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Canada-Ukraine Free Trade Agreement-Patterns and Tendencies

Executive Summary

Effective from August 1, 2017, the Canada-Ukraine Free Trade Agreement (CUFTA) aims to improve market access conditions for Canadian and Ukrainian companies, including elimination of tariffs. Upon CUFTA’s entry into force, Canada immediately eliminated customs duties for 26.5% of its tariff lines resulting in 98.1% of Canada's tariff lines being duty free for imports from Ukraine. The largest tariff cuts under CUFTA included footwear, animal or vegetable fats and oils, textiles and apparel, raw skins, leather & furs, wood and wood products, plasticsFootnote 1. Exceptions comprised of: 1) gradual tariff elimination for certain vehicles; 2) global tariff rate quotas for some agricultural products (poultry, dairy products, eggs, wheat, barley, etc).

At the same time, Ukraine immediately eliminated custom duties for 34.7% of tariff lines and overall, 72.6% of Ukraine's tariff lines became duty free for imports from CanadaFootnote 2. The rest of the tariffs will be eliminated gradually in 3, 5 and 7 years. About 1% Ukraine’s tariff lines for some agricultural products from Canada will remain dutiable (live aimals, animal products, vegetables, vegetable oil, prepared food products). The largest Ukraine’s tariff reductions upon CUFTA’s entry into force in 2017 took place for preparations of vegetables, fruit, nuts, preparations of cereals and flour, cocoa preparations and confectionery, beverages, apparel and textiles, soap and cosmetics, cereals, etc.

CUFTA also contains commitments related to non-tariff measures in order to limit unjustified trade barriers, trade facilitation, mutual preferential access to public procurement opportunities, protection and enforcement of intellectual property rights, environmental standards, trade in digital products.

This analysis uses UN COMTRADE data, however, statistics on merchandise trade flows between Ukraine and Canada significantly differs depending on the reporter. There are several factors that may contribute to the difference including CIF vs FOB prices recording of imports and exports; transit time gap between the goods leaving the country of origin and entering the destination country; exchange rate differences; re-export and trans-shipment; misreporting for fraudulent purposes, etc. Most of the discrepancies in Canada-Ukraine trade data were observed for coal (HS2701), as well as for special purpose tariff positions (HS99), vehicles (HS87), pharmaceutials (HS30) etc.

After signing the CUFTA, Ukraine’s exports to Canada have been steadily growing and expanding much faster compared to other trade partners – up by 70% in 2017, 55% in 2018 and 9.4% in 2019 (as reported by Ukraine). However, Canada’s total exports to Ukraine contracted during 2018-2019, with a significant drop of almost 30% y/y in 2019 largely due to decreasing coal supplies from Canada. However, Canada’s non-coal export to Ukraine has been growing: from USD 90 million in 2016 to USD 115 million in 2019 or by 28% (as reported by Canada). The slowdown of Canada-Ukraine bilateral non-coal trade growth in 2019 was in line with the declining growth trend in total Ukraine’s trade as a result of the national currency appreciation and declining world prices on major Ukraine exported products (metals, etc).

After CUFTA’s entry into force, the following product groups of Canada’s exports to Ukraine expanded the most (in USD) at HS2 level: Fish and crustaceans (HS3), Machinery and mechanical appliances (HS84), Vehicles (HS87), Meat and edible meat offal (HS2), Electrical equipment (HS85), Instruments and apparatus (HS90), Electrical machinery (HS85), Residues and waste from food industries (HS23), etc. On the Ukrainian side, exports to Canada of Iron and steel (HS72), Cooper and articles (HS74), Preparations of vegetables (HS20), Machinery and mechanical appliances (HS84) and Vehicles (HS87) expanded the most in 2019 vs 2016 (in USD).

In order to evaluate how CUFTA affected the bilateral trade we built a gravity model that accounts for international trade flows among all countries. The gravity model estimates the signing of CUFTA to have increased total Ukrainian exports to Canada by 6,5% from 2016 till 2018. At the same time, it was estimated that CUFTA did not have a significant effect on the dynamics of total Canadian exports to Ukraine during this period. However, CUFTA’s effect appeared to be stronger for certain product groups at HS2 level (up by 2-6%): Fish (HS03), Pharmaceutical products (HS30), Electrical machinery (HS85) etc. According to our estimations, CUFTA has not yet considerably affected the trade dynamics due to the short time period it has been in effect – less than 1.5 years of analysed time frame. We expect that it will grow in the future, as FTAs need more time to impact trade.

We also indentified promising goods for importing from Canada to Ukraine, i.e. product groups, in which Canada can expand its export to Ukraine, both in terms of strengthening existing positions and opening up new markets. Methodologically, the promising products were identified according to several criteria:  1) positive revealed comparative advantages (RSA) in this product in Canada and negative - in Ukraine; 2) significant potential for increasing Canada’s exports to Ukrainian market based on the assessment of the gap between current and potential export volumes, or “undertrade” (estimated by the gravity model). The analysis was based on UN Comtrade data for 2018 at HS6 level.

Accordingly, the study suggests a list of 181 promising products with significant volume of potential increase of Canada’s exports to Ukraine (over USD 50,000), including:

Other important items from the list of promising products include: Boilers, machinery and mechanical appliances; parts thereof (61 goods), Iron and steel (21 goods), Plastics and articles thereof (21 goods), Vehicles; other than railway or tramway rolling stock, and parts and accessories thereof (19 goods) and Paper and paperboard; articles of paper pulp, of paper or paperboard (19 goods).

Moreover, the study identifies, which Ukrainian imports from non-FTA countries (e.g. Turkey, USA and Japan, etc.) can be substituted with Canadian products. We found out that out of 301 products imported by Ukraine from non-FTA countries (at HS6 level), Canada already exports 34 goods to Ukraine. There are additional 209 products, which Canada exports to Europe and Central Asia and can potentially export to Ukraine.

For 12 out of 34 products Canada already supplies to Ukraine, Canadian value per unit was lower than the mean value per unit of Ukrainian import from other countries. They are considered the most promising for the intensification and substituion of import from other countries, including:

Out of 209 products that Canada does not yet supply to Ukraine, but sells to Europe and Central Asia, 47 were cheaper than existing imports to Ukraine. Moreover, 15 products from this list overlap with the list of promising products, in particular:

The study also identifies new products from Canada and Ukraine that entered each other’s markets under the CUFTA. Most of the top new products supplied from Canada to Ukraine were machinery and mechanical appliances, electrical machinery, fish products, and vehicles. Moreover, exports of most of these products to Ukraine have been gradually increasing throughout the 2017-2019 period. For example, Canada’s exports of prepared cranberries to Ukraine increased 17 times from 2017 to 2019. While most of new products supplied from Ukraine to Canada belong to metal products (HS 72, 73, 74), as well as machinery, textiles, furniture (such as seats; convertible into beds, gas-turbines and curtains).

Also, Ukraine relied the most on Canadian imports of maple sugar, soya beans, frozen meat of swine, prepared cranberries. While for Canada the highest reliance on supplies from Ukraine were observed for non-alloy pig iron, apple juice, and live animals n.e.c.

List of Abbreviations

 

Request a full copy of this report by contacting the Canadian Trade Commissioner Service in Ukraine.  

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