WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

Photo: © European Union 2014 - European Parliament (Attribution-NonCommercial-NoDerivs Creative Commons license).

The Deep and Comprehensive Free Trade Area (DCFTA) was established as an integral part of the Association Agreements and concluded between the European Union and Georgia, the Republic of Moldova and Ukraine. The study has been undertaken as part of a research project carried out by the Vienna Institute for International Economic Studies (wiiw) in cooperation with Bertelsmann Stiftung, and provides an impact evaluation of the DCFTA implementation focusing on the benefits and costs that have already materialised or are yet expected to manifest themselves in the longer run in the public and private sectors.

The DCFTA in a nutshell

The European Union concluded Association Agreements with Georgia, Moldova and Ukraine in 2014. The DCFTA constitutes the economic core of the Association Agreements, governing the implementation of a wide range of reforms aimed not only at enhancing trade relations between the EU and the signatory nations (trade-related aspects analogous to a conventional free trade area format), but also at facilitating convergence to the EU standards in various business-related regulations in the areas of food safety, technical standards, public procurement, competition policy, intellectual and property rights, etc. (‘deep’ and ‘comprehensive’ aspects).

Effects

The DCFTA agreements tackle both tariff and non-tariff barriers to trade between the signatory countries and will facilitate modernisation of the beneficiary economies with the technical and financial aid from EU institutions. Conditional on the successful implementation of the envisioned reforms, the long-run economic effects on the DCFTA countries are likely to be positive due to the ultimate convergence of the beneficiary economies to a more competitive state underpinned by better institutions, a more predictable and transparent legal setting, improved investment climate, as well as improvements along other dimensions. Yet, the analysis suggests that the net benefits are highly asymmetric along the time dimension (high costs in the short and medium run – benefits accruing mostly in the longer run), as well as across regions and economic sectors (less competitive sectors and regions will face particularly onerous adjustment costs). The costs, challenges and risks associated with the implementation of DCFTAs include, among others, fiscal costs of the legal approximation to the EU acquis, losses of traditional export markets, challenges of finding a market niche in the already highly competitive European markets, adjustment costs related to industrial restructuring leading to contraction of less efficient industries with potentially painful concurrent labour market repercussions, investment needs by the public and the private sector to finance the implementation of reforms and bridging the ‘gaps’ in infrastructure and productivity.

Policy implications

Besides poor competitiveness of the DCFTA countries, largely concentrated in commodities and the agri-food sector (which also tends to be highly protected in the EU), and other economic factors, the challenges are aggravated by difficult geopolitical circumstances, including the existence of ‘frozen conflicts’, and rising populism, which may threaten further progress of reforms or even reverse them. In the light of these circumstances, the wiiw study proposes a range of policy recommendations for the beneficiary countries as well as for a revised EU Neighbourhood Policy, emphasising the need for a gradual transformation with strategic sequencing of reforms to alleviate social costs of transformation, with priorities given to the access to the EU market, improvements of the business environment, promotion of FDI and integration in global value chains, efforts to increase the awareness of the specific DCFTA regulations in the private sector, as well as continued targeted financial and technical support from the EU institutions and other donors with strict conditionality of aid and continuous monitoring of progress at national and regional levels.