Negotiations lasting 12 years
The preparation of the agreement on free trade between the countries lasted more than a decade – due to the efforts of both to ensure the most comfortable conditions for themselves.
The advantage was on the side of Turkey, because Ukraine became a member of the World Trade Organization later, and at the same time opened up the internal market much more. And changing these rules with a bilateral agreement did not make much sense for the Turks.
To some extent, this explains the slow pace of the negotiations.
“The agreement itself was agreed 12 years ago. The text of the agreement is written out. The problem lies in the additions to it and in the tariffs that will be applied to each group of goods,” Ukrainian Ambassador to Turkey Vasyl Bodnar said in an interview for one of the TV channels in the fall of 2021.
In fact, all this time, Turkey actively used Ukrainian grain and scrap as raw materials for its own flour milling and machine-building industries. In general, as Iryna Lemeshova, an international trade expert and manager of a foreign trading house, said, by actively buying grain in the Black Sea region and Ukraine, Turkey has turned into one of the main suppliers of flour on the world market.
Instead, on the Ukrainian side, the signing of the agreement was actively opposed by representatives of light industry, perfectly understanding that the unimpeded access of competitors from Turkey will squeeze Ukrainians out of their own market.
Similarly, Turkish agricultural producers did not want to allow Ukrainian ones into their market due to fear of competition. Although Turkish vegetable producers in Ukraine felt quite comfortable.
“Our distrust of the Turks – they say they will come and take over the markets – was comparable to the Turks’ distrust of us. We bargained to the last for each position,” said the negotiator.
However, despite all warnings, trade between our countries has been developing all this time.
In particular, according to the State Customs Service, in 2021, trade turnover between Ukraine and Turkey increased by 52% to $7.38 billion. Ukraine exported $4.14 billion worth of goods to Turkey and imported $3.23 billion.
The lion’s share of Ukrainian exports this year are metals and grains. This is almost $2 billion and $1 billion, respectively. Instead, the Turks brought us textiles, machine-building products, fuel, citrus fruits and vegetables (the share of Turkish tomatoes in our market was 16%).
The new terms of trade, which will enter into force on January 1, 2023 if the free trade agreement is ratified by the parliaments, open opportunities for Ukrainian businesses to export to Turkey at zero rates not only raw materials – grain or scrap, but also more than 10,000 other commodity items.
“Turkey applies extremely high import duties for Ukrainian goods, in particular: for dairy products – 177%, for meat products – 198%,” stated in 2020 David J. Tarr, head of research at the Institute for Economic Research “Estimation of the economic impact of the potential Free Trade Agreement between Ukraine and Turkey”.
And he added: “If the agreement removes these barriers, then Ukrainian producers of dairy products, meat products, fruits and vegetables, fats and oils, etc. will benefit.”
At the same time, the study indicated a possible negative impact on certain sectors of the Ukrainian economy. “Establishing an FTA with Turkey will require adjustment costs. According to calculations, 1.2% of employees will have to change their place of work as a result of its introduction,” the study said.
In the risk zone are the already mentioned manufacturers of light industry products (textiles and clothing), as well as the manufacture of electrical equipment and engines, machines and electronic components
The Ministry of Economy is still talking about the risks for textile workers, ship-machine-aircraft builders, greenhouses, and the flour mill industry.
And yet, experts estimate the gains to be much higher than the losses, because “adjustment costs actually end when people find a new job, the gains from FTAs persist for years.”
In particular, the Turkish market can already be of interest to our transport companies, fishing industry, confectioners, manufacturers of furniture, wallpaper and even, not surprisingly, textile manufacturers who will be able to take advantage of cheap Turkish fabrics and accessories.
Also, according to forecasts, manufacturers will grow in the following areas:
- dairy and other food products;
- fruits and vegetables;
- fats and oils;
- meat products;
- air transport;
- water transport.
Details of the FTA agreement
The FTA provides that Turkey actually opens 95.6% of its market for new goods from Ukraine, and we, on our part, open 99.6%. At the same time, the list of goods that our country can supply duty-free consists of more than 10,000 items, Turkey to Ukraine – 9,500. And this is in addition to Ukrainian grain and oil products, which currently make up 25% of our exports to Turkey. At the same time, the Turks reduced the nominal duty rates here from almost 30% (which could be set at WTO rates) to 10%. True, and we reduced similar duties from 5% to 0.5%. The Ministry of Economy assures that grain and oil products removed from the de jure agreement will de facto not be subject to this duty if the free trade regime is maintained. This trend will continue in the coming years due to the demand for grain.
Ukraine retains the right to apply a duty on scrap to Turkey, but Turkey only partially opens its domestic market.
In general, taking into account the exceptions, Ukraine received additional opportunities to export 1,348 items of its goods to Turkey (up to the 10,000 that are duty-free), and the Turks – 616.
The Ministry of Economy notes that due to all factors (price reduction, increase in income due to increase in export profitability, etc.) Ukrainian households can increase their income by as much as 2.6%, and the country as a whole will have a 2.2% increase in GDP by reducing tariffs and other barriers between the two countries.
In 5 years, Ukraine plans to increase trade turnover between countries by $1.5 billion to $10 billion, increase our exports by $313 million, save customs payments of our exporters by $370 million.
Also, Ukraine expects that Turkey will increase quotas for agricultural products other than grain.
Before concluding the FTA, Ukrainian textile and confectionery manufacturers were subject to additional duties imposed by Turkey by government decision, especially in 2020-2021, so the agreement contains a clear provision that Turkey will not apply such duties to Ukrainian products. It is also expected that the FTA will simplify road transportation between countries. At the same time, Turkey achieved certain concessions: trucks from Ukraine will be able to enter empty and return with goods, which was prohibited until now.
FTA with Turkey as part of the general export strategy of Ukraine
Thanks to the FTA with Turkey, Ukrainian manufacturers will also receive indirect benefits, including the possibility of re-export and duty-free sale of goods, a large part of which has a Turkish component, to other countries with which we have a free trade zone – the same countries of the European Union.
The signing of the Free Trade Agreement with Turkey is part of the overall strategy of the Ministry of Economy to expand Ukraine’s presence on the territory of the Pan-Euro-Mediterranean free trade zone as the No. 1 direction for Ukrainian exports. Pan-Euro-Mediterranean countries already account for 54% of Ukraine’s trade turnover.