Zoia Pavlenko: Clean or Rich? How Free Trade with Canada will Impact Environment in Ukraine

Developments of the recent years have dramatically changed the foreign trade of Ukraine: due to the loss of the Russian market Ukrainian manufacturers had to reorient their export trade from the East to the West. Due to the efforts of the Ukrainian government, in particular trade diplomacy of the Ukrainian Ministry of Economic Development and Trade, the free trade zone with the EU was introduced, implementation of Free Trade Agreement with Canada is nearing completion, and active negotiations with Turkey and Israel are currently under way. Every day we witness new success stories of Ukrainian goods on foreign markets.

Graph: The Economist

The aspect rarely mentioned in the discussions of the ‘new way’ of Ukrainian export trade is its environmental impact. In this article we will briefly analyze potential impacts of trade liberalization on the environment in Ukraine. Let’s take as an example the Free Trade Agreement between Ukraine and Canada recently ratified by the Ukrainian Parliament.

From Poor and Clean to Rich and Dirty?

The liberalization of foreign trade, in fact, means facilitating international movement of goods and services. It stimulates production in exporting countries. In theory, such growth leads to a greater consumption of natural resources and growing amounts of industrial waste. This may have both local impact (e.g. discharging of untreated sewage into small rivers) and global impact (increase in greenhouse gas emissions).

In 1955, Simon Kuznets (scientist) suggested the curve of correlation between environmental load level and economic activity (Picture 1). According to the scientist’s theory, growing of the GDP per capita, at first, leads to increase of environmental load, and then – to its reduction. The logic is clear – revitalization of economic activities and new financial resources are used to meet critical needs (filling the gaps), so to say – ‘patching the holes’. In a situation like that, no one worries about environment.

However, later on, when a country is already quite rich and environmental problems continue to accumulate, the environmental protection becomes a pressing matter. The country can invest in the upgrading of outdated production technologies and address negative environmental impacts.

Today, the twenty-fold difference in GDP per capita between Ukraine ($2155) and Canada ($43248) puts them at the different ends of the Kuznets curve. It is possible to assume that increase in the trade relations between the two countries threatens our particular state with environmental degradation. But is it really true?

Is a Leap to Cleanness Really Possible?

The particularity of our country’s participation in free trade agreements is the focus on the export of raw materials that requires considerable use of natural resources. However, even with the gradual shift of focus to the export of manufactured goods with higher added value, we should not forget about environmental impacts of the manufacturing processes themselves (energy and water consumption, emissions of air pollutants, wastewater discharges).

The desire to rapidly increase the economic growth rate and attract foreign investments leads to the loosening of environmental control in Ukraine. This includes a moratorium on environmental inspections of enterprises, formalization of environmental assessment process and delaying of the legislative system reboot with regard to environmental matters. Ukraine became an active participant of the ‘race to the bottom’, because the competition to cut a slice of an ‘international economic cake’ leads to a drop in environmental standards.

It would seem that the prospects are not particularly bright for the Ukrainian environment.  However, in the case of a deeper analysis of international agreements, one can see specific ‘win-win’ opportunities for all parties.

Environmental ‘Letter of the Agreement’

The emphasis on environmental aspects is common for the free trade agreements of the new generation. The Free Trade Agreement between Canada and Ukraine is no exception. The document contains direct links to the environmental conventions and protocols to be followed by the parties. These are, for example, the Convention on International Trade in Endangered Species of Wild Fauna and Flora (СITES Convention), the Montreal Protocol on Substances that Deplete the Ozone Layer, the Stockholm Convention on Persistent Organic Pollutants, etc.

In addition, often before signing a free trade agreement, countries conduct its environmental assessment. This helps each party to provide for possible negative impacts and, therefore, make an informed decision and properly plan appropriate countermeasures. In Canada this is stipulated by the legislation – Environmental Assessment Report of the Free Trade Agreement between Canada and Ukraine is available online.

In the terms of environmental regulation, Ukraine is in a better position than the developed countries at the beginning of their economic upturn

While analyzing the articles of the agreement, one can assume that in the terms of environmental regulation Ukraine is in a better position than the developed countries at the beginning of their economic upturn. Since even Canada, learning from its own mistakes, ended up with the need for introduction of more stringent environmental regulations and development of innovative and cost-effective production technologies. And Ukraine can simply adopt these ready-made tools that, in addition, will bring Ukrainian production closer to the European and international standards.

Let Consumers Choose by the Means of a Dollar

Ralph Fücks, the popular German author, in his book ‘The Green Revolution’ claims that, in the modern world, economic growth and environmental protection are not opposed, but become a single whole. So, the obvious solution of the environmental-economic dilemma would be a capital investment in the upgrading of Ukrainian production. Of course, in reality, such quick changes are not so easy to introduce. However, there is an obvious and environmentally-friendly winning approach for small and medium export businesses – let foreign customers support the investments in sustainable production of Ukrainian goods.

In Canada, more than 50 percent of the population identify themselves as responsible consumers.

Greater attention on the part of Ukrainian producers to the environmental protection issues may be rewarded in the markets of the developed countries, such as Canada. Here it has been long-established and growing trend of responsible consumption, when the consumer deliberately buys those goods that reduce the use of energy or water, contain recycled materials or can be recycled themselves, are non-toxic and biodegradable. For example, in Canada, about 58% of the population identify themselves as responsible consumers. Not to mention the global crush on organic products.

The ‘eco-friendly’ image is certainly not just the writing on the label. This is a strategic work, investment and brand development. In some cases, the claimed environmental benefits of the product must be approved by an independent third party in the form of an appropriate certificate. For example, in Canada, consumers very well know product certification according to the ISO 14001 “Environmental Management System” standard, organic certification of agricultural products according to the Canada Organic Regime, timber certification by Forest Stewardship Council (FSC), certification of energy efficiency of electrical appliances by Energy Star, etc.

It is also important to remember that unfounded marketing claims of environmental benefits of your products are the examples of so-called ‘greenwashing’ and involve administrative liability both in Canada and in Ukraine.

The real environmental benefits of goods have direct financial benefits: for example, the cost of the certified organic agricultural products in Canada, on the average, is 40% higher than of their conventional equivalents. So, there is a possibility to not only compensate the costs associated with certification and investments in the production, but also get the higher returns.

Special focus of the Free Trade Agreement between Canada and Ukraine and other international agreements on environmental aspects may create conditions for a quantum leap of domestic producers. Why do the same mistakes, which the developed countries has already made, and go through decades of the depletion of raw material resources, when it is possible to look forward, follow the global trends and get additional price advantages? It is environmental friendliness of Ukrainian goods that can be a part of the brand of Ukraine in international markets and, at the same time, the key to sustainable development of Ukrainian economy.

Information and support on environmental aspects of export to Canada are available at the government Export Promotion Office and Canada-Ukraine Trade & Investment Support project.

Author: Zoia Pavlenko, Ukrainian Environment Expert at CUTIS project