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The impact of DCFTA after 4 years of implementation: The case of THE REPUBLIC OF MOLDOVA

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The impacts on Moldova after the DCFTA negotiations: Geographic distribution and product diversification according to foreign trade. Adrian Lupusor is expert for economy, trade and civil society. Since 2013, he also acts as CEO for Expert-Grup.

Further information:
Stakeholder Dialogue in Cooperation with the AHK Tunisia - Negotiating ALECA – Lessons Learned from the DCFTAs with Ukraine, Moldova and Georgia.
Organizer: Bertelsmann-Stiftung in Cooperation with the AHK Tunisia
Date: Wednesday, 27-28 June 2018.

Publicado en: Economía y finanzas
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The impact of DCFTA after 4 years of implementation: The case of THE REPUBLIC OF MOLDOVA

  2. 2. CONTENT OF THE PRESENTATION • General background • Key statistical indicators • Change in geographical distribution of foreign trade • Change in product distribution of foreign trade • Net impact of DCFTA • Conclusions
  3. 3. GENERAL BACKGROUND (I) • The creation of DCFTA was a key part of the Association Agreement with EU that entered into force in September 2014. • DCFTA entered into force after a prolonged period of gradual liberalization of bilateral trade with EU: • Generalized System of Preferences (GSP) granted in 2016 and extended in 2017 (GSP plus). • Autonomous Trade Preferences (ATP) granted in 2018 • As a result, Moldova entered DCFTA with a highly liberalized custom tariff with EU (4.4% for industrial products and 11.6% for agricultural products). • Allowed to prepare the domestic producers against potential competition shock.
  4. 4. GENERAL BACKGROUND (II) • The risks related to DCFTA were mitigated by a number of key provisions: • Transition periods of up to 10 years for the most vulnerable sectors of Moldova. For example: • 10 years for meat and diary products. • 6 years for furniture, shoes and textiles. • 5 years for cheese, vegetables, fruits, juices, wines, gems etc. • The Agreement allows the Moldovan Government to apply safeguard measures in case some producers/sectors will be endangered by the competition from EU. • For some agrifood industries (meat, diary, sugar etc.) import quantitative quotas are applied (in case of exceeding those quotas, MFN tariffs are applied), which allows the protection of vulnerable domestic producers.
  5. 5. GENERAL BACKGROUND (III) • Entering into force of DCFTA coincided with many negative shocks that shacked the Moldovan economy: • Political crisis: during this period of time Moldova had 5 prime ministers, 2 local elections, 1 parliamentary election and 1 presidential election. • Banking crisis: during 2014-2015, there were uncovered major frauds involving 3 largest banks in Moldova, which led to decapitalization of those banks by 12% of GDP. This money were covered from the central banks foreign reserves, converted into state debt, leading to depreciation of the state currency and destabilization of public finances. • Draught: in 2015, Moldova was hit by a draught that undermined the agricultural supply and the production and exports of the agrifood industry. • Geopolitical implications: Russia imposed tariff and non-tariff barriers for imports of wines, fruits and vegetables from Moldova. • These shocks, undermined the capacity of the Moldovan Government and exporters to implement DCFTA requirements. • As a result, Moldova did not manage to explore the benefits of DCFTA.
  6. 6. KEY STATISTICAL INDICATORS Exports (2015-2018:4 compared to the same period before DCFTA) … to EU +31% … to CIS (mainly Russia) -48% … to other countries (e.g. Turkey) +19% Imports (2015-2018:4 compared to the same period before DCFTA) … from EU -5% … from CIS (mainly Russia) -30% … from other countries (e.g. Turkey) -8% Level of import coverage with exports (from 2014 to 2017) … EU From 49% 67% … CIS From 51% to 39% … other countries (e.g. Turkey) From 28% to 30% Key messages: • During 4 years of DCFTA, exports to EU increased significantly… • … but the growth was not sufficient to compensate the losses on the CIS (mainly Russian) market. • Despite many fears of domestic producers, the imports from EU dropped. • The trade balance with EU improved essentially.
  7. 7. LEVEL OF UTILIZATION OF EU EXPORT QUOTAS UNDER DCFTA, 2017 Entry prices Anti-circumvention Key messages: • The thresholds imposed by EU for entry prices were utilized in full in the case of grapes and plums. • The thresholds under anti-circumvention mechanism appear to be too low for wheat, barley, maize and sugars. • These thresholds need to be renegotiated, in order to alleviate the few remaining trade barriers on the EU market.
  8. 8. CHANGE IN GEOGRAPHICAL DISTRIBUTION OF FOREIGN TRADE (I) Key messages: • EU increased its share in total exports, consolidating its position as the main destination of Moldova’s exports. • The share growth is the result of redistribution of exports from CIS to EU (the share of exports to CIS dropped due to Russian restrictions). • Still, the exports to EU remained highly concentrated: top 3 EU destinations (Romania, Germany and Italy) accounted for 65% of total exports to EU in 2014 and 53% in 2017.
  9. 9. CHANGE IN GEOGRAPHICAL DISTRIBUTION OF FOREIGN TRADE (II) Key messages: • The geographical distribution of imports did not change much. • EU remained the main source of imports (primarily, industrial inputs imported in order to be processed and exported to EU). • Importantly, DCFTA did not endanger the domestic producer, as the imports declined (see previous slides).
  10. 10. CHANGE IN PRODUCT DISTRIBUTION OF FOREIGN TRADE (EXPORTS) Before DCFTA (2014) After 3 years of DCFTA (2017) Key messages: • Exports become more concentrated (TOP-10 exports were 80% of total exports in 2017 (77% in 2014). • Herfindahl-Hirschman Index increased from 844 points in 2014 to 913 points in 2017. • Composition of exports did not change much.
  11. 11. CHANGE IN PRODUCT DISTRIBUTION OF FOREIGN TRADE (IMPORTS) Before DCFTA (2014) After 3 years of DCFTA (2017) Key messages: • Imports are also concentrated, but less than exports. The share of top-10 imports decreased from 65% to 62%. • Herfindahl-Hirschman Index decreased 708 points in 2014 to 599 points in 2017. • Composition of imports did not change much.
  12. 12. NET IMPACT OF DCFTA ON EXPORTS (I) • In order to assess the net impact of DCFTA on exports we estimated what would be the dynamics of exports under status quo (without DCFTA) and compared it with the dynamics under DCFTA. • In order to estimate how exports would have evolved under status quo (without DCFTA), we constructed the following simple model: • 𝐸𝑥𝑝𝑜𝑟𝑡𝑠𝑡 = −29.1 + 2.4𝐺𝐷𝑃_𝐺𝑒𝑟𝑚𝑎𝑛𝑦𝑡 + 0.1𝐸𝑥𝑝𝑜𝑟𝑡𝑠_𝐶𝐼𝑆𝑡 +0.4𝐸𝑥𝑝𝑜𝑟𝑡𝑠𝑡−1 + 𝑒𝑡 • Note: exports to EU are positively influenced by the economic dynamics from Germany, exports to CIS countries and exports from the previous periods (inertia). • The model was estimated for the period 2005:1 – 2014:4 (last year without DCFTA). • Based on this model, a forecast is constructed, for 2015:1 – 2018:1, which does not include the effect of DCFTA. • The difference between the realized exports to EU and forecasted ones is considered to be the net impact of DCFTA.
  13. 13. NET IMPACT OF DCFTA ON EXPORTS (II) Key messages: • During 2015:1 – 2018:1, DCFTA boosted Moldova’s exports to EU by USD 342 million (net impact of DCFTA). • Without DCFTA, exports to EU would have grown by 8% slower than de facto. • DCFTA allowed to alleviate many negative shocks to Moldovan economy (Russian restrictions, political turbulence, banking crisis etc.).
  14. 14. KEY CONCLUSIONS • Despite challenge period of time, DCFTA had a positive net impact on Moldova’s exports, estimated at about USD 342 million during 2005:1-2018:1. • Additionally, the trade balance with EU significantly improved. • The impact would have been larger without the negative shocks that occurred during the same period of time (Russian restrictions, political instability, banking crisis, economic crisis). • Still, 4 years is a short timeline in order to estimate the full impact of DCFTA (its implementation is envisaged for about 10 year). • The main challenges are related to low competitiveness, which keeps the Moldovan exports highly concentrated on the EU market (both, country- and product-wise). • A number of trade restrictions applied by EU have to be re-negociated.
  15. 15. THANK YOU FOR YOUR ATTENTION ​Adrian Lupusor Executive Director Economic think tank "Expert-Grup" (+373) 22 929 994 (+373) 689 53 665