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Euro-Mediterranean

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Euro-Mediterranean

     International Review

    ? 1(5) March 2008

     EU UKRAINE RELATIONS:

     In the dimension of energy security

Authors: О. Shnyrkov М. Honchar О. Volovych

Сушко О.В.

    -- 1.1.1.1.1.

    In this issue of quarterly publication we present results of monitoring of EU-Ukraine

    relations dedicated to energy-related issues and possible options for creation of a free trade zone

    between Ukraine and EU. This publication is prepared within the framework of a joint project

    “Monitoring of EU-Ukraine Relations” initiated by the Regional Office of Friedrich Ebert Fund in Ukraine and Belarus and the Foreign Policy Institute of the Diplomatic Academy of Ukraine

    under the Ministry of Foreign Affairs of Ukraine.

    The need for implementation of this project was predetermined by the need to reconsider

    the situation in EU-Ukraine relations, as well as the need to elaborate a new model of Ukraine’s

    integration strategy into EU in the framework of good neighborhood policy.

    Reconsideration of Ukraine’s strategy of pursuing the EU integration course requires the

    development of new approaches to implementing the European standards in different areas of

    Ukraine’s social life to bring Ukraine closer to meeting EU membership requirements. One of

    such approaches is related to the formation of strategic understanding among the political elite

    with regard to the European vector of Ukraine’s development. Another area for implementation of European integration aspirations of Ukraine is securing broad public awareness regarding the

    status and prospects of Ukraine’s integration into the EU. One more important task is to raise

    awareness and understanding of the importance of Ukraine’s European integration by Ukrainian businesses, include them into Ukraine’s strategic thinking, and into the process of adapting Ukraine to the European market and business culture.

    Regional aspects of integration tend to be an important segment of implementation of

    Ukraine’s EU integration objectives. In this respect the regions should be regularly informed

    about major events in the European Union and the EU-Ukraine relations.

    To achieve these objectives the above project monitors and analyzes the EU-Ukraine

    relations, publishes monitoring results, and mails out findings of monitoring directly to regional

    government bodies, foreign diplomatic missions and NGOs.

    The views expressed in this publication are those of the authors and do not necessarily The views expressed in this publication are those of the authors and do not necessarily

    reflect the views of the Foreign Policy Institute and Friedrich Ebert Fund. reflect the views of the Foreign Policy Institute and Friedrich Ebert Fund.

    TABLE OF CONTENTS

1. Oleksandr Shnyrkov. Creation of an extended free trade zone

    between Ukraine and EU: prerequisites and consequences ………..4

     2. Oleksy Volovych. The State and Prospects of Implementation of Gas Pipeline Project

    “GUEU - WHITE STREAM”…………………………………….18 3. Mykhaylo Honchar Ukraine-RF-EU energy relations: challenges for continental

    security………… ……………………….34

    О.І. Shnyrkov,

    Doctor of Economic Sciences, Professor

    А.М. Kopystyra,

    Candidate of Economic Sciences, Associate

    Professor

    Institute of International Relations

    Taras Shevchenko Kyiv National University

CREATION OF AN EXTENDED FREE TRADE ZONE BETWEEN UKRAINE AND

    EUROPEAN UNION: PREREQUISITES AND CONSEQUENCES

    EU has fifty years’ experience of free trade development. The Rome Treaty, signed in 1957, was the first instrument to provide for the creation of European Economic Community,

    specifically, transition to free movement of goods, services, capital, and labor force. The

    Ankara agreement on free trade with Turkey was signed in 1963, agreement with Malta - in

    1971, and with Cyprus - in 1973. European economic zone (1992) between EU and European

    Free Trade Association (EFTA) is also based on the principles of free movement of goods and

    services. The same mechanism was also incorporated in 10 European agreements closed by EU

    with Central European states in 1993-1999. Euro-Mediterranean agreements (1995) with 12

    countries of this region also stipulate the creation of free trade zone by 2010. In early 2000s’,

    the Autonomous trade regimes (which envisage mutual opening of markets) were proposed

    within the framework of stabilization and association between EU and Balkan states. Later on,

    respective agreements were signed with Bosnia-Herzegovina, Croatia, Macedonia, while

    negotiations continued with Albania, Serbia, and Montenegro. It is also worth mentioning

    existence of Free Trade Agreements with South Africa (1999), Mexico (2000), and Chile (2003).

    EU has included options for creation of Free Trade Zones (FTZ) in Agreements on

    Partnership and Cooperation with a number of CIS countries. Expansion of the scope of free

    trade principles is also planned within the framework of Agreements on economic partnership.

    Respective negotiations are also underway with customs unions Mercosur, and Cooperation Council of Persian Gulf Countries.

    Theoretically, FTZ envisages elimination of customs duties and quantitative limitations for

    all goods in mutual trade, as well as liberalization of trade in services. However, as a rule in

    practice the parties that create a free trade zone still put in place certain limitations, at least at the

initial stage. The EU is not an exception. EU participation in the formation of free trade zones

    makes it possible to discern major specifics of EU policy in this area.

    (1). While expanding foreign manufacturers’ access to its internal markets, primarily,

    those of industrial products, the EU keeps in place substantial limitations for agricultural

    commodities.

    While the EU average import duty in 2005 was only 5.4%, its maximum values for

    certain livestock products reached 219%, for dairy products 264%, for fruits, vegetables,

    and plants 199%, for croups 139%, for sugar and confectionary products 134%, for

    beverages and tobacco products 208%. It is also worth noting that Central European countries received full access to the internal agricultural commodities market only after they

    gained full EU membership. It would be therefore only natural to presume that should Ukraine

    transit to the regime of free trade with the EU, its access to the EU internal agricultural market will

    be most problematic.

    (2). In general, the European Union broadly uses the principles of asymmetry in

    mutual opening of markets.

    This is especially the case with less developed countries. As a rule, the EU first of all

    eliminates the duty on imported industrial products and agrees to gradually eliminate it in

    partner states. Normally this process lasts for 5-10 years.

    Given the existing difference in the level of economic development and the degree of

    customs protection between EU and Ukraine, gradual opening of Ukraine’s domestic market for

    EU industrial products can take over 5 years, and on certain products up to 10 years.

    Notwithstanding, the position paper of European Association ?Businesseurope? dedicated to free

    trade zone with Ukraine advocates for elimination of customs duties over a short period of time

    and on a symmetric basis [8].

    (3). Free trade is being increasingly applied by EU as a more active trade policy format

    in inter-regional cooperation. Moreover, the EU requires that the level of regional integration meets three major requirements before negotiations of a free trade zone on inter-regional level

    may be started:

    ? Operational institutional structure which envisages the effective mechanisms for

    implementation of regional projects and fulfillment of decisions, including dispute

    resolution instruments;

    ? Creation of customs union in accordance with Article XXIV of GATT/WTO,

    including uniform external tariff, customs administration, and common trade policy;

    ? Reduction of non-tariff barriers in internal regional trade, specifically in the area of

    technical requirements and standards, sanitary and phyto-sanitary aspects, as well as

    favorable regional regulatory regimes in the area of services and investments.

    (4). EU is very cautious about emergence of customs unions among neighbor states.

    Proposals on creation of customs unions among Czech Republic and Slovakia, as well as among

    Western Balkan states were welcomed in due time, since the partner states pursued the objective to

    get prepared for EU membership. However, the Resolution of the European Parliament dated

    November 19, 2003 clearly states that the planned creation of the Common Economic Space (to

    include Belarus, Kazakhstan, Russia, and Ukraine) can worsen further cooperation between the

    EU and Ukraine. Message of the European Commission dated May 12, 2004 "European Policy

    of Neighborhood”, Section "Regional Cooperation", specifies only the following initiatives as

    those that can contribute towards trans-border cooperation: European Council, Baltic Council,

    Central European Initiative, Organization for Black Sea Economic Cooperation, Stability Pact

    jointly with Euroregions. Moreover, the EU does not pursue the goal of creating new structures

    and organization, but rather, advocates for the use of opportunities offered by already existing

    organizations. [9].

    In September 2003, the European Commission’s General Directorate on Trade Issues prepared the document entitled “Feedback to the Draft Agreement on Formation of Common Economic Space to include Russia, Ukraine, Belarus, and Kazakhstan”. This document stressed the

    following: if CES remains at the stage of a free trade zone, there will be no changes in the

    EU trade policy towards Ukraine. If CES reaches the stage of customs union, Ukraine will face

    the claims to pay compensations to WTO members, including EU, since Ukraine’s obligations

    on bilateral access to markets significantly exceed the obligations of the other three countries,

    specifically those of Russia. Moreover, the future of negotiations on free trade zone will be

    put to doubt. Therefore, political consensus on creation of free trade zone with the EU

    achieved among the branches of Ukrainian power in 2006-2007 makes Ukraine’s participation in customs unions of CES and Eurasian Economic Community practically impossible.

    (5). The depth of free trade zone directly depends on the level of political interaction and

    integration between the EU and partner states. The EU offers the deepest free trade zone to its candidate countries, as well as member states of European Free Trade Association. In 2002, the

    European Commission proposed to use in the relations with candidate countries the so-called

    communitarian (i.e. common for EU member states) rules for regulation of competition instead of

    antidumping regulation under WTO rules.

    The content of regulatory policy in other sectors of cooperation (intellectual property,

    competition, and procurement) is predetermined by the depth of political integration. Since opening

    of Ukraine’s markets in these areas can be associated with significant costs (losses), one can expect that the degree of access to the internal markets will also depend on the depth of political integration

with the EU, which, in its turn, could offer certain compensation mechanisms for possible losses

    incurred by Ukraine.

    The Message of the European Commission “Global Europe: Competing in the World”

    specifies major approaches to the creation of new generation of the EU free trade zones. In

    this respect, liberalization of trade in the common EU market and expanding access to the

    markets of the third countries is considered an important source for enhancing labor

    productivity, economic growth, creation of new jobs, and thus increasing the competitiveness

    of national economies of the EU member states. The EU determined the following major criteria

    for potential free trade agreements [10].

    The first two criteria include the potential of partner’s market (size of national economy

    and rate of economic growth) and level of tariff and non-tariff limitations of import from the EU. From this point of view, the EU considers as priority ASEAN countries, Mercosur, and South

    Korea since they combine high level protectionism with significant potential of internal markets’

    development. In addition, these countries are very active in creating free trade zones with other

    centers of global economy. Therefore (in case of preserving high trade barriers with respective

    countries and blocks) the EU runs the risk to partially lose respective markets, as it was the case

    with Mexican market after the creation of NAFTA.

    Another group of priority states includes India, China, Russia, and GCC member states.

    Ukraine also gradually becomes one of important trade partners for the EU, since after the EU

    expansion Ukraine accounts for nearly 1% of its foreign trade turnover.

    The third criterion for the selection of free trade zones is predetermined by access to resources (energy resources, raw materials for agribusiness products, mineral ore, and scrap metal)

    along with guarantee of respective supply and economic impact on the EU market. It is worth

    noting that access to resources is also considered to be a priority in the EU concept of

    neighborhood.

    The fourth criterion of EU participation in free trade zones covers political aspects, specifically human rights, democratic values, religious impact of states, compliance with key

    multilateral instruments of the EU security strategy.

    And finally, the fifth criterion is predetermined by the risk of erosion of preferential access to common market of neighbor states and developing countries. From this point of view, the

    states that do not have a free trade agreement with the EU will find themselves in a more

    discriminatory position compared to the states that enjoy more free access to the EU market.

    The Message also specifies the requirements to the content of future EU agreements on free

    trade. These agreements must cover liberalization of services’ market, new opportunities for mutual

    investment, protection of intellectual property rights, procurement issues, and rules of competition.

Major attention must be paid to non-tariff barriers, where for neighbor states it is proposed to use

    the mechanism of regulatory competition based on the EU rules. It is worth noting that in this

    document Ukraine is mentioned, first of all, from the standpoint of securing the protection of

    intellectual property rights.

    Thus, in case of negotiations with the EU, Ukraine along with key principles related to the development of free trade zones in global economy - must take into account the specifics

    of the EU communitarian foreign economic policy.

    Under the first criterion, Ukraine has good prospects to be an EU partner for creation of free

    economic zone. Ukraine has significant potential for domestic market growth, demonstrated stable and

    sufficiently high rate of economic growth in the last years, and already ranks among 25 major trade

    partners of the EU.

    In 2006, export of goods from Ukraine to the EU totaled $ US 10,869.6 mln, import $ US

    15,614.1 mln. (see Diagram 1). Compared to 2005, export increased by 18.1%, import by

    31.5%. Negative balance totaled $ US 4,744.5 mln. against the negative balance of $ US 2,669.7

    mln. in 2005. The ratio of import coverage by export constituted 0.7, in 2005 0.8.

    EU accounts for 28.3% of Ukraine’s total export volume and 34.7% of Ukraine’s total

    import (in 2005 26.9% and 32.9% accordingly). Ukraine’s major partners in both export and import of goods are Germany ($ US 1283.8 and 4267.6 mln.), Italy ($ US 2503.4 and 1465.2

    mln.) and Poland ($ US 1344.5 and 2109.1 mln.).

     Diagram 1.

    Ukraine’s Foreign Trade in Goods Зовнішня торгівля товарами with the EU з країнами ЄС 15614,120000

    11871,3

    1500010869,69201,6експорт

    10000імпорт

    сальдо5000

    млн.дол. США

    0

    -2669,7-4744,5

    -5000

    2005 р.2006 р.

    Source: [2]

    Import of services to Ukraine increased by $ US 582.9 mln. The largest share in the total

    volume of Ukrainian export to the EU member states is represented by transport services

(64.3%), various business, professional, and technical services (16.4%). In terms of import, the

    largest share falls on financial services (21.1%), transport services (16.8%), construction services

    (7.2%), royalty and licensing services (8.1%). Major partners that account for more than half of

    export volume are UK, Cyprus, Germany, Belgium, and Hungary. Major import partners include

    UK, Cyprus, Germany, and Austria (see Diagram 2).

    In 2006, export of Ukraine’s services to the EU member states increased by 28.5% and totaled $ US 2218.5 mln. Import increased by 45.4% and totaled $ US 1867.1 mln. Positive

    balance of foreign trade totaled $ US 351.4 mln. (in 2005 $ US 441.9 mln). The share of

    services’ export to the EU in total export volume constituted 29.6 %. In terms of import 49% (in 2005, accordingly 28.1% and 43.8%). [2]

    Diagram 2.

    Зовнішня торгівля послугами Ukraine’s Foreign Trade in Services

    з країнами ЄСwith the EU

    2218,5

    1867,125001726,1