India-Ukraine: Exploring the upside of a trade agreement

• India exports to Ukraine with the trade agreement were recorded at around US$ 0.40 billion in 2018 while imports stood at US$ 2.28 billion, leading to a trade deficit of US$ 1.87 billion.
• India has signed a protocol with Ukraine for cooperation in sectors such as leather products, tea, gems and jewellery and tobacco.
• Ukraine mainly sources its imports from Russia, EU and China, while India faces high tariffs in its key products of interest.
• CATR expects that India’s gain in the Ukrainian market would hover around US$ 85.5 million to US$ 102.6 million through reduction of tariffs in these product categories.

The 4th Meeting of India-Ukraine Working Group on Trade and Economic Cooperation (IU-WGTEC), under the India-Ukraine Inter-Governmental Commission on Trade, Economic, Scientific, Technical, Industrial and Cultural Cooperation was held in New Delhi in April, 2019.  During this meeting, India and Ukraine signed a protocol that deals with review of trade and cooperation in the fields of small and medium entrepreneurship, technical regulation, PPP and investment. Ukraine wants to explore the Indian market for agriculture while India wants to capture the Ukrainian market in various products with emphasis on leather, tobacco, gems and jewelry and tea sectors.

Ukraine has great economic potential as a developing country, since it possesses a relatively cheap labour force and favourable climatic conditions which make it very attractive for foreign investors. Ukraine’s main trading partners are Russia, EU and China.

It prominently exports ferrous and non-ferrous metals, fuel, petroleum products, cereals, animal or vegetable fats and oils, iron and titanium ores and concentrates, electrical machinery and equipment, rape or colza seeds, soybeans and other oilseeds and oligeneous fruits and machinery and mechanical appliances among others. Ukraine’s major imports are petroleum oil and oil from bituminous minerals, petroleum gas and coal, machinery and mechanical appliances, electrical machinery and equipment, vehicles, plastic and articles and pharmaceuticals among others.

A look at the import basket indicates a huge potential for Indian exporters. It has been seen that India’s exports to Ukraine have stayed relatively flat from US$ 0.43 billion in 2008 to US$ 0.40 billion in 2018. On the other hand, imports have increased at a brisk pace from US$ 1.49 billion in 2008 to US$ 2.28 billion in 2018. As a result, the trade deficit has also surged during the period from US$ 0.97 billion to US$ 1.87 billion. The main product contributing to this deficit is sunflower seed oil as India imported US$ 1.83 billion in 2018.

This CATR research endeavours to identify products that could be helpful for India to increase its exports if it manages to reduce tariffs by entering into a trade agreement with Ukraine.

The top twenty products selected in the table below have been formulated after considering various factors. We can observe from the table that India has a very low share in the Ukrainian market in almost all the 20 products. If we ponder upon India’s export growth to Ukraine in 2017-18, fish & crustaceans and natural or cultured pearls have performed astonishingly. In the same period, rubber and articles, organic chemicals, inorganic chemicals, footwear, cereals and edible vegetables have also performed quite well followed by miscellaneous chemical products, oilseeds, leather, sugar and products.

Table 1: Major export products which have potential in Ukraine

Source: ITC Trade Map

The table below gives a deeper insight into the reasons behind India’s low share in Ukraine’s imports. It can be inferred that Ukraine is sourcing most of the below mentioned products from Russia, Europe and China. India is facing high tariffs mainly on footwear, apparel, leather, vegetables and sugar as compared to European countries. Ukraine and EU have provisionally applied their deep and comprehensive FTA (DCFTA) since January 1, 2016. This agreement facilitates both sides with relatively open markets for goods and services based on predictable and enforceable trade rules, resulting in lower advalorem tariff on EU products.

In table 3 we present our analysis on the export potential of Indian products that can be realized through tariff reduction. In this regard, we assume two scenarios with India tapping 25% and 30% of unexplored potential in Ukraine. The figures indicate gain in export value in both scenarios in US$ million.

Table 2: Product-wise tariffs and competitors faced by India in the Ukraine market

Source: ITC Trade Map

It can be observed that apparels, footwear, leather, rice have the highest potential upside if tariffs are reduced. If we increase exports in the specified products mentioned below we can expect a gain of US$ 85.5-102.6 million. The figures could be higher if we increase the product range to other products such as machinery and mechanical appliance, vehicles and electrical and other equipment among others.

Table 3: India’s export potential product wise in Ukraine

Source: Calculations based on data from ITC Trade Map, export values in US$ million

The Government of India has to negotiate hard to ensure easier access for Indian exporters to Ukraine in these product categories. The trade deficit is already quite high and has been increasing over the years. Moreover, Ukraine is seeking access for its areas of strength like agricultural products, which could further lead to a rise in imports for India.

Tapping the Ukrainian market for these product categories will address the trade deficit, albeit to a small extent. However, to make a significant dent, India will have to aggressively tap the market for 40%+ share in the long run and also include more products in its basket, as this analysis is from a short run perspective.