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The EU-Ukraine trade liberalization: How much do the costs of tariff elimination matter?

  • Miriam Frey



  • Zoryana Olekseyuk

The establishment of the currently negotiated Free Trade Agreement (FTA) between the EU and Ukraine is the next significant step towards Ukraine’s deeper integration into the world economy, widely expected to result in additional welfare gains. As developing countries face some costs associated with trade liberalization, this paper contributes to the literature by analyzing the effects of the EU-Ukraine FTA taking into account the loss of tariff revenues as well as the changed economic conditions after Ukraine’s accession to the WTO in 2008. In particular, we calculate the effects of a unilateral tariff elimination in a Computable General Equilibrium (CGE) model for Ukraine simulating three scenarios reflecting different means to compensate for the loss in tariff revenues. It turns out to be important to take these costs into consideration while modeling trade liberalization, as the results vary significantly across the scenarios. In general, we find that tariff elimination has only a small impact on the country’s welfare because of the already strongly reduced tariff rates after Ukraine’s WTO accession. The effects can even be negative if the country tries to refinance the trade liberalization costs by means of tax policy. According to our simulations the most welfare enhancing option would be the provision of financial support by the EU, which is in fact suggested in the latest European Parliament resolution.

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Paper provided by Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies) in its series Working Papers with number 308.

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Length: 31
Date of creation: Dec 2011
Date of revision: Feb 2013
Handle: RePEc:ost:wpaper:308
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  1. von Cramon-Taubadel, Stephan & Hess, Sebastian & Brummer, Bernhard, 2010. "A preliminary analysis of the impact of a Ukraine-EU free trade agreement on agriculture," Policy Research Working Paper Series 5264, The World Bank.
  2. Harbuzyuk, Oksana & Lutz, Stefan, 2004. "Analyzing trade opening in Ukraine: Effects of a customs union with the EU," ZEI Working Papers B 26-2004, ZEI - Center for European Integration Studies, University of Bonn.
  3. Joseph Francois & Miriam Manchin, 2009. "Economic Impact of a Potential Free Trade Agreement (FTA) Between the European Union and the Commonwealth of Independent States," IIDE Discussion Papers 20090805, Institue for International and Development Economics.
  4. Kemp, Murray C. & Wan, Henry Jr., 1976. "An elementary proposition concerning the formation of customs unions," Journal of International Economics, Elsevier, vol. 6(1), pages 95-97, February.
  5. Maryla Maliszewska & Irina Orlova & Svitlana Taran, 2009. "Deep Integration with the EU and its Likely Impact on Selected ENP Countries and Russia," CASE Network Reports 0088, CASE-Center for Social and Economic Research.
  6. Joseph Francois & Miriam Manchin, 2009. "Economic Impact of a Potential Free Trade Agreement (FTA) Between the European Union and the Commonwealth of the Independent States," CASE Network Reports 0084, CASE-Center for Social and Economic Research.
  7. Rutherford, Thomas F, 1999. "Applied General Equilibrium Modeling with MPSGE as a GAMS Subsystem: An Overview of the Modeling Framework and Syntax," Computational Economics, Society for Computational Economics, vol. 14(1-2), pages 1-46, October.
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