China wants to force closer ties with Ukraine

China reiterated its proposal to create a free trade area with Ukraine. Given the form and the circumstances of the offer, it is more reminiscent of an ultimatum.

The Kiev-based news portal Apostrophe informed that the draft agreement on the establishment of a Chinese-Ukrainian free trade area was prepared in a secret, and now work on its final shape is near completion.

“A meeting of the subcommittee on commercial and economic cooperation, as part of an intergovernmental committee, was held as early as 2015. Our subcommittee heads at the working level informally discussed the issue. Both on the Ukrainian side and on our side the experts are analyzing and preparing opinions concerning this cooperation. If there are any suggestions on the part of Ukraine, the Chinese side is ready to accept them and to listen to them,” declared the Chinese ambassador in Kiev, Du Wei, during a press conference at the end of April.

Du Wei also announced China’s willingness to open its borders to Ukrainians, expecting that Kiev would do the same for Chinese citizens.

China will never give up

The statements made by the Chinese diplomat were another attempt on the part of China to broach the subject of a free-trade area. In the spring last year, during a debate on the prospects of the New Silk Road, the then-Chinese Ambassador in Kiev, Zhang Xiyun unexpectedly announced the need to create such an area: “It is necessary to plan bilateral cooperation at a strategic level. It is necessary to start a dialogue about the creation of a free trade area.” (read more)

The Ukrainian authorities kept silent about the project, but Chinese do not give up easily. At the beginning of November 2016 the Chinese ambassador submitted a proposal to the Ukrainian government to “analyze the possibility” of the creation of a free trade zone covering the two countries. The implementation of the infrastructural project of the trade route should be accompanied by attracting Chinese investment to Ukraine ‒added the diplomat.

Kiev’s response was immediate. The representative of the Ukrainian government, Deputy Minister of Economic Development and Trade Nataliya Mykolska stated that Ukraine wasn’t considering the creation of a free trade area with China.

“When planning talks with Beijing, it is worth remembering that China does not make swift decisions. If the signal on the free trade zone was announced publicly, this means that a lot of reflection, discussions and internal debates took place earlier. And it is unlikely that this decision will be changed by Beijing. Time is working in favor of Beijing rather than Kiev,” commented Oleg Ustenko from the Blazer Foundation.

Involuntary investments

The Chinese have the upper hand in talks on the possible creation of a free trade area. In 2012, the Chinese government transferred USD3bn to Kiev in 2012 for the purchase of grain from the Dnieper steppes and Ukraine’s purchase of agricultural equipment from Chinese manufacturers. The money disappeared, the Chinese have not received the grain to this day.

As a result, Beijing submitted a complaint against Ukraine to the arbitration service of the Grain and Feed Trade Association in London and – according to experts ‒ has a solid chance of winning the dispute. In addition, China is hinting that it could also utilize another tool.

“China invested about USD7bn in Ukraine by purchasing government bonds. Now the main task is to fully activate this huge amount, to revive agriculture, the energy sector, infrastructure and other spheres of the economy which need it, which in turn will generate jobs, taxes and trade flows,” said a representative of the Chinese Embassy, indicating China’s areas of interest during the Chinese-Ukrainian business forum at the end of April.

According to Ustenko, while it is doubtful that Kiev will be able to avoid entering China’s orbit, Ukraine has several strengths that could be used in the negotiations. First of all, cheap labor. The average wage in Chinese cities of USD 1,000 is currently five times higher than the amount seen as a good wage for an Ukrainian worker. The increased demand for agricultural products in China also works to Ukraine’s advantage. Ukraine will not have to deal with strong protection of the internal market, as was the case during negotiations with the EU and Canada. Especially since the Ukrainian agricultural producers will be able to offer to Chinese consumers goods certified by European Union institutions, i.e. of proven quality.

In Ustenko’s opinion, China is a stable economic partner because it makes decisions that are calculated for many years to come, and Ukraine, which is located on route to the EU, is interesting for them in the long term. The relocation of production to Ukraine could mean savings of 5-10 per cent for Chinese companies.

The pros and cons

The Chinese proposal is a response to Ukraine’s association with the EU, which opened the Ukrainian market to goods from Europe, putting its producers in a privileged position in relation to Chinese suppliers, assessed Andrej Prikhodko, an analyst at Ukrsocbank.

The chairman of the Committee of Economists of Ukraine Andriy Novak believes that impoverished Ukraine interests China not so much as a target market, but as a platform enabling the duty-free supply of China’s output to the market of the European Union.

“Ukraine has signed an agreement on a free trade area with the EU. China is therefore very interested in launching its own production in Ukraine in order to sell goods on the European market, which has a high demand and is solvent,” he argued. In his opinion, such a solution would be beneficial for Kiev and would guarantee the influx of investment.

According to Kristina Avramchenko, from the Institute for Social and Economic Studies, the creation of a free trade area would primarily benefit the Chinese economy. The trade turnover between China and Ukraine is large and reaches 10 per cent of Kiev’s total trade exchange. China is the fourth largest recipient of Ukrainian exports and the second largest supplier of goods after Russia.

“A quick analysis of the prospects for a free-trade area shows that China will benefit more from such an agreement and that this issue should be approached very carefully. Ukraine should first determine its own strategy for economic development, and then should conclude free trade agreements in accordance with its priorities, taking into account the goods in relation to which we can make concessions and lift import duties, as well as items which must be protected at the beginning so they can become competitive in the future,” argues Kristina Avramchenko.

A free trade area could help Ukraine as it would lift the existing customs barriers, which are currently against Kiev’s interests. The average customs duty in the most-favored-nation regime at the Chinese border is 12.33 per cent and on the Ukrainian border it is only 3.04 per cent. The only condition is that companies in Ukraine have to produce something that would be interesting for the Chinese recipients. For now, however, China has significantly more products in its offer with which they can enter the Ukrainian market: shoes, clothing, machine industry products, electrical equipment, glass, plastic and metal.

“We should not be afraid that China will flood Ukraine with its production,” argues economist Sergei Guriev from the European Bank for Reconstruction and Development. He notes that Ukraine is currently not among the states with a large internal market, and therefore its companies should be oriented towards external markets and should join the global production chains.

“Kiev needs trade agreements with all the key partners. Even the smallest share of the Chinese market means huge exports for Ukrainian companies, the creation of new jobs in Ukraine,” commented Guriev in an interview with the Kiev-based journal “Economichna Pravda”.

As noted by Sergey Povazhniuk from the State agency Ukrainian Industry Expertise, China only concludes free trade area agreements with its satellite countries, and Ukraine has nothing to offer China in the area of trade exchange.

“The only solution for Ukraine is to persuade China to treat us as a production platform and to move its factories producing for the EU market to our country. These could be assembly plants, and they will start producing some components locally. For this purpose Ukraine should begin talks with China on investment protection,” he argued.