Tag: Association Agreement

How to Intensify and Diversify Ukrainian Exports? The Case of Bilateral Trade with Germany

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This policy brief focuses on trade relations between Ukraine and Germany. In particular, it analyses bilateral trade in goods and examines the possibilities for increasing Ukrainian exports to Germany, in both the extensive and the intensive margins. The brief identifies prospective product groups for such increases and discusses potential obstacles to trade intensification. Finally, it provides recommendations for the further trade development.

German-Ukrainian Trade

Germany has recently become one of the most important trading partners for Ukraine. In 2018, Germany was fifth in terms of Ukrainian export destinations and third in terms of its import source countries.  While Ukraine, not surprisingly, is less important for German international trade (in 2018, Ukraine ranked 42nd in terms of Germany’s export and 45th in terms of its import), bilateral trade between Ukraine and Germany showed positive dynamics over the last five years.

Since Germany is a member of the European Union, its trade relations with Ukraine are regulated by legislation common for all EU member states. The EU’s political and economic cooperation with Ukraine is stipulated by the Association Agreement (AA). The AA is a comprehensive agreement provisioning the Deep and Comprehensive Free Trade Area (DCFTA) between Ukraine and the EU. While the provisional application of the AA began in the fall of 2014, the document fully entered into force on September 1, 2017. The abovementioned intensification of trade relations between Ukraine and Germany was to a significant extent driven by the signing of the DCFTA and a loss of a significant share of the Russian market.

The main Ukrainian exports to Germany include ignition wiring sets used in vehicles, aircraft and ships; low erucic acid, rape or colza seeds, iron ores agglomerated, maize, electrical switches etc. (see Table 1). Together, the top-15 product groups at a 6-digit level of the Harmonised System (HS) give 57% of the total exports from Ukraine to Germany.

Table 1. Top-15 Ukrainian product groups by export to Germany as of 2018

Source: UN Comtrade

This brief argues that both countries are likely to gain additional benefits from further intensifying bilateral trade relations. It summarizes the results of the research (Iavorskyi P. at al., 2019) on how to further expand and diversify Ukrainian exports to Germany, it identifies the prospective product groups and obstacles to their exports, and provides policy recommendations for trade development.

Promising Products

In order to find the most promising ways for increasing Ukrainian exports to Germany, this study employs a two-step approach. First, using a normalized revealed comparative advantage (NRCA) index (Run Yu et al, 2009) we distinguish goods, which Ukraine has world-wide comparative advantage in and Germany does not. A positive (negative) NRCA indicates that country’s actual share of a product in national exports is higher (lower) than the world average, – so that the country has a comparative advantage (disadvantage) in this commodity. According to this criterion, product groups with a negative NRCA for Germany and a positive NRCA for Ukraine were selected.

At the second stage, for the goods identified during the first step, a gravity model was estimated. A gravity model predicts bilateral trade flows based on the size of the economy and trade costs between them (such as distance, cultural differences, free trade agreements, tariffs, etc.). Being a general equilibrium model, it captures not only immediate impact of economic and political changes on trade between two countries, but also how it influences trade with other countries. A gap between current and potential export volumes predicted by the model is a potential for exports increase (which we refer to as undertrade).

The gravity model estimates the total undertrade between Ukraine and Germany at $ 500 million in 2016, or 35% of the total exports from Ukraine to Germany in the same year. Moreover, Ukraine has the potential to increase trade in both goods already exported to Germany as well as goods not yet supplied by Ukrainian companies to this market.

As for the structure of our findings, agricultural and mining commodities, as well as products of traditional Ukrainian export industries, such as metallurgy, are widely represented on the top of the undertraded commodity list. For example, more than a half of the estimated undertrade falls on primary food and primary industrial supplies, such as soybeans, barley, tomatoes, grain sorghum, iron ore, zirconium ores, etc. These categories already account for a large share of the current exports composition, and production in these sectors provides for a significant share of employment. Foreign currency inflow stipulated by exporting these products is also important for the Ukrainian economy.

At the same time, the undertrade in categories of final consumption, capital goods and transport is much lower. However, these product groups are important for exports diversification. These, for example, include liquid dielectric transformers, refrigerator cabinets, telescopes, tugs and pusher craft in capital goods, rail locomotives, railway cars, gas turbine engines in transport; automatic washing machines, electric space heaters, fans, coffeemakers, synthetic curtains, and leather apparel in consumer goods. Despite the complex regulation and relatively small amount of estimated undertrade, export diversification from primary to manufactured goods is important for overcoming export instability and long-term economic growth (Cadot at al. 2013), which is why promotion of trade in such areas is important.

Figure 1. Estimated undertrade according to broad economic categories

Source: Own calculations based on UN Comtrade data

Obstacles to Trade

Following the abolition or reduction of EU import duties between Ukraine and the EU under the DCFTA, tariffs do not significantly restrict exports of Ukrainian goods to the EU. Instead, technical regulations, sanitary and phytosanitary measures, geographical indications, licensing, etc. create significant barriers to bilateral trade. Thus, “non-tradability” can be explained, for instance, by the negative effects of various non-tariff barriers (both at European and national levels) or other factors, such as low competitiveness (in terms of price or quality) of Ukrainian goods compared to similar goods supplied by other countries, taste preferences of German consumers, peculiarities of importers’ associations, specific requirements of retailers, etc. Thus, harmonization of Ukrainian regulations with those of the European Union in accordance with the AA will help reduce customs barriers and existing divergences in regulations, and thus simplify the export of Ukrainian goods to the EU and Germany in particular.

Policy Recommendations

Based on the findings of the qualitative and quantitative research carried out, Ukrainian policy makers are advised to:

  • Timely and effectively align Ukrainian legislation, standards and practices with those of the EU, in line with the Action Plan and Commitments undertaken by Ukraine under the DCFTA within the framework of the AA with the EU, in particular in such areas as technical barriers to trade, sanitary and phytosanitary measures, customs, and protection of intellectual property rights.
  • Accelerate preparations for the signing of the ACAA (the Agreement on Conformity Assessment and Acceptance for Industrial Products) for the top three priority sectors of Ukrainian industry, which Ukrainian authorities agreed with European side, namely in the areas of low-voltage equipment, electromagnetic compatibility and machine safety, which will boost industrial technological exports to the EU and other countries.
  • Conduct government level negotiations with the EU and Germany regarding the removal of those barriers to the single market faced by the promising Ukrainian goods that will not be lifted as a result of harmonization of regulations with the European ones.
  • Take advantage of the Regional Pan-Euro-Mediterranean Preferential Rules of Origin Convention (the Pan-Euro-Med Convention), which establishes identical rules of origin for goods between its member-states under free trade agreements, and will facilitate the opening of new production facilities and involvement in regional and international value chains.
  • Provide information and consulting support to local manufacturers and exporters regarding the most promising destination markets, help them find partners on such markets, advise on the best ways to penetrate such markets by organizing trade missions, etc.

Another push to the German-Ukrainian trade promotion may arise from facilitating German FDIs to Ukraine. German entrepreneurs and investors are interested in localizing German production facilities in Ukraine and establishing joint German-Ukrainian enterprises, STIs, in particular in such areas as agriculture, light industry (including textiles), civil engineering, renewable energy, and circular economy (GTAI 2018a, 2018b, 2018c). This form of cooperation also boosts Ukrainian exports, since such enterprises often produce intermediate inputs for German production. In order to promote joint enterprises setup Ukraine should:

  • Establish effective mechanisms for protecting foreign investments, including export-oriented ones.
  • Ensure the rule of law and effective protection of property rights.
  • Create favorable macroeconomic conditions to ensure access to financing for both Ukrainian and foreign businesses.


Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Agricultural Exports and the DCFTA: A Perspective from Georgia

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On June 27, 2014, Georgia and the EU signed an Association Agreement (AA) and its integral part – the Deep and Comprehensive Free Trade Area (DCFTA). In this policy brief, we discuss the changes and analyze the agricultural exports statistics of Georgia since 2014. Furthermore, we will provide the recommendations to capitalize on the opportunities that the DCFTA offers to Georgia.

Georgia is a traditional agrarian country, where agriculture constitutes an important part of the economy. 36.6% of the country’s territory are agricultural lands and 48.2% of the Georgian population live in villages. Although 55% of population are employed in agriculture, Georgia’s agriculture accounts for only 15.8% of its GDP (Geostat, 2019). Agricultural exports constitute an important part of Georgia’s economy, accounting for about 25-30% of total exports.

On June 27, 2014, Georgia and the EU signed an Association Agreement (AA) and its integral part, the Deep and Comprehensive Free Trade Area (DCFTA). On July 1st, 2016, the DCFTA fully entered into force. The DCFTA aims to create a stable and growth-oriented policy framework that will enhance competitiveness and facilitate new opportunities for trade. The DCFTA widens the list of products covered by the Generalized System of Preferences+ (GSP+) and sets zero tariffs on all food categories (only garlic is under quota), including potentially interesting products for Georgian exports – wine, cheese, berries, hazelnuts, etc. (Economic Policy Research Center, 2014).

As July 2018 marked only two years since the implementation of the DCFTA between Georgia and EU, valuable conclusions on its impact cannot be formulated yet. In this policy brief, we will give an overview of Georgia’s agricultural trade statistics, particularly, we will focus on agricultural exports and provide recommendations for capitalizing on opportunities offered by the DCFTA.

Georgia’s agricultural trade

Despite its potential and natural resources, Georgia is a net importer of agricultural products. In 2018, Georgia’s agricultural exports increased by 23.2% (181 million USD), while the respective imports grew by only 15.5% (179 million USD) compared to 2017. Therefore, the trade balance (the difference between exports and imports) remained almost unchanged at (-394) million USD (Figure 1).

Figure 1: Georgia’s Agricultural Trade (2014-2018)

Source: Geostat, 2019

Out of the sharp increase in agricultural exports, 100 million USD are attributed to tobacco and cigars. Since Georgia cultivates very little tobacco, the growth was instigated mostly from the import, slight processing and re-export of tobacco products. Consequently, the export of tobacco and cigars increased by 240% in 2018, and it currently holds second place (after wine) in Georgia’s total food and agricultural exports. It should be mentioned that wine exports contributed to 26 million USD in export growth.

Over the last five-year period, the top export countries for Georgia were mainly neighboring counties (Azerbaijan, Russia, Armenia, Turkey); for imports, we see the same neighboring countries as well as China and Ukraine. Observing the trade statistics over the years, 45% of Georgia’s agricultural exports were destined for markets in countries of the former Soviet Union, so-called Commonwealth of Independent States (CIS), while the EU’s share in Georgia’s total agricultural exports was 24%.

Trade relationships between Georgia and the EU

The EU is one of Georgia’s largest trade partners. The EU’s share of total Georgian imports was 28% in 2018, and for exports, 24%. Total exports have been more or less stable since 2014, except for 2016, when an 11% decrease was observed (Figure 2). Specifically, for agriculture, in 2017, the EU’s share of Georgian imports was 22%, and its share of exports was 19%. During the same period, the top export products were hazelnuts (shelled), spirits obtained by distilling grape wine or grape marc, wine, mineral and aerated waters and jams, jellies, marmalades, purées or pastes of fruit.

Figure 2: Total and Agricultural Exports to the EU (2014-2018)

Source: Geostat, MoF, 2019

In 2015 (before the full enforcement of the DCFTA), Georgia’s agricultural exports to EU countries (including the United Kingdom) increased by 20% compared to the previous year. This positive trend remained in 2016, when the same indicator increased by 5%. In 2017, which was quite a bad year in terms of harvest in Georgia, we observed a 38% decrease in the country’s agricultural export to the EU (Figure 2). This decrease was mainly caused by a significant decrease (64%) in hazelnut exports during the same period. The reason for such a large decrease is that hazelnut production suffered from various fungal diseases due to unfavorable weather conditions in 2017. The Asian Stink Bug invasion worsened the situation, and in the end, hazelnut exports dropped dramatically in both value and quantity. In 2018, Georgia’s agricultural export in EU slightly increased by 6% compared to 2017.

Trade relationships between Georgia and CIS countries

It is interesting to observe agricultural trade within the same time period with CIS countries. In 2018, the CIS’ share of Georgian imports was 51%, and its share of exports was 60%. The top export products to CIS countries were wine, mineral and aerated waters, spirits obtained by distilling grape wine or grape marc, hazelnuts (shelled), and waters, including mineral and aerated, with added sugar, sweetener or flavor, for direct consumption as a beverage. As we can see in both EU and CIS countries, the top export products are more or less the same. However, the main export destination market for Georgian hazelnuts are EU countries, but wine is mostly exported to the CIS countries.

Figure 3: Agricultural Exports to CIS Countries (2014-2018)

Source: Geostat, MoF, 2019

Due to the worsened economic situation in CIS countries, Georgia’s agricultural exports to these countries decreased by 37% in 2015. Such a sharp decrease was mainly driven by a significant decrease in the export of alcoholic and non-alcoholic beverages, hazelnut, and live cattle. However, since 2015, Georgia’s agricultural exports to CIS countries have been increasing; we observed a slight 2% increase in the value of agricultural exports in 2016, while the same indicator was 37% in 2017 (Figure 3). That was mainly caused by the increased exports of alcoholic and non-alcoholic beverages (wine by 61%, spirits by 28%, mineral and aerated waters by 22%). In 2018, Georgia’s agricultural export in CIS countries increased by 12% compared to 2017.


Despite its potential and comparative advantage in agriculture, Georgia is still a net importer of agricultural products and has negative trade balance (-394 mn USD). Two years after the DCFTA came into force, it is challenging to know its impact on Georgia’s agricultural trade due to the insufficient passage of time since. Notwithstanding, we can formulate some conclusions from trade statistics. The diversity of the destinations for Georgia’s agricultural exports has not changed through the years. Georgia’s agricultural exports has increased to the EU, but at a quicker pace to CIS too. Furthermore, Georgia’s share of agricultural exports to CIS countries is still significant (60%).

While it is obvious that Georgia needs to diversify its agricultural export destination markets, there are several challenges facing small and medium size farmers and agricultural cooperatives in Georgia that are not specific to implementation of the DCFTA. As the previous regime (GSP+) with the EU already covered most products, the DCFTA did not represent a significant breakthrough. On the path to European integration, the biggest challenge for Georgia is to comply to non-tariff requirements such as food safety standards and SPS measures. The attention should be paid on providing consultations to farmers regarding certification processes and standards and better information sharing (e.g. developing online platforms).

In Georgia, agri-food value chains are not well-developed and lack coordination among different actors. In order to capitalize on opportunities offered by the DCFTA, government and private sector should work together to improve logistics infrastructure. There is a need for upgrading at every stage of export logistics: warehousing, processing, labeling, regional consolidation, final customer services. In this regard, there are high approximation costs for business that should be considered as long-term investment to modernize agriculture and improve food the safety system in the country. This would boost the export potential not only to the EU, but to other countries with similar requirements as well.


Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.