Accession to the EU: Trade Scenarios & Challenges

Ukraines Accession to the EU: Trade Scenarios and Institutional Challenges Oleh Nivievskyi Kyiv School of Economics and Freie Universit t Berlin SITE Development Conference December 4th, 2024

Outline Background EU-Ukraine agricultural trade scenarios* Issues beyond trade scenarios** EU Ukraine trade regime Administrative challenges and institutional capacity gap for Ukraine Private sector challenges for Ukraine EU Agricultural support * based on Nivievskyi and Bogonos, 2024 (forthcoming) **based on Nivievskyi, Bogonos, and Grigoriadis 2024 (forthcoming)

1. Introduction WAR the LARGEST SHOCK since 1991 Nivievskyi, Oleg and Goryunov, Dmytro and Nagurney, Anna, War-Induced Damages and Reconstruction in Ukraine (May 17, 2024). Available at SSRN: https://ssrn.com/abstract=4831914

1. Introduction War Damages UNBEARABLE for Ukraine ALONE Nivievskyi, Oleg and Goryunov, Dmytro and Nagurney, Anna, War-Induced Damages and Reconstruction in Ukraine (May 17, 2024). Available at SSRN: https://ssrn.com/abstract=4831914

1. Introduction EU Accession of Ukraine: Trade Scenarios and Issues Beyond Political economy behind the EU enlargement inside the EU itself is very difficult Accession negotiations opened in December 2023 May 2022: Solidarity Lanes and ATMs to facilitate exports from Ukraine Afterwards: imports to the EU surged and neighboring countries(farmers) protested quite heavily and put a pressure on the EU Commission This signals that the EU accession for Ukraine will not be easy June 2024: ATMs (with emergency clause for 7 products) for another year; Next decision on ATMs is in spring 2025 Possible trade scenarios after the spring 2025? Possible trade scenarios after the spring 2025? Ukraine s role as a global agricultural player and its contribution to global food security Issues beyond trade scenarios: Impact on Ukraine s agricultural Issues beyond trade scenarios: Impact on Ukraine s agricultural competitiveness competitiveness

2. Trade Scenarios EU became a major trade partner of Ukraine TotalexportfromUkraine,bn USD ExportfromUkraine tothe EU,bnUSD 80 30 25 60 20 15 40 10 20 5 0 0 2017 2018 2019 2020 2021 2023 2017 2018 2019 2020 2021 2023 Agri-food Non-Agri-Food Agri-food Non-Agri-Food TotalimporttoUkraine,bn USD ImportinUkraine fromthe EU,bn USD 80 40 60 30 40 20 20 10 0 0 2017 2018 2019 2020 2021 2023 2017 2018 2019 2020 2021 2023 Agri-food Non-Agri-Food Agri-food Non-Agri-Food

2. Trade Scenarios Methods and data AGMEMOD model (also used by the EU Commission) 2023 version with 2024 database Econometric dynamic partial equilibrium regional model Actively used in Ukraine since 2016 Data: State statistics service of Ukraine, FAO, USDA

2. Trade Scenarios Scenarios description Baseline Baseline ATMs ATMs Free Trade Free Trade EU EU membership membership ATMs in 2025 and Free Trade afterwards until 2033 Trade with the EU ATMs in 2025 DCFTA in 2026- 2033 (with 40 TRQs) ATMs in 2025 and until 2033 ATMs in 2025 and Free Trade afterwards until 2033 Additional compliance costs (up to 10%) for agricultural producers

2. Trade Scenarios Trade modelling results: wheat 000 t 000 t Soft wheat Soft wheat 22,000 35,000 30,000 17,000 25,000 12,000 20,000 15,000 7,000 10,000 2,000 5,000 2000 2010 2021 2022 2023 2024 2025 2026 2027 2030 2033 0 -3,000 20002010202120222023202420252026202720302033 Total exports_Baseline Exports to EU_Baseline Total exports_EU Exports to EU_EU Production_Baseline Production_EU

2. Trade Scenarios Trade modelling results: corn Maize Maize 000 t 000 t 50,000 60,000 45,000 50,000 40,000 35,000 40,000 30,000 25,000 30,000 20,000 15,000 20,000 10,000 5,000 10,000 0 20002010202120222023202420252026202720302033 0 Total exports_Baseline Exports to EU_Baseline Total exports_EU Exports to EU_EU Production_Baseline Production_EU

2. Trade Scenarios Trade modelling results: sunflower seed Sunflower seeds Sunflower seeds 000 t 000 t 18,000.0 2,000.0 1,800.0 16,000.0 1,600.0 14,000.0 1,400.0 12,000.0 1,200.0 10,000.0 1,000.0 8,000.0 800.0 6,000.0 600.0 4,000.0 400.0 200.0 2,000.0 0.0 0.0 20002010202120222023202420252026202720302033 Total exports_Baseline Exports to EU_Baseline Total exports_EU Exports to EU_EU Production_Baseline Production_EU

2. Trade Scenarios Trade modelling results: sunflower oil Sunflower oil Sunflower oil 000 t 000 t 8,000.0 8,000.0 7,000.0 7,000.0 6,000.0 6,000.0 5,000.0 5,000.0 4,000.0 4,000.0 3,000.0 2,000.0 3,000.0 1,000.0 2,000.0 0.0 1,000.0 0.0 Total exports_Baseline Exports to EU_Baseline Total exports_EU Exports to EU_EU Production_Baseline Production_EU

2. Trade Scenarios Trade modelling results: poultry meat Poultry meat Poultry meat 000 t 000 t 1800 600 1600 500 1400 400 1200 1000 300 800 200 600 400 100 200 0 0 20002010202120222023202420252026202720302033 Total exports_Baseline Exports to EU_Baseline Total exports_EU Exports to EU_EU Production_Baseline Production_EU

3. Issues beyond trade scenarios: competitiveness Setting the Framework: Competitiveness % Competitiveness = % Productivity + % *Poutput- % *Pinput (Nivievskyi et al, 2010) Poutput output prices Pinput input prices How the EU membership will affect agricultural competitiveness of Ukraine? 3 dimensions: Impact of the trade regime Impact of the EU acquis in agriculture and related areas Impact of the agricultural support (Common Agricultural Policy of the EU)

3. Issues beyond trade scenarios: competitiveness Trade policy regime is beneficial for Ukraine s agricultural competitiveness TotalexportfromUkraine,bn USD ExportfromUkraine tothe EU,bnUSD 80 30 25 60 20 15 40 10 20 5 0 0 2017 2018 2019 2020 2021 2023 2017 2018 2019 2020 2021 2023 Agri-food Non-Agri-Food Agri-food Non-Agri-Food TotalimporttoUkraine,bn USD ImportinUkraine fromthe EU,bn USD 80 40 60 30 40 20 20 10 0 0 2017 2018 2019 2020 2021 2023 2017 2018 2019 2020 2021 2023 Agri-food Non-Agri-Food Agri-food Non-Agri-Food

3. Issues beyond trade scenarios: competitiveness State institutions lack capacity might hinder agricultural competitiveness Ukraine must be able to implement the extensive EU agricultural acquis which, together with the CAP, includes regulation of markets and standards in the areas of farming practices, animal and plant health, food safety, and environmental and animal welfare. Current bottleneck technical and financial capacity of state institutions in Ukraine (Nivievskyi, 2024) If they work efficiently, they can crowd in private investments 1 to 4 If not additional burden for the business and drag on competitiveness

3. Issues beyond trade scenarios: competitiveness EU agricultural acquis compliance costs might hinder agricultural competitiveness EU agricultural acquis+ CAP is very demanding Require additional private investments to comply with: Expect up to 10% of the total costs (EU Commission 2014) Not critical to agricultural competitiveness of Ukraine Moreover, there are studies (Halytsia et al, 2024) demonstrating that Ukrainian farms have a capacity to increase their output by almost 20% and simultaneously contract harmful environmental impact by 16%

3. Issues beyond trade scenarios: competitiveness CAP subsidies might hinder agricultural competitiveness TFP trends Ukraine russia Poland Romania France Germany 160 160 160 160 160 160 140 140 140 140 140 140 120 120 120 120 120 120 100 100 100 100 100 100 80 80 80 80 80 80 60 60 60 60 60 60 40 40 40 40 40 40 20 0 20 20 20 20 20 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 0 0 0 0 0 Total Factor Productivity index Output index Input use indes 1998 1991 2005 2012 2019 1996 2011 1991 2001 2006 2016 2021 2021 1991 1997 2003 2009 2015 1991 1997 2003 2009 2015 2021 1991 1996 2001 2006 2011 2016 2021

3. Issues beyond trade scenarios: competitiveness CAP subsidies might hinder agricultural competitiveness 4.5 4 3.5 Tonnes/hectare 3 2.5 2 1.5 1 0.5 0 2000 2005 2010 2014 2015 2016 2017 2018 2019 2020 2021 2022 wheat maize soya sugar beet rapeseed sunflower seed

3. Issues beyond trade scenarios: competitiveness CAP subsidies might hinder agricultural competitiveness Expected amount of CAP subsidies is 10-14 bn euros Politics: CAP budget has been politically set to decrease If there no changes to CAP other EU countries will get less This will not fly politically Economics of subsidies: bad for efficiency and productivity Conclusion: Ukraine has to suggest an option to the EU

Conclusions EU-Ukraine trade scenarios look favorable for Ukraine, while the EU membership is expected to decrease to some extend production and exports Further pressure is possible (if not properly addressed) Institutional and private capacity to comply with the demanding EU agricultural acquis EU agricultural support (might delay the accession and is negative for productivity)