Impact Assessment of a Potential Free Trade Agreement (FTA) between Ukraine and Turkey: Implications for Business
On 4 November 2020, the Institute for Economic Research and Policy Consulting presented its new study prepared with the support of the USAID Competitive Economy Program (CEP). The study assessed the economic consequences of the future potential free trade agreement (FTA) with Turkey using an applied model of general equilibrium.
If the free trade agreement between Ukraine and Turkey includes “deeper integration” (mutual complete abolition of import duties and a significant reduction of non-tariff barriers to trade in services and investment), it will result into additional 2.72% gain in income to Ukrainian households – more than 1 % from the abolition of Turkish import duties on Ukrainian goods and more than 1.2% from the reduction of time costs during imports and exports.
The Turkish market is very protected. “Turkey imposes extremely high import duties on Ukrainian goods, including 177% for dairy products and 198% for meat products,” – mentioned David G. Tarr, head of the research group. If the Agreement removes these barriers, Ukrainian producers of dairy, meat, fruits and vegetables, fats and oils etc will benefit.
Liberalisation of trade in services sector will have a smaller impact, as the share of Turkish investment in Ukrainian markets, except for air transport and telecommunications, is insignificant. At the same time, improving the domestic investment climate by reducing non-discriminatory barriers in the services sector for all suppliers together with trade liberalisation with Turkey will result in 4.76% gain in Ukrainian real household income
Introduction of the FTA with Turkey will require adaptation costs. As a result, it is estimated that 1.2% of workers will have to leave their jobs. However, the gains are valued much higher than the losses from the Agreement. The ratio of gains divided by the losses is 117, meaning that the long-term gains will be 117 times higher than the losses. The adaptation losses will actually end when workers find new jobs, while the benefits of the FTA are maintained for years.
Growing sectors will draw resources from those that have fewer benefits from the FTA. “At the same time, the effective use of the Pan-Euro-Med conventions on rules of origin and accession to the European common transit system can lead to additional gains in trade with Turkey, enhancing the overall positive impact of the FTA,” said Veronika Movchan, IER Academic Director.
“CEP is pleased to support the collection and compilation of economic database and model depicting the Ukrainian economy and to supply government and private decisionmakers with accurate and reliable analysis and underlying statistics. We hope that this initiative will elevate the evidence-based policymaking and contribute to the economic growth”, – Meghan Iorianni, CEP Competition Attorney & Economic Special Initiatives Lead at USAID Competitive Economy Program (CEP) in Ukraine.
The study also highlights some risks, such as the risk of counteracting the effective implementation of the Agreement or the lack of “deep integration” in the signed Agreement. Besides that, the estimates are subject to a margin of error. It expands the range of gains from 2.42% to 4.00%. Nevertheless, the main conclusions preserve at any estimates.
Additional Information: The study was conducted by the Institute for Economic Research and Policy Consulting, led by the internationally recognised economist David G. Tarr, with the support of the USAID Competitive Economy Program. The study was conducted from December 2019 to September 2020 and its key element was the construction of a modern applied model of general equilibrium for Ukraine. The model includes Ukraine and seven external regions (Turkey, the European Union, the US, Russia, China, the regions that have FTAs with Ukraine and the rest of the world) and 45 sectors of the economy.