Institute for Development andMOLDOVA’S FOREIGN POLICY STATEWATCH Social Initiatives “Viitorul” Issue 13, November 2010SHEDDING LIGHT ON THE ONGOINGEU-MOLDOVA TRADE LIBERALISATIONEvghenia SleptsovaMoldova’s Foreign Policy Statewatch represents a series of brief NEXT TOPICSanalyses, written by local and foreign experts, dedicated to the TO BE COVERED:most topical subjects related to the foreign policy of Moldova,major developments in the Black Sea Region, cooperation with Opportunities ininternational organizations and peace building activities in the region. Moldovan-GermanIt aims to create a common platform for discussion and to bring relationstogether experts, commentators, officials and diplomats who areconcerned with the perspectives of European Integration of Moldova. The Treaty regarding theIt is also pertaining to offer to Moldova’s diplomats and analysts a border regime betweenvaluable tribune for debating the most interesting and controversial Moldova and Romaniapoints of view that could help Moldova to find its path to EU.What are all these abbreviations about?ENP, EaP, AA and DCFTA In the run up to the 2004 enlargement, the European Union launched a European NeighbourhoodPolicy (ENP), in order to create ‘a zone of prosperity, stability and security’ along its borders. While severalnew neighbours, such as Moldova and Ukraine, were strongly insisting on a membership perspective, theENP, with its prospect of political association and deeper economic integration, was a ‘carrot’ that the EUwas ready to offer to these countries while it was not in a position to offer a membership. In 2009, under the Swedish presidency, the EU decided to strengthen the Eastern dimension of theENP by launching the Eastern Partnership initiative (EaP), which would cover six CIS economies – Arme-nia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine. Incentives offered to these countries in return fortheir progress in democratisation and reforms included trade liberalisation, increased mobility through visafacilitation agreements and joining the common EU aviation market, as well as participation in various EUprogrammes. Since 2008 with Ukraine and since January 2010 with Moldova the EU has been negotiatingthe Association Agreements (AA), which will replace the existing Partnership and Cooperation Agreements.The deep and comprehensive free trade agreement (DCFTA) – which is already being negotiated withUkraine and soon to be negotiated with Moldova and Georgia – will constitute a key component of the AAs.11 Both the AAs and the DCFTAs are not automatic, and will be offered to countries that are willing to enter into a deeper engagement.
2 Moldova’s Foreign Policy StatewatchMoldova is not alone The situation, interests and readiness for a DCFTA are very different across Eastern Partnershipcountries. Some countries, like Belarus and Azerbaijan, are not yet interested in full integration with theEU. Belarus’ and Armenia’s motivation is mainly political de-isolation. On the other hand, while Georgiais also actively seeking trade and visa liberalisation with the EU, its most important rationale for associa-tion with the EU is also internal security.2 Although the negotiations of a new Association Agreement withGeorgia and Armenia have already been launched (in July 2010), these countries are still at an earlierstage of the required reform process compared to Ukraine and Moldova.3 Both Moldova and Ukraine have been criticising the ENP and the EaP for putting them togetherwith countries that are clearly looking for a lower degree of EU integration. Moldova has, however, es-pecially more recently, taken a pragmatic approach to the EU integration and recognised that domesticreforms should precede a more generous offer from the EU. On a purely economic level, Moldova is alsoenjoying the highest degree of trade integration with the EU among the EaP countries, with over 50 per-cent of its exports going to the EU in 2009, while in Ukraine this share is only 24 percent.4 In Ukraine, the Orange Revolution increased expectations to the democratisation process, andthe EU was willing to offer incentives to sustain this progress. This made Ukraine a frontrunner in thethen ENP process. The negotiations of a new Association Agreement were launched in March 2007, andthe DCFTA negotiations were opened shortly afterwards – in February 2008, as soon as Ukraine joinedthe WTO. However, the negotiations and the implementation of respective reforms have been movingrather slowly. Thus, the Ukrainian civil society notes that Ukraine only met 4 of the 60 reform priorities asof November 2010.5 As far as market access is concerned, while little information is publicly available,an example of disagreements is the EU’s reluctance to fully liberalise trade in cheese and confectioner-ies, where Ukraine feels it is already competitive enough, and to increase the tariff-free quota for meatimports from Ukraine.6 Partially due to this slow progress with Ukraine, in negotiations with Moldova, Georgia and Arme-nia the EU opted for its traditional conditionality-based approach – asking the countries to meet certainrequirements before either the negotiations can be started or before a DCFTA can enter into force (de-pending on the requirements). Moldova, although having started the negotiations on the Association Agreement later, seems tobe moving faster. The ENP Progress Report on Moldova7 emphasises the strengths of the governmentprogramme on European integration, which is aligned with the objectives of the EU-Moldova Action Plan.The report highlights particular progress in civil society dialogue, in improving transparency of the publicdecision-making process, in fighting corruption and money laundering, as well in the area of judiciaryreform and implementation of the rulings of the European Court of Human Rights. In trade related areas,notable improvements have been made in customs administration, sanitary and phytosanitary standardsand financial services. Besides, Moldova joined the Energy Community and progressed significantly innegotiations with the EU on visa and air space liberalisation.What is DCFTA? So what is a deep and comprehensive free trade agreement? And what does it entail for Moldo-va? The difference between a DCFTA and a simple FTA is in the scope of integration. While simple FTAmainly involves liberalisation of trade in goods and services (i.e. abolition of tariffs and restrictions), adeep and comprehensive FTA covers integration along all trade-related areas, including services, intel-lectual property rights, customs, public procurement, energy-related issues, competition, etc, and also2 Centru Roman pentru Politici Europene (2010) Making Sense of EU’s Eastern Partnership. Moldova as an Opportunity.3 Progress Reports on the Implementation of the European Neighbourhood Policy in 2009 for Armenia and Georgia. http://ec.europa.eu/world/enp/documents_en.htm#34 UN Comtrade Online Database, retrieved on 8th of November 2010.5 http://es-ukraina.blogspot.com/2010/11/experts-highlight-very-slow-progress-in.html6 Interview with the Deputy Minister of Economy Valery Pyatnitskyi, 13/08/2010, available at http://www.radiosvoboda.org/content/ar-ticle/2127368.html7 Available at http://ec.europa.eu/world/enp/pdf/progress2010/sec10_523_en.pdfStr. Iacob Hîncu 10/1, Chişinău MD-2005 Republic of Moldova 373 / 22 221844 phone 373 / 22 245714 fax firstname.lastname@example.org www.viitorul.org
Moldova’s Foreign Policy Statewatch 3tackles the so-called “beyond the border” obstacles to trade through deep regulatory approximation withthe trade-related EU acquis. A simple FTA would no longer be in Moldova’s interest as it already enjoysan asymmetric free trade regime with the EU through the Autonomous Trade Preferences (ATP), grantedin 2008. In terms of real economic benefits, at the risk of simplification it can be said that the core benefitof a DCFTA for Moldova is greater attractiveness to foreign investment, with all the ensuing benefits itcarries with it – technological upgrading, new jobs and potential positive spillover effects to domesticsuppliers and distributors. Looking outwards, adopting the international ‘rules of the game’ will makeMoldovan producers much more competitive internationally. In terms of market access, due to the factthat Moldova already enjoys the asymmetrical free trade regime, the DCFTA mainly entails liberalisationon the Moldovan side, although most likely with a transition period of five to ten years.8Costs and benefitsof the DCFTA for Moldova The Feasibility Study ordered by the European Commission analysed four different scenarios toassess the aggregate-level gains for Moldova. Thus, the effect of a simple FTA is estimated as neutral;the effect of an FTA with limited liberalisation of sensitive agricultural products can even be negative; FTAwith trade facilitation measures9 would yield a 6.5 percent increase in real GDP; while DCFTA is expectedto result in about a 12.5 percent increase in real GDP. The reason for limited positive gains from a simple FTA is the fact that Moldova already enjoysan asymmetrical free trade regime with the EU, therefore additional tariff liberalisation on the part of theEU would be negligible. At the same time, simple FTA entails losses of tariff revenue for the budget –even though Moldova has a very liberal trade regime – which would imply a limited negative effect onthe economy. The scenario with restricted agricultural liberalisation would reduce the adjustment costsfor rural areas, but is expected to have efficiency losses if protected sectors do not adjust to internationalpressures, and thus may have an overall negative effect.10 The largest gains, however, indisputablystem from the removal of non-tariff barriers to trade and making Moldova part of international productionchains. Proximity to the EU, flexible and relatively skilled labours are the factors that would serve as im-portant initial incentives for foreign investors. In order to reap these benefits, however, an economy needs to be prepared for a ‘structuralshock’ of liberalisation. The insistence of the EU on Moldova’s progress in a number of market reformsis indeed partially meant to prepare a more beneficial environment for potential European investors,but most of these reforms are needed to Moldovan producers themselves, to have a level-playing fieldwith the competitors both domestically and in the EU. Therefore, the following challenges and costs forMoldova need to be addressed in the earliest future.Challenges Still prevalent state interference in Moldova (either through a still large public sector, state aidor insufficiently competitive public procurement) may hamper the economy’s adjustment capacity in theface of a structural shock of trade liberalisation. Although a satisfactory legal framework to fight corrup-tion has been adopted, its implementation still remains insufficient. Slow adoption of standards, technicalregulations and conformity assessment procedures, and difficulty to cope with sanitary and phytosanitarystandards are the key obstacles to exporters, in particular to agro-food producers. More effort (and per-haps financial assistance) is needed in order to implement a rather consistent legislation in the area offood safety. Poor transport infrastructure is also a major impediment to exporters and investors alike. Last8 Less for industrial goods and longer for agriculture.9 Bringing the administrative and time costs of exporting from Moldova to the level of Romania10 It has to be mentioned, that this is a mainstream approach to economic liberalisation, and the one adopted in the study. There is a growingliterature and international practice showing that protection of small producers might be beneficial, as otherwise they may not adjust at all and goout of business to give way to multinational or simply larger foreign firms. Str. Iacob Hîncu 10/1, Chişinău MD-2005 Republic of Moldova 373 / 22 221844 phone 373 / 22 245714 fax email@example.com www.viitorul.org
4 Moldova’s Foreign Policy Statewatchbut not least, although the DCFTA is expected to have long-term positive gains, in the short run there canbe significant social costs, especially to small producers and farmers. Therefore there is an urgent needto strengthen the social safety net. 11 Clearly, most of these reforms require an enormous financial investment. The government needsto assess the financial costs involved into each of these areas, and then work out a programme of funding(or, more likely, co-funding) for each of the segments.What the EU could do?12 Provide not only technical, but also financial assistance for the adoption of technical regulationsand SPS and for upgrading the road infrastructure. Inclusion of Moldova into the Pan-Euro-Med cumulation of origin would significantly help to in-crease the rates of utilisation of tariff preferences, especially in textile and clothing sectors. Exclude a number of sensitive agricultural products from liberalisation on the Moldovan side, witha transitional phase-out period. In view of the importance of migrant labour for the Moldovan economy, inclusion of migration-related clauses into the DCFTA might be an important part of the agreement. Reduce the remaining protection of Moldovan exports of wine, barley, sugar and possibly wheat. Some estimates of the costs of institutional harmonisation put the costs for Moldova at as muchas US$1.1bn, or about 20 percent of its 2009 GDP. Even if half or quarter of this figure, Moldova will notbear these costs without some external assistance. Indeed, funding has been widely quoted as one of theweaknesses of the EaP. In May-June a Commission delegation carried out an evaluation of Moldova’sinstitutional and legislative capacity to negotiate and implement the DCFTA. The findings of this reportare something to watch out for.Conclusions One of the key conclusions with regard to the EU-Moldova DCFTA relates to the fact that sinceMoldova already enjoys an asymmetrical free trade regime with the EU, the main benefits of the DCFTAwill stem from the institutional and legislative harmonisation, or, in other words, from making Moldova abetter place to run business and invest in. Therefore the approach taken by the EU in its negotiations withMoldova – not to start negotiations and not to sign the DCFTA until a number of reforms are implemented– although somewhat delaying the launch of negotiations, in fact creates the right mechanism for helpingthe Moldovan economy to reap full benefits from this agreement. The second key point relates to the challenges that Moldova is facing in this process. While im-plementation capacity is often quoted as a main challenge, in fact the financial costs of implementationare equally important, and the sooner this issue is addressed, the lower will be the economic and socialcosts of liberalisation to the Moldovan economy.11 Drawn from ITAQA (2009) Feasibility, Impact and Implications of a Free Trade Area between the European Union and Moldova.12 Ibid.This publication was produced by IDIS “Viitorul” with the financial support of Soros FoundationMoldova and the National Endowment for Democracy. The opinions expressed in this publicati-on reflect the author’s/authors’ position and don’t necessary represent the views of the donors.Str. Iacob Hîncu 10/1, Chişinău MD-2005 Republic of Moldova 373 / 22 221844 phone 373 / 22 245714 fax firstname.lastname@example.org www.viitorul.orgStr. Iacob Hîncu 10/1, Chişinău MD-2005 Republic of Moldova 373 / 22 221844 phone 373 / 22 245714 fax email@example.com www.viitorul.org