Report No. 29684-U Report No. 29684-UA Ukraine Trade Policy Study (In Two Volumes) Volume II: Main Report Public Disclosure Authorized Public Disclosure Authorized A Ukraine Study Policy Trade II Volume November 16, 2004 Poverty Reduction and Economic Management Unit Europe and Central Asia Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank Public Disclosure Authorized Public Disclosure Authorized IIPA International Intellectual Property Alliance ILAC International Laboratory Accreditation Center IMF International Monetary Fund IMU Investment Metallurgy Union IP Intellectual property IS0 International Standards Organization LDC Least Developed Country LRMC Long-run marginal costs MEC Multilateral Economic Cooperation MFN Most Favored Nation treatment MEEI Ministry of Economy and Economic Integration MRA Mutual recognition agreement NAAU National Accreditation Agency ofUkraine NBU National Bank ofUkraine NTB Non-tariff barrier OECD Organization for Economic Cooperation and Development OPT Outward Processing Trade PCA Partnership and Cooperation Agreement ROW Rest ofthe world RCA Revealed Comparative Advantage index scs State Customs Service SES Single Economic Space SITC Standard International Trade Classification SPS Sanitary and phyto-sanitary measures ssc State Statistics Committee of Ukraine TACIS Technical Assistance for the Commonwealth of Independent States TBT Technical barriers to trade TOT Terms of trade TRIPS Trade-Related Aspects of Intellectual Property Rights Agreement, which is part of the WTO TRQ Tariff rate quota UAH Ukrainian Hryvnia UEPLAC Ukrainian-European Policy and Legal Advice Centre UNCTAD United Nations Conference on Trade and Development USA United States ofAmerica USAID U.S. Agency for International Development USSR Union of Soviet Socialist Republics VAT Value Added Tax WDI World Development Indicators WITS World Integrated Trade Solution database by the World Bank WTO World Trade Organization WTO MTN The Multilateral Trade Negotiation classification of the WTO TABLE OF CONTENTS PART I1. MAIN REPORT ................................................................................................. 1 CHAPTER 1. TRADE PERFORMANCE SINCE THE EARLY 90s: LOOKING FOR ITS NEW ROLE IN GLOBAL TRADE ............................................................................................. 1 A . Main Trends in Trade Performance ................................................................................ 1 B. Merchandise Trade Dynamics in 1996-2003 ................................................................... 8 C. Commodity Structure of Trade ...................................................................................... 11 D. Geographic Structure of Trade ...................................................................................... 13 E. Export Concentration and Specialization ...................................................................... 22 F. Foreign Trade Data Quality............................................................................................ 30 G. Conclusions ....................................................................................................................... 35 CHAPTER 2 . TARIFF AND TRADE REGIME...................................................................... 39 A . Import Tariff Structure................................................................................................... 40 B. Import Non-Tariff Barriers ............................................................................................ 47 C. Quantitative Import Restrictions and Contingency Measures .................................... 51 D. Export Regime .................................................................................................................. 52 E. Fiscal Aspects of Trade Regime ...................................................................................... 57 F. Trade Regime: Perceptions by the Private Sector ....................................................... 57 G. Conclusions ....................................................................................................................... 66 CHAPTER3.UKRAINU.N EXPORTS AND ACCESS TO THE EU MARKET ...............69 A . Overview ........................................................................................................................... 69 B. Policies Affecting Ukraine’s Access to the EU Market: The Generalized System of Preferences (GSP) ............................................................................................................ ~3 C. EU Protection and the Structure of Ukraine’s Exports ............................................... 85 D. The Impact of EU Enlargement...................................................................................... 89 E. Conclusions ....................................................................................................................... 91 CHAPTER 4 . UKRAINIAN STEEL EXPORT: PERFORMANCE, SUSTAINABILITY AND MEDIUM-TERM PROSPECTS ...................................................................................... 95 A . Export Performance ........................................................................................................ 95 B. Assets, Investments and Capacity Constraints ........................................................... 102 C. Government Policies: Main Instruments of Support to Local Steel Producers .......104 D. Comparative advantages of Ukrainian ferrous metallurgy ....................................... 111 E. Medium-Term Prospects ............................................................................................... 113 F. Conclusions ..................................................................................................................... 115 CHAPTER 5. UKRAINE’S ACCESSION TO THE WTO: COMPLETING THE NEGOTIATIONS AND MAXIMIZING THE BENEFITS OF MEMBERSHIP ...............117 A . WTO Accession Negotiations ........................................................................................ 118 B. Remaining Roadblocks to Accession ............................................................................ 122 C. Reaching the End of Negotiations ................................................................................ 133 D. Reaping the Benefits of WTO Membership ................................................................ 138 E. Conclusions ..................................................................................................................... 148 CHAPTER 6. MEDIUM-TERM PRIORITIES FOR TRADE INTEGRATION STRATEGY ............................................................................................................................... 151 A . Trade integration with the EU: follow pragmatic approach toward attaining realistic goals .................................................................................................................. 152 B. Trade integration with the CIS: expand cooperation based on WTO principles .... 157 C. Strengthening institutional framework for trade policy formulation ....................... 164 D. Conclusions ..................................................................................................................... 167 References................................................................................................................................... 169 Statistical Annex ......................................................................................................................... 175 LIST OF FIGURES Figure 1.1: The Value ofExported and Imported Goods and Balance ofTrade in Goods .......................... 4 Figure 1.2: The Value ofExported and Imported Services and Balance ofTrade in Services .................... 5 Figure 1.3: Dynamics ofTerms-of-Trade (TOT) Index. 1996-2003 ............................................................ 9 Figure 1.4: Commodity structure ofUkraine’s exports in 2003. percent ................................................... 11 Figure 1.5: Commodity structure ofUkraine’s imports in 2003. percent .................................................. 12 Figure 1.6: Geographic structure of exports. percent ................................................................................. 13 Figure 1.7: Indices ofphysical volumes and prices ofexports to the CIS and ROW ................................ 14 Figure 1.8: Growth Rates for Russia’s Imports from Selected Countries in 1996-99 ................................ 16 Figure 1. 9: Growth Rates for Russia’s Imports from Selected Countries in 1999-2003 ............................ 16 Figure 1.10: The seasonally adjusted indices of GDP in the CIS and ROW .............................................. 19 Figure 1.1 1: Real Effective Exchange Rate................................................................................................ 20 Figure 1. 12. Reorientation ofexports in Ukraine and Poland .................................................................... 21 Figure 1.13: Geographic structure ofimports, percent ............................................................................... 21 Figure 1.14: Ukraine’s export concentration .............................................................................................. 23 Figure 1.15: Concordances of the ESIs in Ukraine’s trade with the CIS and the EU ................................ 27 Figure