The Cost of Fence-Sitting: A counterfactual analysis of Ukraine’s non-integration with the EU

Abstract: This paper provides an estimate of the export flows that would have emerged from Ukraine to the European Union (EU) had Ukraine integrated with the EU. Using the 2004 enlargement of the EU as a quasi-natural experiment, this paper employs the Synthetic Control Method (SCM) to estimate the counterfactual Ukrainian export flows to the EU. The results from the SCM shows that the aggregate export flows from Ukraine to the EU would have been 34.6% higher if Ukraine had joined the EU in 2004. In addition, the positive export effects are estimated to reach about 40.4% in the latter part of the post-treatment period. The results are robust to standard sensitivity checks. The results are supplemented by a Difference-in-differences (DiD) estimator. The DiD estimator suggests that the non-integration of Ukraine lowered potential exports by 31.9% These results are strongly consistent in magnitude compared to the results from the baseline SCM estimation, although the size of the effects varies less over time in the DiD estimation. The results suggest that Ukraine paid a heavy price in terms of exports, as a result of its non-integration with the EU.