Any further trade barriers entail welfare losses for all parties concerned

A document was signed on the 27th of June that made Moscow say it will rise import duties on goods from Ukraine, referring to the need for the protection of Russian manufacturers from a likely heavy inflow of Ukraine-made products and the risks of duty-free import of goods from the European Union via Ukraine.

Any further trade barriers always tend to entail welfare losses for all the parties concerned, higher prices and lower level of competition. In spite of the worldwide practice showing that local manufacturers normally succeed in seeking protection, Russia has no economic necessity to protect its domestic manufacturers from Ukraine imports, because trade barriers would make Russia sustain losses as well.

Ukraine exports basically food products, as well as machinery and equipment. Higher import duties on food products will boost prices and impact the poor in Russia, because food products account for the most part of their expenses, while higher import duties on Ukraine-made machinery will impact Russian manufacturers as buyers of such products.

There are two considerations on the side of Russia, both of which seem to be far-fetched. First, when goods from the European Union move to Ukraine, then Ukraine-made would allegedly flood the Russian markets, thereby posing a threat to domestic manufacturers. In fact, the manufacturers are very interest in supplies of inexpensive Ukraine-made machinery and components.

With the crisis in Ukraine, it's preposterous to speak of any stronger inflow of goods, which has indeed been weakening, and hence Russia is more likely to face the threat of running short of Ukraine-made products. For example, the price of building bars, which Ukraine used to supply in large quantities to Russia, increased 30 percents following the reduction in supplies early this year, because Russian manufacturer Severstal took advantage of the situation to raise the price of its products. As a result, Russia may see real estate prices go up.
The second consideration isn't tenable as well: when the Ukraine–European Union Association Agreement comes into force, goods will be imported to Russia in the guise of Ukraine-made goods exempted from import duties. The rules of origin are set forth in the CIS Free Trade Zone Agreement which regulate the trade relations between Russia and Ukraine. If such products are imported from Europe via Ukraine, the respective documents are always provided and the goods are taxed.

For example, fish imports from the European Union to Ukraine is tax exempted, but such imports are subject to the import duty when imported to Russia. There is no way that these goods just like that can be relabeled into Ukraine-made goods. Heroin may just as well be imported as baby food, but this has nothing to do with trade policy, because this is illegal trade which must be counteracted by the customs service and the special service.

As a reminder, Russia began to talk about imposing limits on Ukraine-made goods long before the Ukraine–European Union Association Agreement was signed. In other words, Russia intends to apply higher import duties as bargaining tool designed to be used when "something is not allowed - one has a great wish - then it is allowed", and technically may administer to Ukraine-made goods Attachment 6 to the Free Trade Zone Agreement within the CIS frameworks, which allows the tax regulation on imports from Ukraine to be updated. Once again, however, this is repugnant to the meaning of the Customs Union.
Neither discussions were held, nor estimates performed. The same mantra is being repeated again and again: a cheap price of Europe-made goods being guised as Ukraine-made goods can kill the domestic production industry. This is a fabricated problem in which economic experts play a minor role. It appears that the decision makers rely on economic considerations.

Belarus and Kazakhstan imposed a veto for economic considerations. If Russia imposes import duties which differ from those of other Customs Union member countries, this would abridge the principles proclaimed by the Customs Union and the Eurasian Economic Union between Belarus, Kazakhstan and Russia in force from January 1, 2015, in which a single trade policy must be conducted.

Aleksandr Knobel, Ph.D. in Economics, Head of Foreign Trade Department