Free trade with Turkey: New opportunities or threats to Ukrainian producers?

In early August, the Turkish parliament ratified the Free Trade Agreement (FTA) with Ukraine, following 12 years of negotiations.

The final step for the agreement to take effect is its ratification by the Ukrainian parliament.

Two months after confirmation of the completion of domestic procedures, the FTA between Ukraine and Turkey will come into force.

"After the agreement's ratification, all Black Sea coastal countries, except Russia, will be united in a single economic space," said Ukraine’s First Deputy Prime Minister and Minister of Economy, Yulia Svyrydenko, following the Turkish parliament's decision.

Return to 2021

The Ukrainian parliament is currently on break and will reconvene on August 21. For the time being, Ukrainian deputies (at least those who could be reached by LIGA.net) are not ready to discuss the agreement, citing reasons such as being out of town, unfamiliarity with the issue, or the need to consult with businesses.

Meanwhile, the business sector, particularly the light industry, is actively preparing for such consultations.

Since 2011, Ukrlegprom has been trying its best to hold back the signing of the FTA with Turkey in terms of not applying zero customs duties on Turkish finished products. Later, this became a common industry position.

Industry representatives argued that free access to the Ukrainian market for Turkish producers would gradually displace domestic producers, citing differences in government support, tax rates, and general attitudes toward small and medium-sized enterprises (SMEs) in the two countries.

Before Turkish President Recep Erdogan visited Kyiv in early February 2022, during which the FTA was expected to be signed with President Volodymyr Zelenskyy, business and government came to a joint Action Plan for light industry. This plan was intended to be part of a document accompanying the FTA with Turkey.

The Ukrainian Cabinet of Ministers has already approved the Action Plan to support the light industry for 2022-2024 by its Decree No. 169 of February 16, 2022. It also established a transitional period for zeroing customs rates on finished goods, namely:

- the duty on 48 codes of the Ukrainian Classification of Goods for Foreign Economic Activity (UCGFEA) is immediately "zeroed";

- in 3 years – for 155 codes of the UCGFEA;

- after 5 years – for 359 codes of the UCGFEA.

"We are now returning to the moment that was, let's say, in December 2021 – January 2022. It's an active process of consultations and negotiations with government representatives," said Ukrlegprom Chairwoman Tetiana Izovit in a comment to LIGA.net.

War is no help

There have been no meetings with government representatives since the Turkish parliament ratified the FTA, according to Tetiana Izovit, but such meetings are being prepared.

On the day Turkey ratified the FTA, Ukraine’s Trade Representative Taras Kachka stated that the terms of the 2022 FTA would be revised.

"The agreement signed before the invasion needs improvement. Ukraine is very grateful to Turkey for understanding the situation. Last fall, the countries signed a memorandum in which Turkey agreed to review quotas on certain Ukrainian goods," Kachka said.

Ukrlegprom is already working with industry enterprises on the necessary mechanisms of the roadmap that could realistically be implemented, not just on paper. There is an understanding that the 2022 Action Plan needs to be adjusted to the realities of war.

"If there are no real mechanisms that work for light industry enterprises, the number of such enterprises will decrease. In general, this is a threat of bankruptcy and closure for light industry enterprises," said Tetiana Izovit.

Currently, the key measures for supporting the light industry sector according to Ukrlegprom include:

- Continuing the installment mechanism for VAT payment when purchasing equipment. This was introduced in 2018 and is valid until the end of the current year;

- Introducing a preferential corporate tax regime for operating manufacturing enterprises;

- Changing approaches to tender procurement (where the winner receives 60%, and the remaining participants get 25% and 15% of the lot), which should increase the number of participants and reduce the risk of non-fulfillment of contracts.

"As for public procurement, the key here is prioritizing domestic manufacturers in state procurement. In the third year of the full-scale war, all customers already know that domestic light industry enterprises are fully capable of producing almost the entire range of items needed by the Armed Forces of Ukraine and other military formations," Tetiana Izovit noted.

A painful issue for the Ukrainian light industry is also the decline in exports due to the war.

"Everyone knows that Ukraine manufactures brands under orders from European countries. But the longer the war lasts, the more European customers reduce their orders. Last year, our exports fell by 50%. This year, the negative trend continues. Imports exceed exports by nine times. This has not been the case in the industry for decades. Therefore, I sincerely hope for the adoption of the necessary compensatory mechanisms by the government at the stage of ratifying the FTA with Turkey," Izovit added.

Benefits of the Agreement

The only advantage of the FTA with Turkey for the light industry, according to Tetiana Izovit, is the elimination of tariffs on fabrics and knitted fabrics.

"Currently, Ukraine cannot fully meet its raw material needs independently – neither the full range of products nor the quantity – and is import-dependent. The agreement will allow our manufacturers to use raw materials without paying tariffs to produce finished goods and export them to EU countries with a EUR1 certificate," Izovit said.

The priority here is that Ukraine is geographically closer to the European Union countries than Turkey.

Farmers may also benefit from the FTA with Turkey. The reduction of Turkish duties on a number of products, including chicken, beef, fish and other aquaculture, milk, rye, buckwheat, wine, confectionery, etc., opens up many opportunities for the agricultural sector.

At the same time, reducing tariffs on Turkish products will allow farmers to purchase Turkish fertilizers and plant protection products at lower costs.

The metallurgical sector, for its part, should be satisfied that the export duty on scrap metal of €180 ($200) per ton has been maintained, considering that Turkey is one of the main importers of scrap metal.

Ukrainian metallurgical plants have suffered for many years from a scrap metal shortage, as Turkish competitors buy it up. Turkish metal plants have better logistics – being located on the Black Sea coast – and significant subsidies from their government. Thus, they can afford to offer a higher price for raw materials to Ukrainian collectors, even considering the Ukrainian export duty.

Eliminating this duty under the FTA would have significantly harmed Ukrainian metallurgy. Therefore, the agreement to maintain it is a significant diplomatic success for Ukraine.

In general, the FTA with Turkey provides for the establishment of 0% duties on 10,337 commodity items, which is 95.6% of the total number of goods exported by Ukraine.

For another 1,348 items, tariff quotas or reduced duties will apply. On the other hand, Ukraine will open its market to 99.6%. The list of goods Ukraine can export duty-free includes over 10,000 items, while Turkey’s list for Ukraine includes 9,500.

The FTA with Turkey is part of the Ministry of Economy's overall strategy to expand Ukraine's presence in the European-Mediterranean Free Trade Area (Pan-Euro-Mediterranean), which is the number one destination for Ukrainian exports. Currently, Pan-Euro-Mediterranean countries account for 54% of Ukraine's trade.

Goods produced from Turkish raw materials will be considered Ukrainian after the agreement comes into force and can enter all European countries duty-free under the EUR1 certificate.

According to the State Customs Service, in 2023, Ukraine exported goods worth $2.4 billion to Turkey (6.5% of Ukraine's total exports). In 2023, imports of goods from Turkey to Ukraine amounted to $4.7 billion, making Turkey's share in Ukrainian imports 7.4%.