Impact of the EU-Ukraine Free Trade Agreement on the Dutch Economy

We predict the impact of the EU-Ukraine DCFTA on the Dutch economy using an international trade model. We find that, in the long run, the DCFTA could nearly triple Dutch exports to Ukraine and nearly double Dutch imports from Ukraine. These effects are not yet clearly visible in recent trade statistics. The predicted impact on the overall Dutch economy is positive, but small in size.

Despite the fact that it has not yet been fully ratified, a Deep and Comprehensive Free Trade Agreement (DCFTA) between the EU and Ukraine has been provisionally applied since 1 January 2016. This report aims to assess the impact of this DCFTA on the Dutch economy. It provides an analysis of recent trade flows between Ukraine and the Netherlands and uses an international trade model to predict the long-term impact on Dutch trade and real GDP.

Dutch exports of goods to Ukraine declined significantly between 2012-2015, but increased by 18% during the first 11 months of 2016. While this recovery in exports coincides with the first year during which the DCFTA was provisionally applied, it is difficult to determine to what extent there is a causal effect. To some extent, the growth of Dutch exports during 2016 was likely a recovery from the earlier drop that occurred during the armed conflict in eastern Ukraine during 2014 and 2015. The recovery of Dutch exports to Ukraine appears to have been mostly driven by food, machinery and transport equipment, and manufactured goods categories.

Similarly, it is too early to assess whether the DCFTA has already had any impact on Dutch imports from Ukraine, which consist largely of maize, sunflower seeds, and sunflower oil. First, the period that has passed is simply too short. Second, there are inconsistencies in the official import data, as sectoral import data do not add up to total import data for some years. Third, the import data are affected to a large extent by a major increase and more recent decline in Dutch food imports from Ukraine, which appear to be unrelated to the DCFTA.

To estimate the impact that the DCFTA will eventually have on the Dutch economy, it is more reliable to make long-run predictions using a rigorous economic model, rather than looking at recent trade statistics. We do this by employing a ‘gravity model’ of international trade that incorporates both the direct effects (trade creation) and the indirect effects (trade diversion) of the DCFTA. We use the model to predict the impact on bilateral trade between the Netherlands and Ukraine, as well as the impact on total Dutch trade and GDP.

The model predicts that the DCFTA will have a positive long-term impact on bilateral trade between the Netherlands and Ukraine. We estimate that Dutch exports to Ukraine will nearly triple, from €1.5 billion to roughly €4.2 billion. Dutch imports from Ukraine are predicted to nearly double, from €0.7 to €1.3 billion.

The overall impact on the Dutch economy is also positive, but small. Taking into account all direct and indirect effects on bilateral trade and trade with third countries, Dutch real GDP would increase by €177 million as a result of the DCFTA. This is equivalent to a growth rate of 0.03% with respect to the 2015 GDP level.

These predicted results require a cautious interpretation. First, the estimated coefficients are long-run predicted effects that would occur under stable economic conditions and that require the assumption that everything else remains equal. This may not necessarily hold for the EU-Ukraine trade relation. Second, we have not taken into account the legal enforceability of the provisions in the FTA. Third, the exact magnitude of the estimated effect is hard to pinpoint precisely., as this is a statistical model which always implies some uncertainty. Our robustness checks suggest that different model specifications yield results that are quantitatively slightly different, but qualitatively similar. Finally, this study is limited to the impact on trade and GDP and does not address any other possible positive or negative effects that the DCFTA may have.