October 20, 2021

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Russia in decline, China on the rise, slowdown Liaison office between EU-Ukraine think tanks in Brussels

Russia in decline, China on the rise, slowdown Liaison office between EU-Ukraine think tanks in Brussels

The year 2019 saw new developments in the geography of Ukraine’s commodity trade. Although the official annual statistics have not yet been published, the trends have already been very clear and are not entirely in line with previous expectations.

There are three main changes. First, Russia has lost its leading position among individual countries – Ukraine’s trading partners. Secondly, China has instead become the main partner. Thirdly, trade in goods with the EU has slowed down considerably. Below we consider these developments in more detail.

Reducing Russia’s role in Ukraine’s foreign trade in goods was the long-standing trend that was marked once again in 2019 with the introduction of new trade restrictions. In December 2018, Russia imposed an import ban on over 200 products from Ukraine and another ban on around 140 products followed in April 2019. In addition, exports of selected Russian products, mainly related to energy, to Ukraine have been banned or subjected to a non-automatic system of permits. Ukraine responded by expanding the list of products for which imports from Russia were banned. These measures pushed Ukraine’s exports to Russia by 10% and imports by 13%, so that the value of trade in goods with Russia fell to $ 10 billion, comparable to the trade levels of the early 2000s.

As a result, in 2019, Russia lost its position as Ukraine’s largest trading partner among individual countries for the first time ever. It happened for both exports and imports. In both cases, China has become the main partner, overtaking Poland in exports and Germany in imports. While China’s growing role in imports has been evident in recent years, the fact that China has overtaken Poland as Ukraine’s main individual export partner comes as a surprise. The year started with Poland as the main partner, but the situation changed rapidly as exports to China grew strongly driven by high supplies of agri-food and minerals, while exports to Poland began to slow.

This brings us to the third change, namely the slowdown in Ukraine’s trade with the EU. Ukraine’s trade with the EU resumed growth in 2016 and for three years expanded faster than trade with other trading partners. The EU’s trade expansion was driven by exports as the DCFTA progressed.

In 2019, the trends are quite different. According to Ukrstat, Ukraine’s exports of goods to the EU grew by 4% very moderately (January-November), gradually slowing over the year, while exports to China increased by 70% and overall exports increased by 6%. Exports to Poland, Ukraine’s main export destination within the EU, have slowed to a mere 2% from double-digit growth rates over the past three years. Exports to Germany also slowed considerably.

While the overall slowdown in Ukraine’s exports could be attributed to the appreciation of the hryvnia, there are several EU-specific factors that undermine export growth. First, the EU imposed definitive safeguard measures on steel products, halting the expansion of Ukraine’s steel exports. Secondly, Ukrainian exporters faced significant problems with the availability of Polish road transport permits required for both shipments to Poland and transit to Western European countries.[1]

The growth of imports from the EU was also quite moderate, at 8% in 2019, decelerating compared to previous years, despite the appreciation of the hryvnia. Imports from Germany, mostly shipped by road through Poland, fell by 1%, at least in part due to the issuance of transit permits.

It appears that the boost to trade with the EU generated by tariff liberalization within the DCFTA has been gradually fading due to the growing influence of non-tariff barriers to trade. To reverse the trend, Ukraine and the EU need to act jointly and more decisively. It covers the long-term resolution of the issuance of road transport permits, technical barriers to trade and progress in the ACAA, SPS measures and recognition of equivalence, the common transit system, authorized economic operators and other measures necessary to reduce trade costs and resume the high growth rates of EU-Ukraine trade.

The geography of Ukraine’s commodity trade therefore experienced several distinctive changes in 2019. But it remains to be seen how stable they are.

Author: Veronika Movchan, Academic Director at the Institute for Economic Research and Policy Advisory

This publication was prepared as part of the guided CEPS 3DCFTA project, made possible by financial support from Sweden. The views expressed in this publication are attributable only to the authors and cannot be attributed either to the institutions to which they may be related or to the government of Sweden.

[1] See https://3dcftas.eu/op-eds/eu-road-transport-quotas-are-limiting-trade-expansion-with-ukraine

Author: Ukrainian Liaison Office in Brussels