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The EU-Ukraine Free Trade Agreement and Russia’s Retaliation: a Negative Side of Free Trade Agreements?

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  • Olexandr Nekhay
  • Manuel Alejandro Cardenete Flores
  • Adolfo Cristobal Campoamor
  • Olexandr Nekhay

Abstract

A Deep and Comprehensive Free Trade Agreement (DCFTA) was signed in 2014 between Ukraine and the EU, although it was only partially enforced immediately after signature. The full implementation of the DCFTA was delayed as Russia alleged that the agreement posed a threat to its economy. However, during 2015 the two sides (the EU & Ukraine on one side and Russia on other side) could not reach an agreement. Subsequently, the Ukraine-EU DCFTA was fully implemented from January 1st 2016. In response, Russia unilaterally broke out a FTA with Ukraine signed in 2011 as well as banning all imports of agricultural products from the latter country. Simultaneously, Russia additionally restricted the transit of all goods from Ukraine to other CIS countries. We used a static comparative GTAP CGE model based on the GTAP 9 database to assess the impact of several possible scenarios, based on to the current trade relationships. We calibrated the economic model with data from the year 2015, which was especially important for Ukraine due to the sharp changes in its GDP and endowments. Our first scenario consists of the abolishment of the tariff and non-tariff barriers between the EU and Ukraine, as implied by a complete implementation of DCFTA. Our second scenario includes the first scenario, plus a ban on Ukrainian agricultural goods and some tariffs on industrial goods, according to Russia´s WTO commitments. Our third scenario includes our first scenario plus a ban on the importation of Ukrainian agricultural goods by all the Russia-led Euro-Asian Custom Union. And our forth scenario includes the first scenario plus a ban on the importation of Ukrainian agricultural goods by all the CIS members of the Russia-led FTA. The tariffs for industrial goods in our third and fourth scenarios are set at the level of the Russian tariffs in our second scenario. The results of these simulations allow us to asses the impact on GDP, welfare and trade balances of the implementation of the DCFTA, together with the Russian restrictive measures. This work should also add to the discussion regarding the benefits and drawbacks of FTAs in general and bring light to claims that these type of FTAs between two countries can hurt a third country’s interests.

Suggested Citation

  • Olexandr Nekhay & Manuel Alejandro Cardenete Flores & Adolfo Cristobal Campoamor & Olexandr Nekhay, 2016. "The EU-Ukraine Free Trade Agreement and Russia’s Retaliation: a Negative Side of Free Trade Agreements?," EcoMod2016 9326, EcoMod.
    • Handle: RePEc:ekd:009007:9326
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    Keywords

    The European Union; Ukraine and Russia; Trade and regional integration; General equilibrium modeling (CGE);
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