THE IMPACT OF INTEGRATION IN THE EUROPEAN UNION ON THE DEVELOPMENT OF FOOD PRODUCTS TRADE OF THE REPUBLIC OF MOLDOVA

ZAHARCO, Silvia Working Paper THE IMPACT OF INTEGRATION IN THE EUROPEAN UNION ON THE DEVELOPMENT OF FOOD PRODUCTS TRADE OF THE REPUBLIC OF MOLDOVA Institute of Economic Research Working Papers, No. 116/2015 Provided in Cooperation with: Institute of Economic Research (IER), Toruń (Poland) Suggested Citation: ZAHARCO, Silvia (2015) : THE IMPACT OF INTEGRATION IN THE EUROPEAN UNION ON THE DEVELOPMENT OF FOOD PRODUCTS TRADE OF THE REPUBLIC OF MOLDOVA, Institute of Economic Research Working Papers, No. 116/2015, Institute of Economic Research (IER), Toruń This Version is available at: https://hdl.handle.net/10419/219732 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/3.0/ Institute of Economic Research Working Papers No. 116/2015 THE IMPACT OF INTEGRATION IN THE EUROPEAN UNION ON THE DEVELOPMENT OF FOOD PRODUCTS TRADE OF THE REPUBLIC OF MOLDOVA Silvia ZAHARCO The paper submitted to VIII th INTERNATIONAL CONFERENCE ON APPLIED ECONOMICS CONTEMPORARY ISSUES IN ECONOMY under the title MARKET OR GOVERNMENT? Institute of Economic Research and Polish Economic Society Branch in Toruń 18-19 June 18-19, 2015, Toruń, Poland Toruń, Poland 2015 © Copyright: Creative Commons Attribution 3.0 License Silvia ZAHARCO The State Agrarian University of Moldova, 44 Mircesti Str., 2049, Chișinău, The Republic of Moldova, Phone: +373.22.432.387, Email: [email protected] THE IMPACT OF INTEGRATION IN THE EUROPEAN UNION ON THE DEVELOPMENT OF FOOD PRODUCTS TRADE OF THE REPUBLIC OF MOLDOVA JEL Classification: F15, Q17. Keywords: trade; integration; agri-food sector; cooperation agreement; export; import. Abstract. This paper presents a study of the development of foreign trade in agricultural products of the Republic of Moldova under the impact of EU integration. The agricultural sector has been and continues to be, traditionally, the main branch of the national economy. The average share of agriculture generates to12% of GDP; in this sector almost half of the working population works. Thus, the development of the agricultural sector directly affects the living standards of the people employed in agriculture. However, the development of agriculture depends largely on agricultural production possibilities of sale on foreign markets, it depends on foreign trade. Introduction The establishment of the Zone of Deep and Comprehensive Free Trade (DCFT) between Moldova and the European Community allows the access to the community market for most Moldovan food products. DCFT, as part of the European Association Agreement, involves increasing economic benefits for the Republic of Moldova. The EU gave to the Republic of Moldova a transitional period of up to 10 years to adapt national standards to the Community’s standards. The sensitive Moldovan food products on the Community market are: corn, wheat, barley, white sugar, wine, meat and meat products, dairy products, egg production, certain fruit and vegetables. The food sectors that can easily adapt to the EU requirements are: horticulture (apples, pears), the wine sector (grapes and grape spirits), cereals, meat products, poultry and eggs. Much of the food products cannot be sold on the EU market (especially animal products except honey), because in most cases they do not meet the EU sanitary and phytosanitary standards, and domestic producers have difficulties in adapting them. In this context, the aim of this article is to examine the impact of the EU integration on the development of trade in agricultural products of the Republic of Moldova, considering the fact that the need for the reorientation of the foreign trade of the Republic of Moldova from CIS to the EU is undeniable. Methodology of the research In order to characterize the evolution of agricultural products trade of the Republic of Moldova there were taken into account the data collected from The National Bureau of Statistics. The analysis period of the study comprised the years 2009-2014. To analyze the process of trading with food products there was used the statistical method, by providing data on the level of marketing of agricultural products; the economic method was applied to research the issues related to food products marketing on foreign markets and the ways to boost external trade flows with domestic food products. Paragraph The economy of any country, regardless of its level of development and size, has connection with the outside world through the mechanism of foreign trade exchanges. Exports and imports have an impact on the exchange rate, interest rate, volume of aggregate demand, domestic prices, i.e. on the overall macroeconomic equilibrium. In this context, the country's ability to secure economic independence can be judged by its achievements in foreign trade section. For the Republic of Moldova, which is an agricultural country, agricultural products trade is a significant impediment on the national economy. In the European Union, trade is the second sector of the economic activity, representing the main component of the system of measuring the level of economic development. The emergence of the single internal market of the European Union led to a more efficient allocation of production factors and to the strengthening of the investment climate. These phenomena have led to a substantial improvement of the economic performances in the Commonwealth area (Patriche et al., 2006, p. 345). Trade relations Moldova - EU. At the base of RM-EU trade relations is the Generalized System of Preferences (GSP) given to the Republic of Moldova in 1999. According to this system, the exports to the EU had partial or total exemption of customs tariffs. Its basic condition has been the compliance with the EU rules concerning the principle of exports origin. The basic elements of the GSP are the following: the unilateral character of the offered concessions; their relatively short duration; limited access to the markets of the importing countries (the range of goods to which the concessions were offered and tariff reduction margin); the instability of the offered concessions (the possibility of their withdrawal). For the Republic of Moldova the major problem is that GSP practically doesn’t open access to the most protected markets, such as agricultural market. In 2000, Moldova received additional preferences for sensitive products. Since 2006, Moldova has had benefits from a new Generalized System of Preferences (GSP +), which includes additional preferences for 20062015, granted to the developing countries and those in transition. This fact allowed to attract more foreign direct investments. From the 1 st of September 2014 there entered into force the Association Agreement between the Republic of Moldova and the EU and the Agreement of the Establishment of the Zone of Deep and Comprehensive Free Trade between the Republic of Moldova and the European Union. In 2014, the European Parliament adopted amendments to Regulation ATP (autonomous trade preferences) for the Republic of Moldova by introducing three new tariff quotas for duty-free fresh apples (40 000 tons), fresh table grapes (10 000 tons) and fresh plums (10 000 tons), in addition to the quotas proposed under the Agreement of Deep and Comprehensive Free Trade. The tariff quotas shall be retroactive starting with August 1, 2014 (considering the peak season of the three products) and by the end of 2015, when PCA regime expires. Signing the Agreement of Deep and Comprehensive Free Trade will generate benefits for agriculture and agrifood sector of the Republic of Moldova, such as: increasing the attractiveness of Moldovan agricultural products on the EU market, agricultural modernization and the improvement of working conditions, increasing the investment attractiveness of the agri-food sector, new market opportunities in the EU. Conducting trade relations between Moldova and the EU, however, is affected by the barriers related to standards, customs procedures, trade regulation, patenting imports, limited access to the market, price fluctuations, etc. Moldovan agri-food sector is crucial in trade relations with the EU. In order to export goods to European markets and to ensure food safety in the national food sector changes are required in the following domains: certifying the origin of goods, compliance with competition rules, and the control of compliance with sanitary and phytosanitary standards. Up to now, European norms and standards have been largely adopted. However, their implementation is a long and costly process, especially for animal production. At the same time, the adjustment to European standards means high costs for small producers. Moldovan food products face a low competitiveness on the EU market. The identification of the most competitive and the least competitive Moldovan products is very important in trade relations between the Republic of Moldova and the EU. Thus, less competitive food products require a longer period of adaptation to European standards. In comparison with the competitors in the EU and the neighboring countries that are in a more advanced stage of accession to the European single market, Moldovan farmers are disadvantaged in terms of the status and dynamic of the factors that determine competitiveness. Among them there are: the poor state of inputs (except land resources quality), low economic potential of the economic agents in the food industry, the unfavorable competitive environment, weak links with the processing industries, etc. However, the local prices are much lower than international ones, which lead to lower profitability of agriculture. As a result of market imperfections and inefficiencies there occur important profit transfers from farmers towards other trade network subjects. These distortions reduce agricultural incomes, conditioning an insufficiency of working capital and lack of new investments, which in their turn cause reduced productivity and poor quality products – uncompetitive on export markets (Perju et al., 2010, p. 33). The Independent Analytical Center "Expert-Grup" from Moldova identified competitive and uncompetitive products under the "revealed comparative advantage index". This index is the ratio of the weight of a certain product in the structure of Moldovan exports and the share of this product in total EU exports structure. If this index is greater than 1, our country has the advantage over the EU and vice versa, if the index is less than 1, Moldova has the disadvantage over the EU (Lupuşor, 2012, pp. 5052). The category of competitive goods includes the products for which Moldova has managed to get a more efficient specialization. Trade liberalization of these products can bring important benefits for exporters, in particular, and for the economy in general. The situation is different for the products that are not competitive on the Community market. Their manufacturers are affected by the influx of cheaper and more qualitative goods from the EU, particularly the producers from certain sensitive sectors, such as alcoholic beverages, tobacco and sugar (Table 1). Table 1. The competitiveness of Moldovan agricultural products on the EU market Competitive food products Unpcompetitive food products Seed and sunflower seed oil Fresh and dry walnuts Fresh and dry fruits Fresh and dry grapes Juices Corn seeds Seeds and rapeseed oil Molasses Hides and skins of cattle and horses Concentrated or sweetened milk Butter and other fats and oils derived from milk Cocoa food Confectionery (including white chocolate) Bread and pastry Fresh plants Tobacco cigarettes Bottled water Source: Lupușor (2012, p. 51). From the table we can see that relatively competitive food products on the Community market have a lower degree of processing compared to the less competitive products. In most cases, the exported products are used as raw material in other EU countries. This shows the underinvestment, which does not allow technological modernization of the sector, which makes the firms export raw materials rather then process them on the place and then export the finished products. Since 2006 the main market for Moldovan exporters has been the EU market due to the reorientation of the local trade from the CIS to the UE and due to granting GSP + and ATP to our country by the EU. In 2012, the share of exports to the EU from total Moldovan exports diminished due to the reduced competitiveness of Moldovan producers on the Community market and due to non-compliance with high quality standards of the EU. The exports of agricultural products for the first time exceeded the value of one billion dollars constituting 1.12 billion USD in 2014; it is an increase by 5.4% compared with 2013. Imports decreased by 9.7% (from to 805.82 mil. USD in 2013 to 727.93 mil. USD in 2014). The trade balance of foreign trade is positive and has a value of 394.37 mil. USD, which represents an increase by 52.5% (Figure 1). Figure 1. The evolution of foreign trade with agricultural products of the Republic of Moldova, mil. USD 604,7 732,2 917,1 878,9 987,9 1122,3 513,6 591,5 687,8 743,3 783,7 727,9 91,2 140,7 229,3 135,5 204,3 394,4 0 200 400 600 800 1000 1200 2009 2010 2011 2012 2013 2014 Export Import Trade balance Source: National Bureau of Statistics (information do not include export-import operations of the enterprises and organizations from Transnistria ) The export of more product categories have increased, particularly plant products which have increased by 38%, animal products - by 65.7% and processed products – by 54%. However, the export of alcoholic beverages decreased by 32.6%. This increase caused an increase in the share of the EU countries by 7 percentage points in the structure of exports by geographical areas and, respectively, a decrease in the share of CIS countries as a result of the restrictions imposed by the Russian Federation on Moldovan products. It is important that Moldova's major trading partners such as Ukraine, Russia and other CIS countries have similar standards that are used by Moldova and the compliance certificates are mutually recognized. Thus, the sudden reorientation of Moldova to the EU market can have a negative impact on foreign trade of the country. The main partners in the development of trade in agricultural products between Moldova and the EU are: Romania, Poland, Italy, Germany, France, Spain, Bulgaria and the Netherlands. In 2014, more than half of the value of exports was directed to the EU countries. A high dynamics was recorded in the deliveries to Romania, Italy, Germany and Great Britain, which have absorbed about ¾ of the products value exported to the EU. There also increased the exports of agricultural products, particularly cereals, nuts, wine etc. in other countries such as Indonesia, China and Switzerland (Figure 2). Figure 2. The structure of the exports of agricultural products by groups of partners, % 39,5 40,5 43,1 39,6 32,8 48,2 49,8 46,6 45,2 52,1 12,3 9,6 10,3 15,2 15,1 0 20 40 60 2010 2011 2012 2013 2014 CIS EU Other countries Source: National Bureau of Statistics (information do not include export-import operations of the enterprises and organizations from Transnistria) The largest trade deficit with the EU is recorded in animal products. The agricultural sector is dominated by crop production (60-70% of total agricultural production). The livestock sector plays a smaller role, with a low level of competitiveness. The development of the livestock sector is facing internal resource constraints (limited fodder) and harsh pressures caused by cheaper animal imports. Providing native forage is limited due to the limited availability of good quality pasture. On the other hand, the relatively high cost of local production, low productivity and poor animal breeds make animal products from the Republic of Moldova disadvantaged if compared to cheaper subsidized meat and dairy products from the UE markets and many other countries’ markets. As a result, the Republic of Moldova becomes increasingly dependent on imported animal products. In the last 10 years, the imports of live animals, meat and other animal products have increased approximately by 4.2 times, according to the National Bureau of Statistics. The exports have also increased, but less, only by 3.6 times. The consumption of animal products is increasingly covered by the products of foreign origin, particularly the consumption of fresh milk and dairy products. The imports of these products have increased considerably compared to the exports. If in 2002 dairy products were exported in greater volume than imported (32%), then from the next year the ratio has reversed, so that in 2014 the imports exceed the exports by three times. During the same period, the number of cattle in the Republic of Moldova halved. Bovine livestock, including cattle, reduced from 410 thousand heads in 2012 to 195,000 heads in 2014, or by 52%, decrease rate