Trade as an effective anti-crisis measure within Ukrainian realities

Valeriy Heyets, Academician of the National Academy of Sciences of Ukraine Director of the State Institution “Institute of Economics and Forecasting of NAS of Ukraine”

The crisis that has for the second time in the history of independent Ukraine, currently covering its economy, is systemic. It is based on the accumulated disparity and global destabilization becoming impulsive, that gripped much of the economy of the world and especially highly developed countries. There has been a fall in the rate of growth of the world economy as well as world trade. In general, their relationship is characterized by dependency, according to which world trade grew almost three times faster than GDP growth, confirming the idea that “trade is the engine of progress.” The 2000s were characterized by a change in the relationship: the growth of trade and GDP growth slowed down, although at all times, it had a little anticipatory character. Investigation of the trend of trade in comparison with the dynamics of GDP that was made in the XXI century has showed that the development of trade was a significant factor in the global recovery. That is why it is not surprising that the search for ways to support economic development, for example, in developed countries, due to the formation of so-called free trade zones, continues. In this case, we are referring to the negotiations between the most powerful economies of the world on the formation of a free trade zone between the US and the EU.

It is no coincidence, since, for example, during the period from 2005 to 2010 the world economy has been a significant deceleration in economic growth. Up until 2011, the growth rate of global GDP, according to IMF data, accounted for more than 5% per year, except for the crisis of 2009. However, since 2011 it has fallen to the level of 3%. This significantly decreased the growth rate of world trade and even for the period 2015–2016 the forecast of growth in world trade is at the level of global GDP growth. This suggests that trade is converted from the locomotive of economic growth into its brake that actually motivates the world to search for new ways to rise due to the expansion of areas where there will be fewer barriers to the movement of goods and capital and the search for places where you can use them more effectively and to meet the growing needs of the population, especially in regions where the standard of living rises.

However, it should be noted that in the fight against the crisis the highly developed countries, with their years of its existence have gained considerable experience in dealing with crises that periodically have occurred. They used approaches other than trade policy to stabilize the situation and overcome the crisis. However, in the long-term the trade policy remains a powerful factor in promoting economic growth.

Analyzing the methods of dealing with the current crisis, which is global in nature, it should be noted that the fundamental way was the one related to increased demand for products and services. It would be logical to apply this approach in Ukraine, which after nearly eight years cannot overcome this crisis that started in late 2008. However, an analysis of existing premises that have been established in the Ukrainian economy during 2015, shows that attempts to stimulate demand that were repeatedly carried out in previous years. This will not give the expected result, since the policy of macroeconomic stabilization, which is implemented in Ukraine in accordance to the Memorandum with the IMF, concerning the state of public finances, provides limitation of demand amid frozen wages, pensions and lack of funds for investment in order to achieve a balanced budget and to prevent the growth of employment debt. Due to instability and hostilities in the east of Ukraine, investment demand, which could be generated by foreign and domestic investors, is declining, not growing. Ukraine does not have the ability to access external markets for borrowing for its budget and in order to support the investment business. There are some opportunities for investment projects by donor countries, but we cannot expect in terms of their production and technology, the significant increase due to their impact on the economy, at least during 2015–2016.

Under these circumstances in Ukraine, in our opinion, we should take advantage of opportunities that arise in connection with the reform of the free trade zone with the EU against the background of the loss of the Russian market. At the round table, which is supposed to be held at the initiative of the Institute for Strategic Studies, we will need to justify the risks and threats that may arise as a result of the expansion of the free trade zone for Ukraine in the West, because, given the global experience we know that very often such activities are more advantageous for a relatively developed country. Therefore, in the course of implementation of treaty provisions, it is important to offer ways to minimize potential losses and simultaneously, the way of maximizing the benefits for the Ukrainian business and its economy as a whole.

We also should note the following: if all sorts of technical standards and regulations that Ukraine needs to perform are a question of at least the medium-long term, the question of expansion of the current activities of the Ukrainian producers, including export activity, is the priority today.

It is primarily about improving the efficiency of Ukrainian logistics, characterized by the development of activities for the implementation of supply chains. During the period from 2010 to 2014, according to Connecting to Sompete 2014, Ukraine increased its LPI index and moved from 102 to 61st place. This is a significant improvement, but it does not give grounds for reassurance, because almost all the countries of the European Union are in front of us. They are of course our main competitors in the EU. Thus, Ukraine is losing the quality of trade and transport infrastructure, the quality of logistics services and their coverage, for the duration of the customs and border clearance, to even such countries as Poland, Lithuania, not to mention the EU’s leaders that in terms of NPP have much higher position.

In the context of the functioning of a free trade zone with the EU, in spite of everything, there is the problem of protecting the domestic market. Highly developed countries have accumulated considerable experience in this field. For example, Japan in order to protect the domestic market successfully, has developed and implemented a special tariff system. Among the special antidumping and countervailing measures in the world up to mid-2015, according to the WTO, there were about 1,500 anti-dumping measures.

In our country, there is legal framework and some experience in the use of special measures to protect national businesses. But overall the trade policy of Ukraine adheres to the liberal approach, which, in our opinion, is not justified, because in terms of the global competitiveness of the countries at the end of 2014 its rating was 49, again and again losing to most of the EU countries and in particular, to Poland (ranked 36th). The provision of operational support to protect the domestic market within the free trade zone, especially from EU countries, which have a high level of competitiveness, it is important to follow the idea of the formation of a particular element of the system (which is yet unavailable in Ukraine), which would provide operational analysis towards the preparation of the information of price factors and imbalances that are generated in foreign and domestic trade.

It is this order from the Institute of Economics and Forecasting of NASU which could develop proposals for the formation of the Interdepartmental Analytical Center for Research of market conditions and the dynamics of prices by increasing the quality, functions and powers of the existing State Enterprise “DZI.” This should be work because in the conditions that are developed in the world, we should expect the competitive pressure on Ukraine.

The trade policy of Ukraine adheres to the liberal approach, which, in our opinion, is not justified, because in terms of the global competitiveness of the countries at the end of 2014 its rating was 49, again and again losing to most of the EU countries.

Another important factor for the realization of the benefits and minimization of the risks in terms of implementation of the free trade zone with the EU is the Europeanization of Ukrainian transport space in accordance with the practices and perspectives of its development in the EU. As of 2014, under the quality of trade and transport infrastructure and tracking the passage of goods, Ukraine took the 71st and 72nd places in the rankings, below both Poland and Latvia.

The process of the Europeanization of Ukraine’s transport space is multidimensional and at the round table on these problems and the potential conditions of implementation for the free trade zone with the EU, it was noted that some issues should be discussed separately. Now it is worth mentioning a very significant risk for Ukraine, namely, the implementation of EU directives on railway transport as one of the most highly developed mode of transport in Ukraine, with infrastructure being required to be at the level of the EU. There are other warnings and the Institute of Economics and Forecasting of NASU analyze them in detail. But let’s pay special attention to two of them: the first is that the EU provided only a period of eight years for the implementation of EU directives into national law. These modern conditions of reforming the railway transportation of Ukraine are unacceptable, because even in the EU the total period of implementation of such similar directives lasted for 21 years. The second warning is the fact that today most of the processes of modernization of railway transport and its infrastructure in Ukraine are due to grants from international organizations. These projects are guided by the use of techniques and technologies of foreign origin. Although Ukrainian producers do indeed have the appropriate level of development of industrial enterprises for the production of train carriages. In fact, these techniques are already recognized in other world markets. If the status quo continues, Ukraine threatens to be under a technological dependence, the loss of national production and research, as well as the lack of development that accompanies such issues. This, like many other threats must be removed due to events in the course of implementation of the agreement on the free trade zone with the EU. Consequently this will then lead to and promote more favourable conditions for Ukraine’s development.