Prospects of free trade with China: development of domestic export and risks of import dependence

Development of the trade between Ukraine and China generates serious challenges for the national economy, because, presently, the trade with China accounts for more than a half of Ukraine's negative balance in this country's international trade in goods (56% in January-November 2018). Despite the risks of further deterioration of trade balance, Ukraine has suggested to start consultations on the Ukraine-China free-trade agreement (FTA). The purpose of the paper is to estimate the possible impact of the liberalization of trade with China and to develop recommendations for raising exports and suppressing China's goods expansion on domestic market. In order to investigate the problem and shape the outlook for domestic exports to China, the following steps have been made: (1) compared the structure of external trade in goods of Ukraine and China; (2) evaluated the trade regimes' symmetry between China and Ukraine; (3) identified the characteristics of China's non-tariff trade regulations; (4) analyzed special ties features of negotiating with China on FTA; (5) analyzed the situation with the development of domestic export to China, and identified prospective markets for domestic goods; and (6) analyzed the dynamics of imports of goods from China during 2004-2018. Also, discussed the groups of import goods that are top items by absolute volume and possess a high share in imports and in local domestic consumption. Analysis of the structure of trade flows between Ukraine and China showed that the most probable development scenario in the trade with China is the increased orientation of Ukrainian export on raw materials and empowering of Ukraine's dependence on the import of Chinese industrial goods. Probability of this scenario is increasing since the trade regimes of Ukraine and China are asymmetrical, which creates unequal conditions of trade that are more preferable for China. It was found that, even in case of trade liberalization as the result of FTA negotiations between China and Ukraine, Ukraine could not expect sustainable increase in exports of agri-food goods, as China has special non-tariff regulations in domestic agri-food markets. Among the core directions of the government policy of supporting the development of agricultural export to China is promotion of corn export in accordance with the credit agreement of 2012 between State Food and Grain Corporation of Ukraine and Export-Import Bank of China, and soybean export promotion with the purpose to substitute US in the Chinese import soybean market, which opened up as a result of US-China trade disputes in 2017-2018. Negative trends in bilateral trade are the reason for active government policy promoting the export of processed goods to China, first of all the products of food industry and optical photographic instruments and apparatus that are of high demand in local Chinese markets. Import dependence of domestic local market remains high without significant signs of decrease. In 2017, the ratio between import and GDP was the highest for the recent 17 years. During 2013-2017, this ratio increased from 0.51 to 0.56. Dependence of Ukraine's economy on import could increase further as a result of liberalization of the trade with China. Despite the benefits for exporters (mostly exporters of raw goods), cheap Chinese import could delay the renaissance of the domestic light industry that has gradually started after a sharp decline in 2013-2015. Dynamics of goods import from China during 2004-2018 was analyzed, and discussed groups of goods that are the top import items by absolute volume, possess a high share in imports and in local domestic consumption. The research was conducted on agricultural and agri-food goods, and for 4- and 6- digit codes. Presence of Chinese goods in domestic market is constantly increasing. In 2002-2003, balance of trade between Ukraine and China was positive, and the share of China's goods in market was below 2%, but, starting from 2005, the trade balance has been always negative with share of Chinese goods increasing to 13% (2018). Machinery accounted for more than a half of Chinese import in 2018, with machinery, instruments and equipment making the highest share. China is the main exporter of telephone equipment for cellular networks, computers and notebooks, photo-sensitive semi-conductors, light-emitting diodes and other innovative and high technology products. China possesses top positions in imports of household electronics and appliances, light industry goods (shoes, toys, synthetic textiles etc.) and other goods. In 74 out of 178 analyzed 4-digit groups of goods, China's share in import in 2017 was higher than 50%. From the position of domestic market protection, trade liberalization with China could cause high risks for domestic producers. Assortment of industrial goods that are imported from China is very extensive, hence their expansion in domestic market could be quite significant.