EU-UKRAINE
CIVIL SOCIETY PLATFORM / / ПЛАТФОРМА ГРОМАДЯНСЬКОГО СУСПІЛЬСТВА УКРАЇНА-ЄС

4thmeeting, Brussels, 18 May 2017

EU-UKRAINE DCFTA: FIRST YEAR OF IMPLEMENTATION

Drafted by: Sofia Bournou, BusinessEurope

This report is looking at the progress of the implementation of the EU-Ukraine Deep and Comprehensive Free Trade Area (DCFTA), which is part of the EU-Ukraine Association Agreement[1]. In order to have a more comprehensive and global perspective on the progress of the implementation of the DCFTA, this report is also looking at other aspects of the Association Agreement, that contribute to this purpose – suchas broader institutional elements.

Introduction

The Association Agreement was signed on 27 June 2014. It was simultaneously ratified by the Verkhovna Rada and the European Parliament on 16 September 2014 and entered into provisional application on 31 December 2015. The full application of the Association Agreement will take place as soon as all the national Parliaments of the EU give their consent[2].

Title IV of the Association Agreement entitled “Trade and Trade-related Matters” comprises the DCFTA. It consists of 15 Chapters (accompanied by 14 Annexes) and 3 Protocols, namely:

Chapters:

  1. National treatment and market access in goods
  2. Trade remedies
  3. Technical barriers to trade
  4. Sanitary and phytosanitary measures
  5. Customs and trade facilitation
  6. Establishment, trade in services and electronic commerce
  7. Current payments and movement of capital
  8. Public procurement
  9. Intellectual property
  10. Competition
  11. Trade-related energy
  12. Transparency
  13. Trade and sustainable development
  14. Dispute settlement
  15. Mediation mechanism

Protocols:

  1. On Rules of Origin
  2. On mutual administrative assistance in customs matters
  3. On a Framework Agreement between the European Union and Ukraine on the General Principles for the Participation of Ukraine in Union Programmes

Besides opening up more market opportunities, the parties of the DCFTA paid particular attention to promoting regulatory approximation and, supporting trade and sustainable development.

Looking at the evolution of trade flows between the EU and Ukraine[3], we see that in 2016, EU exports to Ukraine reached € 16.5 billion, increased from € 14.0 billion in 2015. EU imports from Ukraine rose at € 13.1 billion, increased from € 12.8 billion in 2015. Between January and August 2016, the total share of trade (imports and exports)of Ukraine with the EU was 38.8% at a value of € 42.820 Million.

With regards to trade in services and foreign direct investment (FDI), no statistics are available yet for 2016. In 2015, the EU exported to Ukraine services valued € 5.0 billion, while imported services from Ukraine valued € 2.7 billion. This was an increase in comparison to 2014, where EU exports of services to Ukraine amounted at € 4.7 billionand EU imports of services from Ukraine at € 2.6 billion. In terms of FDI, in 2015, EU outward stocks (in Ukraine) amounted at € 16.3 billion, while EU inward stocks (from Ukraine) reached € 0.4 Billion.

These statistics indicate that the full potential of the DCFTA has not been reached yet. However, more analysis is required to evaluate the reasons behind this, taking into account, the progress in the implementation of the DCFTA as such, the overall political and economic environment in Ukraine and in the EU as well as the progress of the implementationof the EU-Ukraine Association Agreement in general.

Tariffs and tariff rates quotas

-Tariffs:

95% of duties were abolished on day one of the implementation of the DCFTA, while the final target is to scrub-off 99.1% of EU duties and 98,1% of Ukraine’s. Liberalisation periods are longer for some products on the Ukrainian side. These include automotive at 10 years (the longest liberalisation period), fertilisers at 7 years and footwear at 5 years.

Ukraine has raised particular concerns on the competitiveness and exports of their automotive sector under the Agreement. From an EU perspective, even if concessions for this sector under the EU Generalised System of Preferences (GSP) are expiring, the DCFTA provides a good framework for the development of the sector, under the tariff schedules over a 10-year transitional period and a 15-year safeguard clause.

Ukrainehas also kept the right to maintain export duties over a 13-year transitional period and has a safeguard clause in the form of surcharge.

-Tariff rate quotas (TRQ):

Ukraine holds 3 TRQ on EU imports(poultry;pork and sugars), while the EUhas in place around 40TRQ on Ukrainian importsunder the DCFTA (sheep meat; honey; garlic; oats; sugar; glucose and fructose; flavoured sugar syrup; groats, pellets, grains; malt and gluten; starches; dextrins and glues; residues; mushrooms; preserved tomatoes; grape and apple juice; buttermilk, cream, yogurt; dairy spreads; sweetcorn; fructose, preparations, odoriferous substances; tapioca, bulgur wheat; chocolate milk crumb and others; food preparations; ethyl alcohol, cigars, cigarettes; mannitol, sorbitol; finishing agents; beef meat; pork meat; poultry meat; milk, cream, condensed milk and yogurts; milk powder; butter and diary spreads; eggs and albumins; common wheat, flour and pellets; barley, flour and pellets; maize, flour and pellets). There is an asymmetry in this regard, which the EU seeks to address through autonomous trade measures (look at section “Other developments).

Ukraine has expressed concerns on the threshold of the EU’s TRQ, especially the one on poultry. Indeed, the poultry quota was quickly exhausted, not responding to the real capacity of Ukraine. This was mainly due to the fact that a few producers in Ukraine were able to fulfil it). Following the existing rules, the Most Favoured Nation (MFN) treatment is applied for the rest of Ukraine’s exports. However, there is a discussion on increasing the quotas.

Services

A negative list approach (under the format of ‘liberalisation with reservations’) is taken in the DCFTA in the area of services. The Agreement also promises gradual integration for services sectors in the EU market.This is a long-term process, pending on approximation of standards and legislation. In this context, Ukraine should deliver roadmaps on areas such as postal services, telecommunications services, international maritime[4] services and financial services.Although the deadline for the delivery of the roadmaps(June 2016) was missed, Ukraine has delivered some of the roadmaps which now need to be endorsed by the relevant bodies of the Agreement.

With regards to financial services in particular, the changes in the EU’s legal framework that came as a result of the global financial crisis have created a number of problems in the implementation of this particular aspect of the DCFTA and the full integration of Ukraine in the EU’s internal market for services. For instance, the Banking Union and the Capital Union do not allow non-EU countries to participate in supervising bodies. Discussions are currently being undertaken within the EU on finding a solution to this issue. The EU is also explaining the new acquis to Ukraine. Reforms in the banking sector of Ukraine could facilitate a solution.

Public Procurement

Significant progress was achieved in the area of public procurement during the first year of implementation of the DCFTA. This is reflected in the Council Decision (EU) 2017/43 of 12 December 2016[5], which adopts on behalf of the EUDecision No 1/2016 of the EU-Ukraine Association Committee in Trade Configuration of updating Annex XXI to the Association Agreement and giving a favourable opinion regarding the comprehensive roadmap on public procurement.

As agreed under the DCFTA, Ukraine should ensure that its public procurement legislation is gradually in line with the EU acquis in this area. Annex XXI is updated in accordance with the new EU Directives in the area of public procurement, amending the thresholds for public procurement contracts. The new structure of the EU acquis on public procurement is also reflected. The Roadmap runs until 2025.

Furthermore, Ukraine has also made advances in the area of E-procurement through the adoption of the ProZorro[6] system. This has been an impressive effort of the Ukrainian authorities, with pilot projects now being extended to apply at regional level. Some issues of neutrality have been observed. However, the review body under ProZorrois currently working to resolve them.

Competition

This is another area were approximation between the EU and Ukraine legislation and norms is very advanced since the implementation of the DCFTA. Most of the commitments described are already in place, including the adoption of by-laws and the establishment on the part of Ukraine of a State-Aid Authorisation Agency – the Antimonopoly Committee of Ukraine (AMCU).

SPS Chapter

Implementation of the SPS Chapter is progressing steadily, especially on food safety and SPS veterinary issues. The authorities are currently working on improving the enforcement of legal frameworks on site, focusing on the process of individual authorisation of exports and inspections of certain products and establishments. Furthermore, some problems, namely concerning the application of the principle of regionalisation,are being solved by the Member States.

The roadmap on SPS is still in the pipeline. An agreement at technical level is reached and foresees a 5-stage process of implementation of the EU acquis. The roadmap is pending adoption by the EU-Ukraine Association Committee in Trade Configuration, which is planned to take place in June 2017.

Trade and Sustainable Development Chapter

There are serious problems in the implementation of the Trade and Sustainable Development Chapter of the DCFTA.Although all the members of the Domestic Advisory Group (DAG) have been appointed on the EU side[7], theUkrainian side has not been able to appointexperts on their side.Although the government should (under the rules of the DCFTA) facilitate this process, in practice there are delays in the procedure. This practically means that no monitoring of the implementation of the DCFTA has effectively taken placesince its provisional application.

There are already a number of issues on the agenda of EU DAG that its members would like to address and, in this regard, should be discussed at the meeting of the Trade and Sustainable Development sub-committee. These are:

-A wood export ban maintained by Ukraine and issues of sustainable forestry – managementand good governance practices

-Labour inspections in Ukraine and implementation of the relevant ILO instruments

-The implementation by Ukraine of international standards on animal health

-Sustainable fisheries policy in Ukraine

Institutional aspects of the DCFTA

Institutional aspects of the EU-Ukraine Association Agreement are described under Title VII – Institutional, general and final provisions. The Agreement foresees the establishment of EU-Ukraine Association Committee in Trade configuration with a mandate to discuss issues pertaining to the DCFTA.Meetings should take place on an annual basis. The first meeting of the EU-Ukraine Association Committee in Trade configuration took place on 12-13 April 2016, while the second meeting is planned to take place in June 2017, in Brussels.

There are 4 sub-committees under the EU-Ukraine Association Committee in Trade configuration:

-Trade and Sustainable Development

No meeting of the sub-Committee in question has taken place so far, due to institutional issues on the part of Ukraine. The first meeting should take place at the end of May 2017 in Brussels.

-Geographical Indications (GIs)

The next meeting of the sub-Committee will take place on 18 May 2017 in Kiev.

-Customs and Trade Facilitation

The next meeting of the sub-Committee in question is planned to be organised in June or July 2017 in Brussels.

-Sanitary and Phytosanitary (SPS)

The next meeting of the SPS sub-Committee took place on 16 May in Kiev. At the moment of the writing of this report, technical work was on-going for the finalisation of the rules of procedurefor the particular sub-Committee.

Furthermore, the Agreement foresees the appointment of arbitrators under the State-to-State dispute settlementprocedure. Although the EU has completed the work in this area, the appointment of arbitrators on the part of Ukraine is still pending. We understand that this may be due to a constitutional issue in Ukraine. At the same time, there is a clear responsibility of the parties under the Agreement that should be respected.

Other developments

There is a number of developments that may have an impact on the implementation of the EU-Ukraine DCFTA that are worth mentioning:

-Implementation of Title V of the EU-Ukraine Association Agreement – Economic and sector cooperation

This is the basis for reinforcing dialogue at both the regulatory and industrial levels between the EU and Ukraine. It covers sectoral issues such as automotive, engineering, space, as well as horizontal issues, including SMEs and technical barriers to trade. Work is progressing well in this area. A high-level industrial and regulatory dialogue between the Ministry of Economic Development and Trade of Ukraine and the European Commission’s Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs took place recently, on 2 March 2017 in Brussels.

-Regulation on the introduction of temporary autonomous trade measures for Ukraine supplementing the trade concessions available under the Association Agreement

This Regulation was proposed by the European Commission as an instrument to facilitate exports of certain Ukrainian products into the EU market.The legislative process for the adoption of the Regulation is still on-going. The Committee on International Trade (INTA) of the European Parliament has adopted its Opinion on 4 May 2017, proposing amendments to the Commission’s proposal, slightly watering down the strength of the autonomous measures. The Council has not adopted its Opinion yet. At this stage, it is not clear whether there will be a trilogue among the Institutions.

-Visa liberalisation for Ukrainian citizens

On 11 May 2017, the Council adopted a Regulation granting a visa-free regime to Ukrainian citizens travelling to the EU for a period of 90 days in any 180-day period. The Regulation should become effective in June2017.

-Accession of Ukraine in the pan-Euro-Mediterranean cumulation and the PEM Convention (Pan-Euro-Med Convention)

Ukraine has officially requested to join the Pan-Euro-Med Convention 12 September

2016.A decision is expected to be taken by the Council in the course of May 2017.

Recommendations

-All pending institutional and structural matters that prevent the full implementation of the DCFTA and the Trade and Sustainable Development Chapter in particular should be solved.As a party of the Agreement, Ukraine should conclude the process of the appointment of their DAG members and arbitrators for the dispute settlement mechanism under the Agreement as soon as possible. The implementation and monitoring of the DCFTA is a responsibility of both parties of the Agreement and no further delays should be allowed in this process.

-The wood export ban applied by Ukraine and all concerns related to the sustainability of the forestry sector as well as all issues related to the implementation of labour standards in Ukraine, including labour inspections in particular, should be addressed as a matter of urgency by the relevant structures established under the EU-Ukraine Association Agreement and the DCFTA.

-The EU and Ukraine should closely monitor the implementation of the DCFTA, assess the impact on bilateral trade and investments, as well as on labour, environmental issues pertaining to the Agreement and human rights. This assessment shall also be used as part of the EU’s and Ukraine’s analysis on the potential update of certain aspects of the DCFTA after the lapse of the initial 5-year period of implementation of the Agreement. In this context, the EU DAG and the EU part of the Civil Society Forum should play a central role in identifying areas of interest for the EU. A similar exercise should take place on the Ukrainian side as well.

-A coherent implementation of the EU-Ukraine Association Agreement as a whole should be pursued.There are complementarities between the different Titles of the Agreement, such as between the DCFTA and the Economic and sector cooperation that are mutually supportive and can effectively contribute to increasing the benefits of the Association Agreement in general and the DCFTAin particular.

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[1]

[2] 27 EU Member States have so far ratified the EU-Ukraine Association Agreement, with the exception of the Netherlands, following a referendum that was organised on 6 April 2016, which concluded in 61% of votes against the Agreement.

[3]Source: Eurostat, DG TRADE

[4]The total ban on Crimea should be taken into account when developing the roadmap in international maritime services.

[5]

[6]

[7] The mandate of the EU DAG runs until September 2020