Trade imbalance

There are many reasons, however, there is no such an obstacle for changing the trade balance which could not be eliminated by reforming the Ukrainian economy. And, oddly enough, in order to understand the problems of our foreign trade, first of all, we need to look at the structure of our domestic production.

Last year, the index of industrial production in Ukraine amounted to 99.8%, meaning that there was no production growth. If we compare it with the previous year, it had even decreased by almost 3%. The volumes of the mining industry increased insignificantly – by 2%. If we consider the processing industry, the profit was made only by the production of chemical products (+16.5%), vehicles (+9.5%) and refined petroleum products and coke (+3.3%). The production of food products decreased by almost 2%, textiles and clothing – by 4.6%, computers and electronics – by 3.7%, equipment – by 17.8%.

The situation with the production of agricultural products is fundamentally better. During the year, it increased by 7.8%: the agricultural enterprises increased the volume of crop production by almost 15% and livestock production – by 3%.

Now let’s look at the commodity structure of our export. Almost 40% is agricultural and food products (during the year the export grew by 3.7%), 25% is production of the metallurgical complex (increased by 17.2%), 11.6% – engineering products (+10.8%), 9.2% − mineral products (+9.6%), 5.4% − chemical industry (+17.4%), 4.4% − wood (+20.5%), 3% − industrial products (+6.9%) and 2.6% – light industry products (+13.3%). As you can see, the export is growing in all fields, but the trade balance is not improving, because the lion’s share of our export is raw materials. On the one hand, its cost is, in any case, lower than the cost of the finished products, and on the other hand, it depends on the current situation in the world markets, which Ukraine cannot influence. Therefore, even increasing the volume of export and opening new markets doesn’t help us earn much, because we sell cheap raw materials in these markets.

It is clear that it is much easier to sell raw materials than finished goods: production costs are lower, access to markets is easier, quality requirements are less strict. And most importantly, this business is profitable, as it requires a minimum of investment and gives quick returns. Therefore, it is quite logical that domestic exporting producers are eager to rather produce raw materials than goods with high added value. Business is always looking for the easiest and most comfortable way. And that is what we need the state regulation in the economy for – to simplify other ways for business, to encourage it to work in other industries, to make domestic producers prepare finished products instead of just “shoveling the wheat”. It will help bring their products not only into the port of another country but also to the shelves of its local supermarkets. But so far, the picture is unchanged, Ukraine keeps increasing production of raw materials and reducing the production of goods of deep processing.

This imbalance is also noticeable in the domestic market – the lack of finished goods of Ukrainian production encourages a rapid increase in import to Ukraine. With an annual export growth of almost 10%, the import grew by 16.7%. Having sold $43.2 billion worth of goods to other countries, we bought $52 billion of goods, which makes a negative result in our foreign trade.

During the year, we increased the import of industrial goods by 34%, light industry products by 18%, engineering products by 18.3%, and mineral products by 16.2%. Even the import of food products to agricultural Ukraine increased by 18.5%. And if earlier the growth of import in most cases was associated with the import of fuel commodities to Ukraine, now it is a group of industrial goods of high added value.

Even our trade with the EU is beneficial only if we talk about the percentage of growth. Indeed, during the year, the exports to the Commonwealth countries increased by 15.7%, and our import from the EU − by 12.4%. But the money picture is different: we sold $18.4 billion worth of goods to the EU and bought $21.2 billion worth of products from the EU. If we do not change the commodity structure of our export, the balance will keep being not in our favor. We sell more cheap products to the EU and buy less but expensive goods from the EU.

No program of import substitution, except for that in the defense industry, hasn’t yet been proposed by the government. Despite the Declaration of business support, the fake search for investors, and the focus on the development of small and medium-sized enterprises, the state is not too concerned about the growth of domestic producers of finished products. Huge holdings that export raw materials are clearly more appealing to the state because these holdings provide the country with foreign exchange earnings here and now. The prospects for manufacturers of finished products to significantly increase export earnings after entry into foreign markets are too distant, thus they are bare of any interest for the officials. This is confirmed by statistics – only 11% of small and medium-sized enterprises are directly or indirectly engaged in export, the rest work exclusively on the domestic market. As a rule, they lack a basic understanding of foreign trade processes, contacts and the like for entering foreign markets. And the state may well help them in this.

Also, in order to overcome the deficit in foreign trade, in addition to the development of the state’s own production of finished goods, the government should turn to the development of the service sector, because it is there that the highest added value is formed. Unlike foreign trade in goods, our trade in services is in surplus. In the first 9 months of last year, Ukraine exported $8.7 billion worth of services and imported $4 billion worth of them. Of course, it is impossible for us to earn as much on services as we do on the sale of products in the short-term prospects, but it is definitely worth to pay attention to the positive trend of this direction. Because with the growth of services export by 11%, their import grew only by 5% and we do have the potential to continue this trend and increase the volumes.

From 2017 to 2018, the export of franchise services increased by 82%, the export of financial services – by 46%, and that of processing services by 36%. Given our favorable location, we could well increase, for example, the volumes of transport or touristic services. And there are no obstacles here, except for the reluctance of the central and local authorities to invest in the development of transport infrastructure and the renewal of tourist attractions. The export of services will not only help us to at least partially compensate for the deficit in trade in goods but will also reduce our dependence on commodity markets.

Now the volume of foreign exchange earnings in Ukraine directly depends on commodity prices in foreign markets, on the processes that we cannot influence. We can only wait with fear to see what will be the result of the trade confrontation between the US and China, whether the energy will rise in price, whether it will be a fruitful year for our main competitors in the grain market, or whether the economies of our trading partners will grow. Minimizing this uncertainty factor is probably our main short-term goal.

In addition, the government should pay more attention to signing the foreign trade agreements by Ukraine. When signing an agreement on a free-trade zone, it is worth remembering that we do not only open access to these markets for our exporters, but also invite importers from these countries to our market. And in fact, this cooperation may not be beneficial for Ukraine. A striking example is the plans of the Ukrainian government to sign an FTZ agreement with Turkey, which already imports industrial goods, light industry goods, and tourist services to Ukraine, while not being ready to open its market for our food products. Therefore, our benefits from such cooperation will be very doubtful.

In General, Ukraine does not fully use its export potential in the trade with 75 countries, losing about $6 billion worth of additional revenues annually. There is a lot to choose from, but it is necessary to choose wisely – out of those countries that are interested not only in our commodities, have capacious markets and small volumes of import to Ukraine. For example, India is such a country, but the FTZ with it is not even mentioned in the government.

Also, Ukraine is very poorly integrated into the global value chains – when the country exports spare parts or components for the production of the final product. This will significantly increase our revenues from export, but for this, we need to produce technological products, and it is problematic for us – only 5% of our export can be attributed to medium or high-tech. To increase this share, we need investment and technology, which we have not yet managed to find. Even the creation of technological or innovation parks in Ukraine has been slowing down for years.

Despite the fact that changes in the structure of production in Ukraine will require considerable time, the export should be increased, but not only through signing the FTZ agreements. Often, to improve the performance of foreign trade, it is enough to sign large infrastructure contracts with other countries, participate in international exhibitions and events that would allow our producers to get to know the markets of other countries and help them enter these markets. Ukrainian business still lacks knowledge about the existence of trade agreements and the potential opportunities they offer. It is very difficult for exporters to access information on export procedures and formalities, market access requirements, distribution channels, packaging requirements, labeling and duty-free access. Large export-oriented companies have considerable experience and easily find new markets, but small producers, even if their products have a large added value, are reluctant to become the exporters. Firstly, they often do not have the necessary knowledge, and secondly, they lack additional human resources to perform all the necessary formalities. The task of the state is not just to open the market of another country, but to assist those who cannot cope with this task on their own in entering this market.

Text by Valentyna Yushchenko