Source: New Europe

EU and Ukraine: Trade is Not the Main IssueAmidst high hopes for democratization, global attention is firmly focused on the situation in North Africa and the Middle East. Meanwhile, however, something important is stirring in the EU’s eastern neighborhood, and it risks going unnoticed. Last week the EU and Ukraine held their 18th round of talks on a deep and comprehensive free trade agreement (DCFTA). With the majority of positions agreed, the EU finds itself trapped between the need to protect the economic interests of its members and the desire to be an influential regional player. The EU will have to make a choice that will have an impact on the whole neighborhood.

The DCFTA has been one of the key elements of negotiations between the EU and Ukraine on their future Association Agreement. The DCFTA was supposed to bring Ukraine closer to the EU through the opening of the markets for trade in select goods and services. First and foremost, however, it aimed at bringing Ukrainian standards of economic governance in line with those of the EU through the adoption of important parts of the EU acquis and the creation of institutions compliant with European norms.

After three years of difficult negotiations, the process is seemingly coming to an end. The gross majority of tariff-related talks have been finalized and the talks on legal approximation and institution-building agendas are almost complete. Both sides claim to be keen to bring the talks to an end before 2012. At the same time, however, both emphasize that the quality of the final text matters more than the timing.

However, a number of sensitive issues still stand in the way of completing talks. Questions such as quotas for Ukrainian exports in agricultural products, transport services and geographical indications of origin for agricultural products and foodstuffs remain problematic. The EU claims that in these three areas it has to protect the interests of its 27 members, whereas Ukraine is insisting that bigger quotas and wider inclusion of services are crucial to protecting its own interests.

Ukraine clearly wants to conclude negotiations before the end of the year and will therefore ultimately compromise on some key issues. However, the EU should also show flexibility by making certain reasonable concessions. Allowing Ukraine a transition period to halt the production of goods that bear titles belonging to EU producers, for instance, or increasing quotas for some Ukrainian agricultural products over a period of 5 or 10 years are two potential measures. Such measures should be coupled with pressure from the EU for progress on the central idea of the DCFTA, which is the reform of Ukraine’s rules of economic governance.

EU negotiators, however, are stymied by the many divergent positions that member states have adopted. Some member states feel that the EU is indebted to Ukraine, and favor rapprochement at all costs. Others, however, do not see the need for closer relations with Kyiv, and consequently are not in favor of an agreement, despite having agreed to a mandate for the talks. There is also an increasing degree of Ukraine fatigue among member states, who are growing tired of the lengthy negotiation process and are skeptical that Ukraine is willing or able to implement its DCFTA commitments.

The Association Agreement and DCFTA are flagship projects for the EU and putting a halt to them will therefore be difficult politically. However, the EU’s commitment to help Ukraine implement the future agreements by, for instance,  providing more financial aid, may prove problematic.

The negotiators must also take their cues from the governments of EU member states that call for the protection of national interests. This is particularly visible in the domain of agriculture, where there is a strong and established lobby.

The EU is also aware of Russia looming in the background. While establishing a closer relationship with Ukraine, and drawing the country away from Russia’s Customs Union, sounds appealing to the EU, some member states are also wary of irritating Moscow and meddling in the Kremlin’s ‘sphere of influence’.

Prime Minister Putin will visit Kyiv this week to push again for Ukrainian membership in a customs union. Ukraine will resist Russian pressure, but will also use it as a source of leverage in its talks with the EU. European negotiators should be wary of this tactic and should stick with the Union’s own interests of making Ukraine more democratic and economically liberal.     
 
The EU is, therefore, stuck between its willingness to help Ukraine, its need to protect its own economic interests, and the fear of irritating Russia.

Ukraine, on the other hand, has neither a clear vision nor a plan regarding the DCFTA. According to experts, a free-trade agreement with the EU would improve Ukrainian people’s quality of life, while simultaneously providing better access to the EU internal market for local businesses and promoting a better business climate in the country.  Ukrainian president Yanukovych sees the completion of the talks during his second year as an issue of image. He therefore upgraded the level of negotiations on the Ukrainian side by assigning the first deputy prime minister, Andrii Kliuev, to oversee the talks politically.

There is, however, a small group of big businessmen in Ukraine for whom the DCFTA may pose an existential threat, at least in the medium to long-term. Measures such as the introduction of EU competition rules, and reform of the customs service and the mechanisms for allocating state aid, will not be welcomed by those who have so far enjoyed very little external competition, availed of the possibility to ‘fix’ customs problems through bribes, and benefitted from the cushioning effect of state aid.

The will of oligarchs is unlikely  to prevent legislative approval of the document; with his image at stake, Yanukovych will most likely ensure that the parliament ratifies the agreement. However, as is the case with Ukraine’s WTO commitments, the parliament may adopt decisions that will deviate from DCFTA arrangements.

Today is a unique moment for both the EU and Ukraine. Kyiv may finally close the gap with the EU if talks end and the real work starts. EU negotiators should seriously consider making certain concessions to Ukraine. However, these concessions should be clearly linked with a number of things that matter to the EU, such as the introduction of the rule of law and judicial reform, and of course, the full implementation of the DCFTA. On the other hand, the EU should be ready to allocate more resources to monitoring and scrutinizing the implementation of DCFTA commitments by the Ukrainian side.

The EU cannot, and probably should not, offer Ukraine the prospect of membership in the short-term. However, it should do more in pushing Ukraine to reform. The DCFTA, which is a legally binding document, may be one of key instruments in doing this.

While the principle of ‘more-for-more’ is being discussed in the EU in relation to its neighbors, the Union should think of what kind of incentives to build to be able to push for more in the longer term. By pushing for a conclusion to the DCFTA negotiations, the EU will be making a concession in the immediate, but in the long-run will be able to demand far more in terms of reform and compliance. Ultimately, the EU will be promoting the creation of a prosperous, secure and more predictable partner in Kyiv.