24 January 2014

Ukrainians Are Right to Suspect EU Deal Would Be Harmful

Research of public opinion in Ukraine
suggests a plurality of 39% of Ukrainians believes signing the EU Association Agreement would have a net negative impact on Ukraine. Only 30% of Ukrainians believe it would be beneficial to sign it. The Ukrainian public is right to doubt the usefulness of the deal.

The nine hundred pages long deal envisions a near-complete, mutual elimination of tariffs, This dramatic relaxation of trade between the Ukraine and the EU, however, is only to take place once Ukraine copies a variety of EU regulations. In other words, albeit free-flowing trade between EU and the Ukraine would just by itself be beneficial to both, it is Ukraine alone that must pay for it with a committal to "approximate EU legislation, norms and standards". Ukrainian goods can have free access to the EU market but only once Kyiv introduces more regulation that will make production costlier and products more expensive, and therefore less likely to actually benefit from the theoretical access to the EU markets.

Ukrainian goods will be cheaper for the EU customer on the account of not being subject to a customs duty, but more expensive on the account of Ukrainian producers having to comply with EU regulation. It is anyone's guess if the former positive effect would make up for the latter negative one. What is more, since the deal introduces the concept of "dynamic approximation" Ukraine would actually commit to copying, not just existing EU regulations, but any EU regulations full stop, including those the EU shall pass in the future.

Economic "regulations" (actually restrictions) have the effect of suppressing productivity from where it would otherwise be. Highly advanced economies like Germany can "afford" placing restrictions on economic activity at the cost of a large cut in the, still high, standard of living. But for Ukraine, with its out-of-date industries, to commit to forever labor under the weight of the same economic restrictions that highly modern Germany can endure somewhat painlessly, could mean putting the breaks on its ability to ever catch up with the West and sentencing itself to a permanent state of poverty vis-a-vis Western Europe.

Moreover hand in hand with signing the EU Association Agreement Kyiv would have to seek loan from the IMF. The supposedly "neo-liberal" IMF, however, had demanded Kyiv commits to gradually raising import tariffs so as to increase government revenue and assure the IMF of repayment. In other words the result of Kyiv opting for the EU-IMF route would be a decrease to barriers to trade with the European Economic Area in the long term, under the condition that Ukraine copies EU economic regulations, but an actual increase to barriers to trade with the entire world in the short term to please the IMF.

The EU-IMF route combines gains to trade that are quite uncertain and very much in the future with losses that would be immediate and assured. The Brussels deal is not an appealing bargain and would not actually boost trade.

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