3.10 2.33 63 Cork and wood manufactures (excl. furniture) 0.42 0.30 0.47 0.72 0.79 0.92 1.13 Paper, paperboard, artic. o fpaper, paper- 64 pulphoard 2.57 2.91 3.41 5.36 5.29 5.97 5.71 65 Textile yam, fabrics, made-upart., relatedproducts 2.77 3.71 4.15 4.35 3.65 3.06 3.58 66 Non-metallic mineral manufactures, n.e.s. 4.25 4.15 4.13 3.73 3.69 3.39 3.57 67 Ironand steel 8.58 7.17 7.82 4.97 8.58 8.54 8.35 69 Manufactures of metal, n.e.s. 4.40 4.06 3.76 3.49 4.14 5.15 5.59 71 Power generating machinery and equipment 6.88 7.00 8.72 6.66 7.12 7.60 9.30 72 Machinery specialized for particular industries 6.85 6.61 4.82 5.96 4.88 6.98 4.10 73 Metalworking machinery 1.95 2.03 2.13 1.26 1.14 0.92 1.54 General industrial machinery & equipment, and 74 parts 8.32 9.22 8.61 8.80 11.00 11.66 10.71 Office machines & automatic data processing 75 equip. 0.38 0.40 0.38 0.51 0.45 0.62 0.18 76 Telecommunications & sound recording apparatus 1.86 1.95 1.98 3.45 1.97 1.73 1.64 77 Electrical machinery, apparatus & appliances n.e.s. 9.34 9.08 8.39 8.55 11.22 8.25 9.74 78 Road vehicles (incl. air cushion vehicles 5.58 5.06 4.08 4.15 4.26 3.76 3.53 79 Other transport equipment 3.10 6.02 4.31 4.51 2.11 2.53 2.12 81 Sanitary, plumbing, heating and lighting fixtures 0.62 0.70 0.75 0.52 0.37 0.35 0.41 82 Furniture and parts thereof 0.69 0.85 0.75 1.00 1.16 1.18 1.16 83 Travel goods, handbags and similar containers 0.02 0.03 0.05 0.09 0.06 0.07 0.05 84 Articles o f apparel and clothing accessories 1.44 1.61 2.07 2.77 1.74 1.79 2.13 85 Footwear 1.42 1.01 0.87 1.01 0.60 0.72 0.92 87 Professional, scientific & controlling instruments 1.45 1.53 1.94 2.20 1.62 1.64 2.90 88 Photographic apparatus, optical goods, watches 0.17 0.18 0.11 0.10 0.10 0.12 0.25 89 Miscellaneous manufactured articles, n.e.s. 1.79 2.61 2.06 1.96 1.73 2.16 2.63 Grubel-Lloydindex,total 48.12 42.36 40.52 40.94 44.85 46.78 43.99 Source: WITS, COMTRADE 217 StatisticalAnnex Table A41: Contribution of commodity groups to the Grubel-Lloyd index for trade with the CIS in 1996- 2002, Yo SITC code 1996 1997 1998 1999 2000 2001 2002 ~ 51 Organic chemicals ~ 3.57 3.01 -2.49 3.13 3.16 2.56 2.66 52 Inorganic chemicals 3.57 2.27 1.72 2.50 2.13 2.43 1.98 53 Dyeing, tanning and coloring materials 1.26 1.10 1.33 1.35 0.95 0.81 0.64 54 Medicinal andpharmaceutical products 1.45 1.66 1.44 1.50 1.05 1.12 1.40 55 Essential oils & perfbme mat.; toilet-cleansing mat 0.20 0.17 0.22 0.96 1.39 1.30 1.26 56 Fertilizers, manufactured 0.13 0.26 0.18 0.42 0.38 0.21 0.29 57 Explosives and pyrotechnic products 0.08 0.03 0.03 0.03 0.05 0.03 0.05 58 Artif.resins, plastic mat., cellulose esterdethers 2.21 1.88 2.19 2.86 3.32 2.71 2.49 59 Chemical materials and products, n.e.s. 1.32 1.22 1.40 1.22 1.73 1.02 1.15 61 Leather, leather manuf.,n.e.s. and dressed furskins 0.26 0.29 0.30 0.35 0.30 0.27 0.19 62 Rubber manufactures, n.e.s. 9.13 5.47 6.14 5.97 5.39 5.28 3.90 63 Cork and wood manufactures (excl. furniture) 0.41 0.27 0.26 0.22 0.32 0.25 0.29 Paper, paperboard, artic. o fpaper, paper- 64 pulpiboard 3.61 4.47 4.87 8.04 7.10 9.25 9.23 65 Textile yam, fabrics, made-upart., related products 2.57 2.21 1.89 2.99 3.18 1.84 1.95 66 Non-metallic mineral manufactures, n.e.s. 2.86 3.59 3.23 4.45 4.42 4.00 4.04 67 Iron and steel 11.57 9.37 9.94 7.75 10.40 12.54 15.56 69 Manufactures o f metal, n.e.s. 5.05 5.32 4.61 4.67 4.30 4.01 4.36 71 Power generating machinery and equipment 9.84 9.71 12.66 10.56 12.24 10.78 15.14 72 Machinery specialized for particular industries 6.61 9.10 7.22 5.72 4.83 5.80 3.95 73 Metalworking machinery 0.71 0.59 0.65 0.45 0.37 0.39 0.56 General industrial machinery & equipment, and 74 parts 9.10 13.80 12.12 8.55 8.31 10.56 5.78 Office machines & automatic data processing 75 equip. 0.14 0.06 0.03 0.10 0.10 0.23 0.04 76 Telecommunications & sound recording apparatus 0.63 0.43 0.29 0.35 0.45 0.21 0.27 77 Electrical machinery, apparatus & appliances n.e.s. 8.00 6.24 7.19 7.57 7.63 6.34 7.07 78 Road vehicles (incl. air cushionvehicles 8.84 8.45 6.09 6.72 7.93 7.02 5.82 79 Other transport equipment 3.21 4.81 6.18 4.95 2.92 3.88 4.33 81 Sanitary, plumbing, heating and lighting fixtures 0.18 0.11 0.17 0.31 0.18 0.26 0.41 82 Furniture and parts thereof 0.13 0.11 0.14 0.27 0.30 0.32 0.38 83 Travel goods, handbags and similar containers 0.01 0.00 0.01 0.01 0.01 0.00 0.01 84 Articles o f apparel and clothing accessories 0.28 0.21 0.33 0.17 0.30 0.33 0.42 85 Footwear 0.13 0.16 0.45 0.61 0.37 0.26 0.22 87 Professional, scientific & controlling instruments 1.57 2.18 2.67 3.50 2.76 2.20 2.07 88 Photographic apparatus, optical goods, watches 0.11 0.13 0.11 0.14 0.14 0.08 0.09 89 Miscellaneous manufactured articles, n.e.s. 1.24 1.32 1.46 1.62 1.60 1.71 1.99 Grubel-Lloydindex,total 58.02 60.80 65.96 63.43 59.98 66.45 65.71 Source: WITS, COMTRADE 218 StatisticalAnnex Table A42: Contribution of commodity groups to the Grubel-Lloydindex for trade with the ROW in 1996 -2002, % SITC code 1996 1997 1998 1999 2000 2001 2002 51 Organic chemicals 4.36 3.92 4.90 5.60 6.05 4.95 3.97 52 Inorganic chemicals 3.05 2.76 2.78 2.42 2.43 1.76 1.68 53 Dyeing, tanning and coloring materials 0.91 2.95 3.34 1.80 2.01 1.57 2.25 54 Medicinal and pharmaceutical products 3.14 3.92 2.78 1.10 1.53 1.35 0.78 55 Essential oils & perfbme mat.; toilet-cleansing mat 2.56 1.46 1.74 0.68 0.35 0.25 0.45 56 Fertilizers, manufactured 0.09 0.17 0.11 0.04 0.05 1.04 1.64 57 Explosives and pyrotechnic products 0.09 0.25 0.07 0.05 0.10 0.07 0.07 58 Artif. resins, plastic mat., cellulose esterdethers 2.24 1.45 2.20 1.05 1.08 2.12 2.66 59 Chemical materials and products, n.e.s. 5.56 5.09 6.86 6.38 6.00 6.3 1 4.48 61 Leather, leather manuf., n.e.s. and dressed fbrskins 2.67 2.35 2.55 2.57 2.04 2.05 1.71 62 Rubber manufactures, n.e.s. 2.17 2.12 2.54 2.19 1.67 1.63 1.48 63 Cork and wood manufactures (excl. furniture) 0.53 0.38 0.74 1.18 1.28 1.52 1.75 64 Paper, paperboard, artic. of paper, paper-pulphoard 1.56 1.47 1.98 3.35 4.51 3.90 3.85 65 Textile yam, fabrics, made-upart., related products 3.69 5.75 6.94 5.69 4.53 4.27 4.86 66 Non-metallic mineral manufactures, n.e.s. 2.27 5.19 5.41 3.29 3.58 3.19 3.50 67 Ironand steel 5.92 5.46 5.95 2.85 8.22 6.11 4.3 1 69 Manufactures of metal, n.e.s. 4.37 3.08 3.05 2.65 4.56 6.47 6.75 71 Power generating machinery and equipment 3.88 3.11 4.86 3.68 3.83 3.28 5.96 72 Machnery specialized for particular industries 8.73 4.51 2.45 6.44 5.57 8.49 4.47 73 Metalworkingmachinery 1.92 1.92 2.10 1.68 1.93 1.42 2.27 74 General industrial machinery & equipment, and parts 8.96 5.08 5.22 9.43 10.14 10.69 11.78 75 Office machmes & automatic data processing equip. 0.84 0.81 0.81 0.88 0.80 0.98 0.28 76 Telecommunications & sound recording apparatus 4.16 3.83 4.01 6.22 3.48 3.07 2.62 77 Electrical machinery, apparatus & appliances n.e.s. 9.10 10.71 10.28 9.77 12.15 10.45 9.71 78 Road vehicles (incl. air cushion vehicles 1.84 1.81 2.08 2.19 1.79 1S O 2.30 79 Other transport equipment 3.63 7.97 2.49 4.35 1.72 1.68 0.86 81 Sanitary, plumbing,heating and lighting fixtures 0.27 0.36 0.42 0.53 0.35 0.44 0.44 82 Furniture and parts thereof 1.69 1.77 1.47 1.66 1.05 0.88 1.01 83 Travel goods, handbags and similar containers 0.04 0.06 0.10 0.17 0.12 0.12 0.07 84 Articles o f apparel and clothing accessories 3.54 3.32 4.16 5.10 3.16 3.09 3.36 85 Footwear 1.31 1.44 1.39 1.39 0.87 1.15 1.43 87 Professional, scientific & controlling instruments 1.59 0.97 1.24 1.21 0.90 1.34 3.63 88 Photographic apparatus, optical goods, watches 0.29 0.26 0.11 0.07 0.07 0.16 0.37 89 Miscellaneous manufactured articles, n.e.s. 3.03 4.31 2.87 2.34 2.07 2.70 3.23 Grubel-Lloyd index, total 32.47 29.48 27.07 30.42 33.44 35.52 34.40 Source: WITS, COMTRADE 219 StatisticalAnnex Table A43: Complementarity ofUkraine's exports structurewith its tradingpartners' imports structures in 1996-2002 1996 1997 1998 1999 2000 2001 2002 2002- 1996 RC-EU 25.65 30.28 31.20 31.39 37.76 39.22 33.42 7.77 TC-EU 39.88 38.95 37.95 37.98 39.25 40.48 38.43 -1.45 RC-CIS 64.25 60.25 61.06 63.20 64.59 62.32 60.10 -4.14 TC-CIS 49.67 42.10 42.77 44.56 44.64 43.36 40.31 -9.36 Source: WITS, COMTRADE; authors' calculations 220