autonomous trade preferences

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AUTONOMOUSTRADEPREFERENCES:IMPACT ON UKRAINIAN EXPORTS

INSTITUTE FOR ECONOMIC RESEARCH AND POLICY CONSULTING

INSTITUTE FOR ECONOMIC RESEARCH AND POLICY CONSULTING

AUTONOMOUS TRADE PREFERENCES:

IMPACT ON UKRAINIAN EXPORTS

This study has been developed as part of 'Implementation of

Economic Part of the EU - Ukraine Association Agreement'

project supported by the International Renaissance

Foundation

Kyiv - 2015

Table of Contents

Table of Contents ............................................................................................................. 3

Abbreviations .................................................................................................................... 4

Diagrams and Tables ......................................................................................................... 5

Section 1. Introduction ................................................................................................ 7

Section 2. Description of Autonomous Trade Preferences ......................................... 9

Section 3. Monthly dynamics of Ukraine’s exports to the EU .................................. 14

Section 4. Impact of the ATPs: Enterprise Survey Findings ....................................... 22

Section 5. Analysis of Tariff-Rate Quotas Utilization ................................................ 28

Section 6. ATPs Impact on the Dynamics of Firms in 2014 ....................................... 34

Section 6. Conclusions ............................................................................................... 39

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Abbreviations

ATP Autonomous Trade Preferences

GSP Generalised System of Preferences

YoY year-on-year

EU European Union

IER Institute for Economic Research and Policy Consulting

ISIC International Standard Industrial Classification of All Economic Activities

HS Harmonized Commodity Description and Coding System

DCFTA Deep and Comprehensive Free Trade Area

MFN Most Favoured Nation Treatment

SPS Sanitary and Phytosanitary Measures

Т Ton

TBT Technical Barriers to Trade

TRQ Tariff-rate Quota

CCI Chamber of Commerce and Industry

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Figures and Tables

Figure 2.1: The EU's base rate and the rate to be applied during the first year of DCFTA implementation by HS commodity groups, % ................................................... 10

Figure 2.2: The EU's base rate and the rate to be applied during the first year of DCFTA implementation by ISIC Rev. 3.1. sectors, %....................................................... 11

Figure 3.1: Monthly Ukraine’s exports to the EU, USD bn ........................................ 15

Figure 3.2: Monthly dynamics of Ukrainian exports to the EU and the rest of the world,% yoy .................................................................................................................... 16

Figure 3.3: EU-28 share in the Ukraine’s total exports of goods in 2013-2015, % of total exports .................................................................................................................. 17

Figure 3.4: Changes in exports to the EU members in May 2014 - June 2015 .......... 18

Figure 3.5: Dynamics of exports to the EU by commodity groups ............................ 19

Figure 3.6: Dynamics of exports to the rest of the world by commodity groups ...... 19

Figure 3.7: Dynamics of exports to the EU by commodity groups in May 2014 – June 2015 .................................................................................................................. 20

Figure 4.1: Use of the Autonomous Trade Preferences, Breakdown by Enterprise Size .................................................................................................................. 22

Figure 4.2: Use of the Autonomous Trade Preferences, Breakdown by Industries ... 23

Figure 4.3: Autonomous Trade Preferences Impact Assessment, Breakdown by Enterprise Size ................................................................................................................ 24

Figure 4.4: Obstacles to the Use of the Autonomous Trade Preferences .................. 24

Figure 4.5: Obstacles to the Use of the Autonomous Trade Preferences, Breakdown by Enterprise Size ........................................................................................................... 25

Figure 4.6: Reasons for Non-Use of the Autonomous Trade Preferences ................. 26

Figure 4.7: Reasons for Non-Use of the Autonomous Trade Preferences, Breakdown by Enterprise Size ........................................................................................................... 27

Figure 5.1: Utilization Rate of 'First Come, First Served' Quotas in 2014 .................. 28

Figure 5.2: Utilization Rate of Quotas based on Import Licenses in 2014 ................. 29

Figure 5.3: Utilization Rate of 'First Come, First Served' Quotas in the First Half of 2015 .................................................................................................................. 30

Figure 5.4: Utilization Rate of Quotas based on Import Licenses in 2015 ................. 31

Table 5.1: Are the EU Tariff Quotas within the ATPs Restrictive .............................. 31

Figure 6.1: Dynamics of Ukrainian Exporting Firms to the EU in May-December 2014 .................................................................................................................. 35

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Figure 6.2: Dynamics of Ukrainian Exporting Firms to the Rest of the World in May-December 2014 .............................................................................................................. 36

Figure 6.3: Monthly Dynamics of Ukrainian Exporting Firms to the EU in 2013 and 2014 .................................................................................................................. 37

Figure 6.4: Dynamics of the Number of Exporters to the EU by Commodity Groups 38

Section 1. Introduction

The EU - Ukraine Association Agreement signing was initially scheduled for November 2013 in Vilnius as part of the Eastern Partnership Summit. However, at the last moment the then Ukrainian leaders refused to sign the Agreement and whereby triggered the Revolution of Dignity in Ukraine.

In February 2014, having returned to the parliamentary presidential form of government and with newly appointed Government Ukraine retook the path to the European integration. On March 21, during the extraordinary EU - Ukraine Summit, new government of Ukraine headed by Arseniy Yatsenyuk signed the political part of the Association Agreement. The President Petro Poroshenko signed full text of the Agreement on June 27, 2015 concurrently with signing similar Agreements with Georgia and Moldova.

However, well before the signing of the full text of the Agreement, particularly in late April 2014, to support the Ukrainian economy in the times of economic and political crisis the EU unilaterally opened its market for Ukrainian goods whereby having provided Ukraine with the autonomous trade preferences (ATP).

Initially, these ATPs were expected to apply for a half year until November 1, 2014 when they should have been replaced by the Association Agreement, the provisional application of most provisions of which until the full ratification of the Agreement by the Member States was planned to start in late 2014 after the ratification by the EU and Ukrainian parliaments. However in September 2014, as part of the trilateral consultations between Ukraine, the EU and Russia, it was decided to postpone the implementation of that part of the Agreement concerned with the deep and comprehensive free trade area (DCFTA) to the end of 2015. This decision was a step towards Russia, who expressed concern about implications of the Agreement application for the Russian economy. Having postponed the implementation of the Agreement the EU extended the ATPs for Ukraine for the entire 2015.

This study is purported to investigate how the introduced ATPs affect the Ukrainian exporters. To start, it should be noted that the ATPs have been introduced when Ukraine is in difficult times. A part of the country's territory has been occupied while other regions of the state have suffered from hostilities. The national economy is in deep crisis and requires major reforms to resume growth. While the unilateral opening of the EU market certainly boosts the economic development of the state, not all manufacturers, let alone exporters, have had the opportunity to take advantage of these preferences. The understanding of who has used the ATPs and in which manner is of key importance because implications for further economic policy are essential to ensure the effective use of the opportunities offered by the DCFTA a partially case of which the ATPs actually are.

The structure of the report shall be as follows. Section 2 describes the autonomous trade preferences. Section 3 deals with the dynamics of trade in commodities with the

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EU. Section 4 provides for the findings of a survey of exporters trading with the EU representing their opinion on the ATPs application. The aforesaid ATPs related survey makes part of a wider survey that was conducted in the spring 2015 under the 'Trade Policy and Practice in Ukraine' project supported by the Swedish Government. Section 5 is concerned with the use of tariff quotas being an important part of the agricultural trade with the EU. Section 6 deals with the ATPs impact on exporters conduct. The conclusions are set forth in Section 6.

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Section 2. Description of Autonomous Trade Preferences

The Autonomous Trade Preferences (ATPs) were introduced on April 22, 2014 by virtue of Regulation (EU) No 374/2014 of the European Parliament and of the Council of 16 April 2014 on the reduction or elimination of customs duties on goods originating in Ukraine.

Initially it was expected that ATPs would apply until November 1, 2014, the date for which the commencement of provisional application of the Association Agreement in terms of the deep and comprehensive free trade area (DCFTA) with the EU was planned. However, Ukraine, the EU and Russia as a result of the tripartite negotiations agreed that Ukraine and the EU would postpone the implementation of their obligations under the DCFTA to January 1, 2016 and extend the application of the ATPs until the end of 2014 and for the entire 2015. The extension of the ATPs was formalised in Regulation (EU) No 1150/2014 of the European Parliament and of the Council of 29 October 2014, amending Regulation (EU) No 374/2014 on the reduction or elimination of customs duties on goods originating in Ukraine (came into effect on November 2, 2014).

As such, the autonomous trade preferences can be regarded as the EU's unilateral fulfilment of their obligations under the DCFTA. The following key components can be distinguished:

The EU's cancellation of import duties for Ukrainian products according to the the first year of the DCFTA implementation schedule;

The application of tariff quotas for a number of agricultural and food products to the extent provided for the first year of the DCFTA implementation;

Exports using the autonomous trade preferences are permitted only subject to the availability of a preferential certificate of origin EUR.1.

According to Annex I to Regulation No 374/2014 of the European Parliament and of the Council of 16 April 2014, the autonomous trade preferences provide for the reduction (cancellation) by the European Union of import duties for Ukrainian exports to the EU market. This implies the cancellation of 83.4% of import duties on agricultural and food products (referred to groups 1-24 of the HS classification) and 94.7% of import duties on industrial products (referred to groups 25-97 of the HS).

As a consequence, the EU's tariff protection for Ukrainian products reduced drastically: the average rate fell from 4.9% to 0.5%, while the average trade-weighted rate reduced from 5.0% to 2.6%, which, according to the calculations of the Institute for Economic Research and Policy Consulting (the 'IER'), ceteris paribus, could provide Ukrainian manufacturers with an opportunity to expand their exports to the EU market by 4.5%, or about USD 0.8 bn.1

1 http://www.ier.com.ua/files//Projects/Ryzhenkov_Partial%20equilibrium_2014-11-27.pdf

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Liberalisation of the EU's tariff protection was goods and sectors specific. Thus, the most important reduction was recorded for finished food products, products of animal origin, vegetable products, animal and plant origin fats and oils, textile and textile products (Figure 2.1).

Figure 2.1: The EU's base rate and the rate to be applied during the first year of DCFTA implementation by HS commodity groups, %

Source: own calculations based on Association Agreement tariff liberalization schedule

Accordingly, considering its nature, this tariff liberalisation, ceteris paribus, should have been favourable primarily for agriculture, manufacture of food products and manufacture of textiles, where the most significant decrease in import tariff rates should have been expected (Figure 2.2).

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Figure 2.2: The EU's base rate and the rate to be applied during the first year of DCFTA implementation by ISIC Rev. 3.1. sectors, %

Source: own calculations based on Association Agreement tariff liberalization schedule

Applying tariff-rate quotas to products originating in Ukraine under the Association Agreement is another important component of the autonomous trade preferences.

The Agreement provides for the use of 36 zero tariff quotas made available under 'first come - first served' principle, mainly for agricultural and food products.

A zero tariff quota means that, to the extent of a given tariff-rate quota, Ukrainian products are exported to the European market duty-free, while in case the quota is fully utilized Ukrainian products should be exported at the base rate ( MFN rate or GSP rate as applicable at the time of entry into force of DCFTA, or, in this case, autonomous trade preferences).

'First come - first served’ principle means that quotas are allocated on a first served basis, i.e. permits for import under a given tariff quota are issued in order of applications for such permits.

Major groups of agricultural and food products covered by tariff quotas include:

Products of animal origin: meat (beef, pork, lamb, chicken), milk and dairy products, eggs, honey etc.;

Products of vegetable origin: grain (wheat, barley, oats, maize), mushrooms, garlic, etc.;

Finished food and other products: sugar and sugar products, grape and apple juice, sweet corn, preserved tomatoes, ethanol, cigarettes etc.

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In contrast to the DCFTA, under the ATPs not all tariff quotas are allocated following 'first come - first served' principle. Some of them are allocated using the import licences system. In particular, Annex II to Regulation (EU) No 374/2014 of the European Parliament and of the Council of 16 April 2014 sets out 27 tariff quotas allocated in accordance with 'first come - first served' principle. The effect of tariff quotas allocated to be applied within the first period was extended until the end of 2014 and new volume of quotas was provided for 2015 to the extent comparable to that of 2014 by virtue of Annex I to Regulation (EU) No 1150/2014 of the European Parliament and of the Council of 29 October 2014. These quotas are managed by the European Commission's Taxation and Customs Union Directorate.

Tariff-rate quotas allocated using the import licence system are provided for in Annex ІІІ to Regulation (EU) No 374/2014 of the European Parliament and of the Council of 16 April 2014. Similar to tariff-rate quotas allocated following 'first come - first served" principle, Annex II to Regulation (EU) No 1150/2014 of the European Parliament and of the Council of 29 October 2014 has extended the period of application of this quotas category until the end of 2014 and new volume of quotas has been made available for 2015. These tariff quotas are managed by the European Commission's Directorate-General for Agriculture and Rural Development. Managing each separate tariff quota is different. In particular, imports of meat products (beef, pork, poultry) is performed quarterly to the extent of 25% of the annual quota, while licensing imports of grain is carried out on a weekly basis, and the quota for dairy products is allocated every six months.2

Major quotas allocated using 'first come - first served' principle include: ethyl alcohol - 27,000 tons / year, sugar - 20,070 tonnes / year, bran - 16,000 tons / year, glucose and fructose, starch, tomatoes, grape and apple juice - 10,000 tons / year each.

Major quotas allocated using the import licence system include common wheat and flours - 950,000 tonnes / year, maize and maize flour - 400,000 tonnes / year, as well as barley and barley flour - 250,000 tons / year.

It should be noted that the Ukrainian exporters can take the above opportunities offered by the liberalised access to the EU's market to the extent of the autonomous trade preferences only subject to the availability of EUR.1 certificate of origin (or a declaration of origin for smaller consignments which value does not exceed EUR 6,000).

In contrast to the DCFTA that provides for such certificates to be issued by customs authorities, under the ATPs certification may be performed by chambers of commerce and industry (CCI), who issue, among other things, certificates of origin Form A.

It should be noted that notwithstanding the absence of a certificate EUR.1, an entity is allowed, subject to the availability of certificate of origin Form A, to take advantage of the Generalised System of Preferences (GSP), which was applied by EU to Ukrainian

2 http://www.me.gov.ua/Documents/List?lang=uk-

UA&tag=AvtonomniiPreferentsiiniiTorgovelniiRezhimYesDliaUkraini

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products before the ATPs were introduced and which application was extended for the entire period of the ATPs application. GSP provides, on average, less liberalised access to the EU market than the ATPs. However, the GSP is more favourable to certain goods to which the EU applies transitional periods under the DCFTA, and, therefore, no cancellation of import duties occurs during the first year and the ATPs provide for the application of non-zero duties.

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Section 3. Monthly dynamics of Ukraine’s exports to the EU

The autonomous trade preferences were not the only factor that influenced the Ukrainian exports in general and to the EU in particular. Thus, the political and economic crisis in Ukraine and situation on global markets put pressure on Ukrainian production and exports whereby neutralising or strengthening the potential impact of the ATPs on Ukrainian exports to the EU markets.

Military conflict in Donbas and annexation of the Autonomous Republic of Crimea and the City of Sevastopol led to the shutdown of Ukrainian production facilities within the occupied territories and caused logistics problems including the breakdown of the traditional value-added chains and limited access to resources, for example coal, produced within the territories in question.

As to the direct impact on exports, Crimea annexation led to the loss of about 1.6% of exports (in 2013 the shares of the ARC and the City of Sevastopol in total exports accounted for 1.4% and 0.2%, respectively). Military conflict in the East, and the suspension of production resulted in sharp decline in exports in Donetsk Oblast (-32.3%) and Luhansk Oblast (-46.3%), which exceeded the corresponding rate of decline in total exports (-23.5%). In this respect the region saw a significant reduction in its value for the national exports. As of 2013, about 25% of exports originated directly in Donbass (19.6% - Donetsk Oblast and 5.6% - Luhansk region), while in 2014 Donbass share in exports declined to 19% (15.6% - Donetsk Oblast and 3.5% - Luhansk region).

The depreciation of the national currency (32.8% in 2014 and 52.0% in 2015) had a dual impact on exports. On the one hand, Ukrainian products become cheaper in foreign currency terms, thereby increasing their competitiveness at global markets. However, on the other hand, the rise in costs of imported raw materials and components had an adverse effect on the Ukrainian manufacturers / exporters since Ukrainian economy imports about one-third of raw materials and components.

Downward price trend at global markets, particularly for grains, metals, and iron ore, further reduced earnings of Ukrainian exporters in foreign currency terms because the above listed products are among key export positions of Ukraine.

Unprecedentedly high grain yields (63.8 million t in 2014 or + 2.4% yoy) positively influenced the dynamics of Ukrainian exports.

Additional import surcharge, which was introduced in late February 2015, increased even more the cost of imported raw materials and components for Ukrainian producers and exporters.

Finally, a very important factor was the substantial decrease in trade turnover with Russia because of political and trade tensions that further stimulated Ukrainian exporters to focus on the EU market and the markets of third countries.

Thus, the national currency depreciation, loss and switch from the Russian market and unprecedentedly high grain yields strengthened the positive impact of the autonomous preferences on Ukrainian exports to the EU, while the military conflict

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and annexation of the territories, downtrend in prices on global markets and additional import duty undermined or neutralised it.

Because of the factors set forth above, in 2014 total exports decreased by 23.5% and by 35.1% in the first half of 2015. As for exports to the EU, in 2014 total Ukrainian export to the EU member-states increased by 1.5%, but a part of this growth was recorded before the introduction of the autonomous trade preferences. In particular, during the first four months of 2014, exports to the EU increased by 8.9%, while over the period from May to December 2014, when the ATPs were already introduced, it declined by 2.9%. In 2015, exports decline rate accelerated - over the first half of the year Ukrainian exports to the EU decreased by 35.5%.

Compared to 2013, total Ukrainian exports to the EU increased from USD 16.8 bn to USD 17.0 bn, which corresponded to the average monthly export volume equal to USD 1.4 bn. Over the first half of 2015 Ukrainian exports constituted USD 6.1 bn (compared to USD 8.3 bn in the first half of 2013 and USD 9.4 bn in the first half of 2014) demonstrating a decrease in the average volume of supply to USD 1.0 bn. Over the period of the autonomous trade preferences application, the average volume of exports decreased from USD 1.6 bn in April - May 2014 to USD 0.9 bn in May-June 2015 (Figure 3.1).

Figure 3.1: Monthly Ukraine’s exports to the EU, USD bn

Source: State Statistics Service of Ukraine, State Fiscal Service of Ukraine

Maximum annual increase of exports to the European Union at 36.1% yoy was recorded in May 2014. However, since September 2014 the situation has been deteriorating steadily and exports to the EU has been declining drastically. For example, in May 2015, one year after the record growth, the decline reached 41.4% yoy. In 2014 exports to the rest of the world (excluding the EU and the Customs Union of Russia, Belarus and Kazakhstan) in general declined except May 2014 when it increased by 6.3% yoy.

If compare the dynamics of trade with the EU and trade with the rest of the world, one can see that already in the first month of the decline period, September, dynamics of exports to the EU caught up with the dynamics of trade with the rest of the world, and

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since November 2014 trade with the EU has been declining faster than trade with the rest of the world. However, if the Customs Union of Russia, Belarus and Kazakhstan were part of the rest of the world, the rate of decline of exports to the EU and all other countries in 2015 would be roughly the same (Figure 3.2).

Figure 3.2: Monthly dynamics of Ukrainian exports to the EU and the rest of the world,% yoy

Source: State Statistics Service of Ukraine, State Fiscal Service of Ukraine

Different dynamics of trade with the EU and the rest of the world cause changes in the geographical structure of exports. For example, in 2013, exports to the EU-28 accounted for 26.5% of total exports, but in 2014 it already increased to 31.5% and 32.7% in the first half of 2015. Analysis of indicators recorded for May-June 2015 shows that the share of the EU begins to decline (as of June 2015 it was 29.0%), however, this could be related with the cyclical nature of trade with the EU (Figure 3.3). The share of exports to the EU is high at the beginning and at the end of a year, but reduces in the middle of the year. This cyclical nature can be related with cyclical trade in different groups of commodities that are presented differently in the structure of trade with various countries.

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Figure 3.3: EU-28 share in the Ukraine’s total exports of goods in 2013-2015, % of total exports

Source: own calculations performed on the basis of data provided by the State Statistics Service of Ukraine and State Fiscal Service of Ukraine

In May 2014 - June 2015, the period when the autonomous trade preferences were applied, the dynamics of exports to most EU member states was negative. There are only three countries where Ukrainian exports increased over the analysed period: Luxembourg (+104.3%), Slovenia (+40.5%) and Latvia (+2.7%). The most significant decrease in exports was recorded for Malta (-381.6%), Cyprus (-46.6%), and Ireland (-44.5%) (Figure 3.4).

However, the dynamics of exports to these and other EU member states were different during the period when the ATPs were applied. More specifically, in May-December 2014 increase in exports was recorded for ten EU member states: Luxembourg, Latvia, Slovenia, Spain, Lithuania, Cyprus, Belgium, Romania, Italy and Finland. It should be noted that the rate of increase in exports to most of these countries accelerated during the last eight months of 2014 compared to the beginning of the year (excluding Cyprus). Notwithstanding decline in exports to four countries, Greece, Denmark, Estonia, and Finland, the rate of decline slowed. The situation worsened in 2015 with declined exports to the absolute majority of the EU member states, except Malta and Slovenia.

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Figure 3.4: Changes in exports to the EU members in May 2014 - June 2015

Note: the chart excludes Malta; exports to Malta fell by 381.6%


The situation was complex in terms of sectors too (Figure 3.5). May - December 2014 saw an increase in exports of wood and wood products (+ 11.6% yoy), industrial goods (+ 11.2% yoy), machinery and equipment (+ 7.0% yoy) and food products and raw materials used in their production (+ 4.4% yoy) to the EU. Negative dynamics was observed for mineral products (-55.6% yoy), metal products (-9.6% yoy) and chemical products (-2.1% yoy). Trends in the rest of the world countries only partially corresponded to the above dynamics in the EU market: exports of wood and food products also increased, but exports of industrial products and machinery and equipment declined.

In 2015, negative dynamics of exports to the EU were observed for all commodity groups: the lowest fall was observed in exports of industrial products (-14,0% yoy) and wood (-14.9% yoy), while exports of mineral products (-55.6%) and chemical products (-45.5% yoy) declined most. Comparisons with the rest of the world shows that in the first half of 2015 Ukraine managed to boost only food exports to the third countries

-16.4% -12.1%

-27.4% -21.9%

-26.0% -18.9%

-26.5% 40.5%

-24.2% -0.4%

-16.4% -19.3%

-12.0% -12.8%

104.3% -15.4%

20.7%

-46.6% -13.9%

-2.9%

-44.5% -11.3% -11.4%

-5.8% -27.0%

-31.1% -17.1%

-28.7% -17.9%

-60% -40% -20% 0% 20% 40% 60% 80% 100% 120%

RoW

Sweden

Czech Republic

Croatia

France

Finland

Hungary

Slovenia

Slovakia

Romania

Portugal

Poland

Germany

The Netherlands

Luxembourg

Lithuania

Latvia

Cyprus

Italy

Spain

Ireland

Estonia

Denmark

Greece

United Kingdom

Bulgaria

Belgium

Austria

EU-28

19

markets. In addition, throughout the period from May 2014 to June 2015 third country markets demonstrated positive dynamics of exports of food, while exports to the EU market declined for all broad groups during the period (Figure 3.6).

Figure 3.5: Dynamics of exports to the EU by commodity groups


Figure 3.6: Dynamics of exports to the rest of the world by commodity groups


Finally, analysing in more details exports to the EU for the period from May 2014 to June 2015, we can conclude that during this period Ukraine managed to increase its exports of animal products (+ 106.9%), articles of stone (50.0 %), animal or vegetable

-26.5%

-18.8%

-13.1%

-1.2%

-35.6%

-35.9%

5.4%

-34.9%

-36.4%

-28.9%

-10.9%

-27.8%

-51.5%

7.0%

-20.8%

-4.8%

-1.9%

6.6%

-39.9%

-23.0%

4.5%

-60% -50% -40% -30% -20% -10% 0% 10%

Machinery and equipment

Metals

Industrial goods

Wood products

Chemical products

Mineral products

Food products

May-December 2014 first half of 2015 overall during ATP

-26.5%

-18.8%

-13.1%

-1.2%

-35.6%

-35.9%

5.4%

-34.9%

-36.4%

-28.9%

-10.9%

-27.8%

-51.5%

7.0%

-20.8%

-4.8%

-1.9%

6.6%

-39.9%

-23.0%

4.5%

-60% -50% -40% -30% -20% -10% 0% 10%


Metals

Industrial goods

Wood products

Chemical products

Mineral products

Food products

May-December 2014 first half of 2015 overall during ATP

20

fats and oils (+ 26.0%), miscellaneous manufactures articles (+ 9.0%), wood products (+ 2.1%) and finished food products (0.9 %). Most of these groups belong to agriculture and food industry (Figure 3.7).

Figure 3.7: Dynamics of exports to the EU by commodity groups in May 2014 – June 2015


Thus, the autonomous trade preferences were only one of a number of factors that affected Ukrainian exports to the European Union in 2014-2015. Some factors, such as devaluation or high grains yield, strengthened the ATPs effect on exports, while a number of factors, such as the suspension of production and logistics chains break caused by the occupation of certain Ukrainian territories offset the effects of the ATPs. In 2014, the dynamics of exports to the EU differed significantly from the dynamics of exports to third countries (excluding the RBK CU). Thus, in 2014 exports to the EU increased by 1.5%, while exports to the rest of the world declined by 23.5%. The situation changed in 2015 with exports to the EU markets that declined drastically in the first half of 2015 by 35.5% yoy, which is comparable with the dynamics of Ukrainian exports to other markets (-35.1% yoy). If in 2013 the EU's share in total exports was accounted for 26.5%, in 2015 it increased to 32.7%. In terms of geography

9.0%

-38.1%

-13.5%

-3.7%

-23.2%

-40.9% 50.0%

-4.1%

-5.7%

-28.6%

2.1%

-13.0%

-6.1%

-26.6%

-35.9%

0.9%

26.0%

-30.6%

106.9%

-60% -40% -20% 0% 20% 40% 60% 80% 100% 120%






Precious and semi-precious stones and metals

Articles of stone, plaster, cement, asbestos,…



Pulp, paper, paperboard and articles thereof




Products of the chemical or allied industries

Mineral products

Prepared foodstuffs

Animal or vegetable fats and oils and their…

Vegetable products


21

and commodity structure, 2014 saw a positive trend for a number of commodity groups or countries, but in 2015 the dynamics of exports was mainly negative.

Section 4. Impact of the ATPs: Enterprise Survey Findings

Since the statistical analysis methods of the ATPs impact on exporters are complicated due to the limited data and significant number of additional impact factors acting simultaneously with the ATPs application, we referred to qualitative impact assessment methods.

The survey of exporters to the EU which either made use of the ATPs or not was conducted in April-May 2015 throughout the territory of Ukraine, except for the occupied territories.

The survey was conducted by GfK at the request of the Institute for Economic Research and Policy Consulting under the 'Trade Policy and Practice in Ukraine' project supported by the Swedish Government. ATPs related issues were only a part of the wider range of those relative to the trade policy of Ukraine.

Generally, 1,009 enterprises took part in the survey, including:

605 enterprises engaged in export and import operations, including 278 exporters to the EU;

404 enterprises operating solely in the domestic market.

Among the exporters to the EU participating in the survey, only about one third indicated that they made use of the ATPs (Figure 4.1), approximately a half of the exporters stated that they did not use the ATPs, with the other exporters being unable to answer this question.

Figure 4.1: Use of the Autonomous Trade Preferences, Breakdown by Enterprise Size

Source: IER Survey

0%

10%

20%

30%

40%

50%

60%

70%

total small medium big

Yes, used No, did not use Don't know

23

Such a low level of use of the ATPs may be due to the difficulty of using the autonomous trade preferences (problems with obtaining certificates of origin, conformity assessment, etc.), as well as due to the lack of knowledge of the opportunities provided by the ATPs.

It should be noted that on average large enterprises (250+ employees) more often use the APTs than those of other sizes, which may be caused both by their higher capability to overcome business obstacles and their higher awareness.

As the study showed, the ATPs were most actively used in the area of manufacture of construction materials and in the food industry, while the least active use of the ATPs was recorded on the part of agricultural producers (Figure 4.2).

Figure 4.2: Use of the Autonomous Trade Preferences, Breakdown by Industries

Source: IER Survey

Although not all enterprises made use of the ATPs, those that used them positively appraised the EU's action (Figure 4.3). None of the surveyed enterprises assessed the ATPs impact as negative or more likely negative. All the estimates - regardless of the size, ownership type, industry, etc. - lie within the range from ‘neutral’ to ‘positive’.

As certainly positive, the ATPs impact was assessed by 35% of small, 42% of medium and 53% of large enterprises. Another 27% of small, 24% of medium and 20% of large enterprises said that the ATPs impact was more likely positive. Other enterprises noted neutral impact.

As seen, large enterprises that used the ATPs more often as compared with small and medium enterprises were also more optimistic in their assessments of the ATPs impact.

0% 10% 20% 30% 40% 50% 60%

Agriculture

Metallurgy

Chemical industry

Machine building

Wood industry

Manufacture of construction materials

Food industry

Light industry

% of exporters to the EU, which have made use of the ATPs, relative to the total number of exporters in the industry

24

Figure 4.3: Autonomous Trade Preferences Impact Assessment, Breakdown by Enterprise Size

Source: IER Survey

Respondents to the survey rather positively appraised the ease of using the ATPs (provided they have made use of them). Nearly a half of the respondents noticed no problems with the use of the ATPs (Figure 4.4).

Figure 4.4: Obstacles to the Use of the Autonomous Trade Preferences

Source: IER Survey

Among the main obstacles to the use of the ATPs, respondents to the survey noted the difficulty of searching for partners (24% of the respondents using the ATPs) and lack of information about the ATPs (21% of the respondents). Procedural problems related to

0%

10%

20%

30%

40%

50%

60%

Positive Rather positive Neutral Rathernegative

Negative Don't know

total small medium big

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Lack of information on ATPs

Problems to meet rules of origin

Procedural issues with obtaining a certificate…

Difficult to find enough partners

Problems to meet EU standards

Problems with customs clearance

Other barriers

Any barriers

25

the confirmation of the origin of commodities and obtaining the relevant certificate were mentioned by 15% of the respondents. Problems attributable to the compliance with the EU requirements in the area of standards were noted by 12% of the respondents. This may be indicative of both the readiness of Ukrainian exporters for the EU market requirements and distortion of trade - the ATPs were used by exporters whose products are not regulated by the TBT/SPS norms.

Absence of obstacles to the use of the ATPs among the enterprises that have made use of them is rather characteristic to small and medium enterprises than large ones (Figure 4.5).

Figure 4.5: Obstacles to the Use of the Autonomous Trade Preferences, Breakdown by Enterprise Size

Source: IER Survey

It should be emphasised that the obstacles faced by the enterprises were to some extent different for enterprises of different size. For large enterprises, the most problematic were operational issues - search for partners and obtaining a certificate of origin EUR.1. For small enterprises, information, or more exactly, its insufficiency became the issue of first priority along with the problem of searching for partners. This means that despite the things already done, the state has to increase its efforts in the area of information distribution for entrepreneurs.

This conclusion is confirmed by the analysis of the answer to the question why an enterprise failed to make use of the ATP opportunities. According to the respondents, the most common reason for non-use of the ATPs was lack of information sufficient for

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Lack of information on ATPs

Problems to meet rules of origin

Procedural issues with obtaining a certificateEUR.1

Difficult to find enough partners

Problems to meet EU standards

Problems with customs clearance

Other barriers

Any barriers

big medium small

26

decision making and lack of knowledge about the existence of the ATPs. Such answers were given by 17% and 15% of the respondents respectively. Shortage of time to enter the EU market (13%) and severe competition in the EU market (11%) were among the other reasons for non-use of the ATPs. Problems with standards, funds, rules of origin, etc. became an obstacle for 5-7% of the respondents only (Figure 4.6).

Figure 4.6: Reasons for Non-Use of the Autonomous Trade Preferences

Source: IER Survey

Problems with obtaining information are the most topical for small enterprises. Among enterprises with up to 50 employees, lack or shortage of information was noted by 18% of the respondents, while among large enterprises with more than 250 employees, 16% indicated that information was insufficient for decision making, however only 9% said that they did not know about this opportunity at all (Figure 4.7).

In addition to the shortage of information, large enterprises point out that they have been short of time so far for reorientation and entering the EU market within the ATPs. This may mean that the enterprises will make use of the ATPs later during the year.

Severe competition in the EU market, lack of partners and problems related to compliance with the EU standards are more incidental to medium enterprises than for small and large ones.

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Did not know about this opportunity

Not enogh time to enter of to reallocate to theEU markets

Tough competition at the EU market

Have no partners in the EU

Lack of information for decision-making

Lack of money to enter the EU market

Products do not meet EU standards

Products do not meet rules of origin (cannotobtain certificate EUR 1)

Don't know

27

Figure 4.7: Reasons for Non-Use of the Autonomous Trade Preferences, Breakdown by Enterprise Size

Source: IER Survey

So, the survey showed that in most cases the ATPs had positive impact on the exporters, which had made use of them. No negative impact of the ATPs on the exporters was recorded. At the same time, despite the positive effect, only one third of the exporters to the EU have made use of the opportunities provided by the ATPs (according to their own estimate). According to them, lack or shortage of information about the ATPs is the main obstacle for the exporters. This means that the state has to strengthen its efforts in the area of distribution of information for entrepreneurs in an intelligible form for them.

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Did not know about this opportunity

Not enogh time to enter of to reallocate to…

Tough competition at the EU market

Have no partners in the EU

Lack of information for decision-making

Lack of money to enter the EU market

Products do not meet EU standards

Products do not meet rules of origin (cannot…

Don't know

big medium small

28

Section 5. Analysis of Tariff-Rate Quotas Utilization

Tariff-rate quotas is a tool of partial liberalisation envisaged in the Association Agreement for goods, trading in which is sensitive for one or both parties to the Agreement. We analyse the utilization rate of the tariff quotas of each type, see how base tariff rates for exceeding TRQ volumes are restrictive, as well as identify the potential causes preventing Ukrainian exporters from trading with the EU in such products.

In 2014, Ukraine exported products to the EU within 14 from 27 tariff quotas provided on the 'first come, first served' principle. In this regard, only 4 from such tariff quotas were used in full - apple and grape juice, tomatoes, cereals and grain, natural honey. The level of use of the other quotas was substantially different - the next quota in terms of the level of use was the quota for malt and wheat gluten, which was used to 28.4%. Besides, the non-zero level of export to the EU within the tariff quotas was also observed for bran, fructose and cocoa powder, starch, garlic, glucose, sugar, oat, other food products and sweet corn (Figure 5.1).

Figure 5.1: Utilization Rate of 'First Come, First Served' Quotas in 2014

Source: own calculations based on the data of the European Commission

3

As to the quotas granted based on import licenses, in 2014, exports were within 6 quotas, where only quotas for corn and wheat were fully utilized, while the utilization rate of the quota for poultry meat equalled to 77.3% (mainly through the non-conformity between the quota structure and that of the Ukrainian exports of poultry

3

http://ec.europa.eu/taxation_customs/dds2/taric/quota_consultation.jsp?Lang=en&Origin=UA&Code=&Critical=&Status=&Expand=true

0.0%

0.0%

1.6%

2.6%

3.5%

7.1%

7.3%

10.5%

11.5%

28.4%

100.0%

100.0%

100.0%

100.0%

0% 20% 40% 60% 80% 100% 120%

Sweet corn

Food preparations mics

Oats

Sugar

Glucose and fructose

Onions, shallots, garlic, leeks

Starches, inulin

Cane or beet sugar…

Bran, sharps

Malt, wheat gluten

Natural honey

Cereal groats and grains

Tomatoes prepared or preserved

Grape and apple juice

29

meat to the EU). The quota for ethanol (30.0%), barley (9.1%), eggs and albumins (2.6%) was also used partially (Figure 5.2).

Figure 5.2: Utilization Rate of Quotas based on Import Licenses in 2014

Source: own calculations based on the data of the Ukraine's Representative Office at the European Union and European Atomic Energy Community

4

In 2015, the situation with the use of the quotas has not changed to better. For example, in the first half of 2015, exports only took place within 12 tariff quotas from 27, which is lower than that in the previous year. As of 27 June, only 3 quotas were used, in particular, cereals and wheat, natural honey, as well as apple and grape juice. The utilization rate is also rather high for some other tariff-rate quotas, such as sugar, tomatoes and oats. The non-zero exports are continuing within the quotas for bran, fructose, starch, glucose, malt and other food products (Figure 5.3).

4 http://ukraine-eu.mfa.gov.ua/ua/ukraine-eu/trade-and-economic/atm

2.6%

9.1%

30.0%

77.3%

100.0%

100.0%

0% 20% 40% 60% 80% 100% 120%

Eggs and albumins

Barley

Ethanol

Poultry

Corn

Wheat

30

Figure 5.3: Utilization Rate of 'First Come, First Served' Quotas in the First Half of 2015

Source: own calculations based on the data of the European Commission

5

The quota for corn was also fully utiilzed in 2015 (Figure 5.4). We expect that the quota for wheat will be also fully utilized with a new yield - now it has been only used to 34.3%. The quota for poultry meat has been generally used to 28% for the six months, however, the main volume of the quota assigned for the first half of the year (4 thousand tons for the first quarter and 4 thousand tons for the second quarter) has been completely used (the quota for poultry was divided into sub-quotas, one of which is being used in full and the other one only in part). The comparably low level of use of this quota is explained by the low activity of exporters within the additional quota for 'frozen poultry skeletons'. Barley exports continues to be not so active - only 2.2% of the tariff quota volume has been supplied.

5

http://ec.europa.eu/taxation_customs/dds2/taric/quota_consultation.jsp?Lang=en&Origin=UA&Code=&Critical=&Status=&Expand=true

0.1%

0.9%

0.9%

5.2%

9.4%

10.2%

73.2%

76.3%

87.0%

99.9%

100.0%

100.0%

0% 20% 40% 60% 80% 100% 120%

Food preparations mics

Malt, wheat gluten

Glucose and fructose

Starches, inulin

Cane or beet sugar…

Bran, sharps

Oats

Tomatoes prepared or preserved

Sugar


Natural honey

Cereal groats and grains

31

Figure 5.4: Utilization Rate of Quotas based on Import Licenses in 2015

Source: own calculations based on the data of the Ukraine's Representative Office at the European Union and European Atomic Energy Community

6

In order to determine how restrictive for exports the base tariff rates of above-mentioned quotas with a high level of use are, we use of the study conducted by the Institute for Economic Research and Policy Consulting in association with the German Consulting Group7.

According to the methodology of this study, the base tariff rate on volumes exceeding tariff quota is restrictive for exports, if the annual export volume is close or equal to the quota volume and provided prior to the implementation of the tariff quota the exports were much lower than after its implementation. This means that beyond the quota, import duty is high and substantially restricts the access of Ukrainian products to the EU market. Results of such analysis are presented in Table 5.1.

Table 5.1: Are the EU Tariff Quotas within the ATPs Restrictive

Category TQ, t/y Duty within

the quota

Ukrainian exports to

the EU, 2014, t/y


the EU, 2013, t/y

Duty beyond

the quota (MFNT)

Is the base rate for volumes

exceeding TRQ restrictive?

Honey 5,000 0% 26,121 17,145 17.30% No

Barley cereal and flour

6,000 0% 12,653 12,211 EUR 93 per ton

No

Preserved tomatoes

10,000 0% 11,411 1,391 14.40% Tariff rate is potentially restrictive

6 http://ukraine-eu.mfa.gov.ua/ua/ukraine-eu/trade-and-economic/atm

7 http://www.beratergruppe-ukraine.de/wordpress/wp-content/uploads/2014/06/PB_06_2015_ukr.pdf

2.2%

28.0%

34.3%

100.0%

0% 20% 40% 60% 80% 100% 120%

Barley

Poultry

Wheat

Corn

32

Category TQ, t/y Duty within

the quota


the EU, 2014, t/y


the EU, 2013, t/y

Duty beyond

the quota (MFNT)

Is the base rate for volumes

exceeding TRQ restrictive?


10,000 0% 84,032 73,834 18.9 % + EUR 27 per hectolitre; 36.5 % + EUR 121

per hectolitre

No

Soft wheat, wheat flour and granules

950,000 0% 1,048,614 101,658 EUR 95 per ton

Tariff rate is potentially restrictive

Corn, corn flour and granules

400,000 0% 7,680,590 6,482,331 EUR 5.35 per ton

(from July 2014)

No

Poultry meat and semi-finished products

36,000 0% 17,408 496 EUR 149 per ton

Tariff rate is potentially restrictive

Source: Veronika Movchan, Iryna Kosse and Ricardo Giucci (2015), Tariff Quotas for Import from Ukraine. Institute for Economic Research and Policy Consulting / German Consulting Group. Analytical Note [PB/06/2015], Berlin/Kyiv, June 2015.

8

The analysis results show that the base import tariff rates for preserved tomatoes, wheat and poultry meat are potentially restrictive, i.e. for these goods, tariff-rate quotas granted within the ATPs were a real driver for expansion of exports to the EU market. These exports stopped once the volumes envisaged for duty-free trade within the quotas were achieved.

It should be noted that nearly a half of the tariff-rate quotas were and remain unused. In particular, there were 17 such quotas in 2014, while as of the first half of 2015, their number increased up to 21. Due to the several factors, Ukraine has not started yet exporting, within the tariff-rate quotas, some types of meat products (pork, beef, sheep meat), dairy products (milk, cream, condensed milk, yogurts, dry milk, butter, milk pastes), cigars and cigarettes, mushrooms, ethyl alcohol, etc.

As to the causes that prevented efficient use of the tariff quotas, Movchan, Kosse and Giucci (2015) present the following:

Problems related to compliance with safety rules for food products;

Non-compliance with the SPS;

Insufficient domestic production;

Existence of other key markets;

8 http://www.beratergruppe-ukraine.de/wordpress/wp-content/uploads/2014/06/PB_06_2015_ukr.pdf

33

Low competitiveness of Ukrainian goods and consequently low demand;

Lack of trading partners.

To improve the level of use of duty-free export volumes granted within the tariff-rate quotas, one should complete the harmonisation with the EU SPS standards and ensure their proper implementation, improve control over animal diseases, develop domestic production, improve its competitive ability, as well as contribute to the development of business contacts with the EU.

34

Section 6. ATPs Impact on the Dynamics of Firms in 2014

Behaviour of individual exporting firms at the microeconomic level forms the basis of the general export dynamics at the macrolevel. For example, different enterprises may differently perceive changes in the trade policy of countries or trade partners and make relevant decisions. In general, the following behaviour options will be possible for firms in the foreign market:

A firm enters the export market, if it has not traded with this partner before (or temporarily interrupted its cooperation with this trade partner), if its productivity is sufficient to generate income required to cover export-related costs;

A firm leaves the export market (forever or temporarily), if its productivity becomes insufficient to cover all the necessary costs related to export.

A firm continues exporting to the foreign market, while increasing or decreasing the trade volume with this trade partner.

The first two cases mentioned above are called extensive margin of trade under the international trade theory. Extensive growth explains the contribution of the changed number of exporters to the dynamics of trade. Accordingly, ceteris paribus, increased number of exporters will result in the positive extensive margin and growth of the total export volume, while their reduction will result in the negative extensive margin and consequently reduced trade.

The third case, where exporting firms remain in the foreign market, was called intensive margin of trade. The intensive margin explains the contribution of the change in the average export value of firms continuing to trade in the foreign market. Therefore, if the most part of the exporters will increase the export value, then the intensive margin will be positive and the total export volume will increase, while in the case where most exporters will wind down their trade in the foreign market, the intensive margin will be negative and the total export value will decrease.

To analyse the dynamics of exports to the EU during the application of the ATPs from this point of view, we use data at the level of exporting firms, containing information on the volume and direction of export of each legal entity engaged in international trade in goods. As to the time period, we analyse data for May-December 2014 (full months of 2014, when the autonomous trade preferences actually came into effect) and compare them with the same period of 2013. We compare the export dynamics to the EU with that to the rest of the world, except for the countries of the Customs Union of RBK. Exclusion of the CU RBK from the other countries of the world is conditioned by the specific character of shocks affecting the bilateral trade relations between Ukraine and the CU RBK, in particular with Russia (political and trade disputes). Using the other countries of the world without the CU RBK enables the use of the part of the export as a comparative base, which part was not subject to specific trade shocks, but only to those shocks, which had even influence on the goods and geographic nomenclature.

35

Analysis of the described database generally shows positive dynamics of the number of exporters in the EU-28 market (Figure 6.1). Like this, during the period from May to December 2013, 6,113 exporting firms were engaged in exports to the EU market. Their number increased up to 9,116 in the same period of 2014. Therefore, the net increment was 3,003 firms: 5,302 enterprises with no export during May-December 2013 entered the European market during the application of the ATPs in 2014, while 2,299 exporters terminated/suspended their export operations to the EU market.

Besides, we can emphasise the 'core' exporters, which exported to the EU both in 2013 and continued trade with the EU in 2014. This group includes 3,814 enterprises or 42% of exporters in 2014, however the dynamics of their exports to the European market was different - most of them, 2,106 firms or 55% reduced their supplies to the EU.

Figure 6.1: Dynamics of Ukrainian Exporting Firms to the EU in May-December 2014

Source: own calculations

The exports of a firm which continued exporting to the EU was on an average 5 times higher than that of a firm which entered the EU market and 4 times higher than the exports of the firms which left the EU market. Accordingly, on an average, this market was left by firms with higher export volumes than those entering the EU market.

Inflow of firms to the EU market significantly exceeded the entrance of new firms to the market of the other countries of the world (except for the EU and Customs Union). In this manner, analysis of the dynamics shows that the number of exporting firms to the markets of the other countries of the world increased from 6,124 to 6,934 as compared with May-December 2013 (Figure 6.2). Comparing to the same period of 2013, 3,447 firms entered the market of the other world and 2,637 firms left the market, resulting in the net increment of exporters at the level of 810 firms. Therefore, the increment of exporters to the market of the rest of the world was much lower than

2106

1708

3814

2299

5302

3003

9116

6113

0 2000 4000 6000 8000 10000

Decreased exports

Increased exports

Continued exports to the EU

Exited the EU market

Entered the EU market

Change in the number of exporters

Number of exporters in 2014


36

the net inflow to the EU market, which may be indicative of a certain reorientation of the exporters, on the one hand, from other international markets to the EU market, and, on the other hand, from the domestic market to the external European market in order to increase the share of foreign currency proceeds to compensate a part of currency shocks in the domestic market as a result of the Hryvnia devaluation.

As to the 'core' exporting firms continuing exports to their traditional markets of the other countries of the world, it was 3,487 or 50% of the number of exporters in May-December 2014, which is relatively higher than the respective share in the EU market (42%). Therefore, we can conclude that the composition of exporters to the EU market was updated more than the composition of those cooperating with markets of the other countries of the world. In addition, it is worthwhile to note that in the markets of the rest of the world, the most part of the exporters decreased their supply volumes to foreign markets - they accounted for 2,036 or 58% of the those continuing to export.

Figure 6.2: Dynamics of Ukrainian Exporting Firms to the Rest of the World in May-December 2014


Therefore, in May-December 2014 as against the same period of 2013, exporters to the EU market were able to increase their number to a greater extent than those trading with the rest of the world - nearly four times more exporters entered the EU market. In addition, it should be noted that the composition of exporters in the EU market was updated to a greater extent.

As regards the contribution of the extensive and intensive margins of trade, the extensive margin had the highest impact on the exports of Ukrainian products to the EU. As noted above, through the higher export volumes of the 'core' firms, the reduction of the average export of an exporting firm determined the export dynamics, while new enterprises with substantially lower supply volumes could not substantially

2106

1708

3814

2637

3447

810

6934

6124

0 1000 2000 3000 4000 5000 6000 7000 8000

Decreased exports

Increased exports

Continued exports to the RoW

Exited the RoW market

Entered the RoW market

Change in the number of exporters



37

influence the total export dynamics to the EU. However, the inflow of new exporters allowed substantial neutralisation of the adverse impact of leaving the EU market by enterprises. As compared with the situation in the markets of the rest of the world, we can conclude that the impact of leaving the market and decreased export volumes of the 'core' firms was much more negative. Hence, as the positive effect from the ATPs, we can identify the incentive, which was obtained by the enterprises to enter the EU market. This had insignificant but notable impact on Ukrainian exporters.

As to the monthly dynamics of the number of enterprises during the period 2014, when ATPs the autonomous trade preferences were in force, in 2014 the number of exporting legal entities increased from 3,762 in May to 3,989 in October with the subsequent insignificant reduction to 3,931 exporters at the year-end (Figure 6.3). Therefore, the number of firms increased by 4.5% during 8 months of implementation of the ATPs in 2014. As compared with the same period of 2013, the total number of exporting firms to the EU market increased by 49%. The highest inflow was observed during the first months when the ATPs became effective, however this effect began to damp gradually: from 51% of new firms in May to 25% in November (31% in December) through the slowed-down entering of the firms to the EU market and their accelerated exit.

Figure 6.3: Monthly Dynamics of Ukrainian Exporting Firms to the EU in 2013 and 2014


The industry breakdown shows that the most favourable dynamics of entering the market was observed for enterprises supplying wood and its products (+149.7%), food products (+54.4%), as well as commercial products (+22.0%) to the European market. Negative dynamics was observed for enterprises supplying machines and equipment (-3.2%) (Figure 6.4).

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Number of exporters in 2013 Number of exporters in 2014 Change, % yoy

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Figure 6.4: Dynamics of the Number of Exporters to the EU by Commodity Groups


Accordingly, in terms of the HS product groups, the most favourable dynamics is also observed for commodity groups associated with the abovementioned leaders: wood and wood products (+193.7%), products of animal origin (+97.8%), products of vegetable origin (+58.3%), precious and semi-precious stones and metals (+44.8%), as well finished food products (+39.7%). The most negative trend was observed for art works (-72.2%), leather and its products (-14.8%), mass from wood (-10.8%), transport vehicles (-10.7%), as well as devices and appliances (-8.5%).

Finally, we can observe the following trend in industry terms: the highest increase in the number of exporters was recorded in chemical production, beverage production, agriculture, forestry and forest procurement, as well as in textile manufacture. The most reduction in the number of exporters was recorded for the coal industry, wood processing, water supply, food production, as well as manufacture of other transport vehicles.

Consequently, analysis of the export dynamics from the microlevel showed that the most of changes in the trade volumes with the EU took place on account of the firms which continued exporting to the EU market. Entry of new exporters only allowed to mitigate the adverse effect from the reduction of the supply volumes by the 'core' exporters. Comparison with the export trends to third country markets shows that in the trade with the EU, the number of firms, which entered the EU market, and their role in the export dynamics is much higher.

-3.2%

6.7%

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-50% 0% 50% 100% 150% 200%


Metals

Industrial goods

Wood products

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Food products

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Section 6. Conclusions

The Autonomous Trade Preferences were introduced at the end of April 2015 initially for six months and were subsequently extended until the end of 2015, as the entry into effect of the trade part of the EU-Ukraine Association Agreement was postponed just for the same period. Previous assessment results by the IER showed that such measure would enable Ukraine to increase its annual exports to the EU by nearly 4.5% and the most winning sectors would be agriculture, food and light industries.

However, analysis of the Ukrainian exports to the EU during the validity period of the ATPs shows that although they had positive impact on exporters to the EU, their effect was insufficient to compensate a number of negative factors affecting the Ukrainian exports during 2014 and the first half of 2015. Such negative factors include the military conflict and annexation of territories, declining price trend in world raw materials markets and price hike for imported raw materials and component parts through the devaluation of Hryvnia and approval of additional protective measures by Ukraine (additional import charge). In its turn, devaluation of Hryvnia, loss and reorientation from the Russian market, as well as the historically high yield of cereal crops strengthened the positive effect of the autonomous preferences on the Ukrainian exports to the EU.

As a result of such wide spectrum of factors affecting the Ukrainian exports to the European Union, the export dynamics to the EU was worse in 2014 than may be generated by the autonomous trade preferences without the effect of other factors, however better than the situation with the exports to other countries of the world. In May 2014, which was the first month of the effectiveness of the ATPs, there was a surged increase of exports to the EU, however in the future, the growth rates slowed down with the drop-down started from November and continuing up to now with increasing rates. Following the results of the first half of 2015, the drop of exports to the EU is comparable with the dynamics of trade with third countries. However, the EU share in exports is continually growing.

During the validity period of the autonomous trade preferences in 2014, the growth of exports to some EU countries accelerated and the drop in exports to another part of the EU countries slowed down. However, exports to the absolute majority of the EU countries dropped in 2015. In commodity terms, the validity period of the ATPs in 2014 featured the growth of exports of foodstuffs, wood, commercial goods, as well as machines and equipment. However, reduction of the trade volumes in 2015 finally hindered the increase of the exports for either of the wide commodity groups. Nevertheless, detailed analysis shows the positive dynamics for May 2014 - June 2015 for some types of foodstuffs (products of animal origin, animal or vegetable fats and oils, and finished food products), industrial goods (products from stone, various products and commodities), and products from wood.

Since the statistical analysis methods of the ATPs impact are complicated by limited macroeconomic data and substantial number of extra impact factors acting simultaneously from the application of the ATPs, we looked at the exports to the EU

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with the help of other important information sources as to the ATPs impact on exporters, trade data at the level of exporting firms, as well as analysed the use of the tariff quotas.

Although only one third of the surveyed exporters to the EU have made use of the ATPs, those who used them assessed the EU's action positively. None of the surveyed enterprises assessed the ATPs impact as negative or more likely negative. All the estimates - regardless of the size, ownership type, industry, etc. - lie within the range from ‘neutral’ to ‘positive’. As certainly positive, the ATPs impact was assessed by 35% of small, 42% of medium and 53% of large enterprises. Respondents to the survey, which have made use of the ATPs positively, assessed their ease in use. Nearly a half of the respondents noticed no problems with the use of the ATPs. In the first place, the respondents to the survey noted the difficulty in searching for partners and lack of information about the ATPs as an obstacle to using the ATPs.

It should be emphasised that the obstacles faced by the enterprises were to some extent different for enterprises of different size. For large enterprises, the most problematic were operational issues - search for partners and obtaining a certificate of origin EUR.1. For small enterprises, information, or more exactly, its insufficiency became the issue of first priority along with the problem of searching for partners. According to the respondents, the most common reason for non-use of the ATPs included problems with information, such as lack of information sufficient for decision making and lack of knowledge about the existence of the ATPs. Hence, the issues of awareness raising of entrepreneurs should take an important place in the state policy of promotion of exports to ensure effective use of the opportunities arising owing to the active policy of the Government in opening markets for Ukrainian goods.

Analysis of the tariff quotas showed that Ukraine does not use the opportunities of exports within a half of the tariff quotas. In particular, in 2014, 20 of 37 quotas were used and only 6 of them were used in full (apple and grape juice, tomatoes, cereals and grain, natural honey, corn and wheat). The situation somewhat degraded during the first half of the year - as of the end of July 2015, Ukraine exported to the EU within 16 quotas, four of which were already used in full (cereals and wheat, natural honey, apple and grape juice, and corn). The analysis also shows that the tariff quotas for preserved tomatoes, wheat and poultry meat were a real driver for expanding exports to the EU market.

Effective use of the tariff quotas was hindered by a number of causes, among which the following may be emphasised: problems related to compliance with safety rules for food products; non-compliance with the SPS standards; insufficient domestic production; existence of other key markets; low competitiveness of Ukrainian goods and consequently low demand; and lack of trade partners.

Analysis of data at the level of exporting firms for the period May-December 2014 generally showed positive dynamics in the number of exporters in the EU-28 market. The net increment counted 3,003 firms: 5,302 enterprises with no export during May-December 2013 entered the European market during the validity term of the ATPs in 2014, while 2,299 exporters terminated/suspended their export operations to the EU

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market. "Core' exporters which exported both in 2013 and 2014 amounted to 3,814 enterprises or 42% of the number of exporters in 2014, however most of them, 2,106 firms or 55%, reduced their supplies to the EU. Exports of the firms continuing to export to the EU on an average several times exceeded the exports of the firms which either entered or left the EU market. In addition, on an average, this market was left by firms with higher export volume than those entering the EU market.

In May-December 2014 as against the same period of 2013, exporters to the EU market were able to increase their number to a greater extent than those trading with the other countries of the world - nearly four times more exporters entered the EU market. Exports of Ukrainian products to the EU and to the other countries of the world were to the utmost influenced just by the extensive margin and new enterprises with substantially lower supply volumes were unable to influence substantially the general dynamics of exports to the EU. However, the inflow of new exporters proved able to substantially neutralise the adverse effect of the exit of enterprises from the EU market, as well as slightly mitigate the effect of the reduced volumes of trade of the 'core' exporting firms. Hence, as the positive effect from the ATPs, we can identify the incentive which was obtained by the enterprises to enter the EU market. The most favourable dynamics of entering the market was observed for enterprises supplying wood and its products, food products, as well as commercial products to the European market.