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Free Trade Areas – Better Access to Markets

Date of publication: 16 July 2019

Olena Omelchenko, Partner, Attorney at Law, Head of International Trade Practice

Source: Ukrainian Law Firms 2019

Regional trade agreements have become one of the most serious challenges facing the WTO over the many years of its existence. WTO rules do not prevent the conclusion of Free Trade Agreements (FTAs) and Agreements on Customs Unions, provided that such agreements promote the development of free trade and do not hamper the trade between its member states and third countries.

The overwhelming majority of regional trade agreements are concluded as FTAs.

Article XXIV of the General Agreement on Tariffs and Trade (GATT) 1994 provides that the free trade area shall mean a group of two or more customs territories in which the duties and other restrictive trade regulations for goods originating from such territories shall not be higher or more restrictive by nature than duties and other restrictive regulations of commerce applicable in the same constituent territories before the free trade area was established.

Upon entering into Free Trade Agreement the customs tariffs for trade between the countries of such area are significantly reduced, while the countries still retain their right to regulate their own relations and customs tariffs with the third countries. This is precisely the difference between the free trade areas and customs unions, which represent a more sophisticated form of economic integration and provide for a common tariff policy to the third countries, as well as for the uniform customs legislation.

This is the reason why the overwhelming majority of regional trade agreements are concluded as FTAs. And it is not surprising, since the FTAs regulate access to strategically important markets, i.e. ensure the required integration of the economies with the maximum possible preservation of sovereignty of the participating countries and with minimal efforts expended. In addition, the country can definitely enjoy a status of a member of several free trade areas.

Besides the system of dispute resolution in customs unions and free trade areas is different. The customs unions may have a permanent court to resolve disputes between the member states and to exercise control over the lawfulness of acts adopted by the supranational body governing a common tariff policy vis-à-vis third countries. Within the free trade areas all disputes between the countries are resolved through the ad hoc arbitration.

Global trends show that the number of FTAs has the tendency to increase from year to year, and the WTO statistics is a clear case in point; in particular, according to the WTO as much as 37 FTAs were in force in 1993, and by the end of 2018 there were already 467 FTAs in force.

The top five WTO members by the number of FTAs concluded are: the EU (40), the European Free Trade Association (31), Chile (30), Singapore (24) and Turkey (23).

Changed was not only the number of agreements, but also their content.

Previously bilateral free trade agreements were more frequent, and now multilateral agreements are being concluded more often. The FTAs are still called “regional”, although there is often no reference to a particular region and it is used to distinguish them from the WTO agreements only.

The content of regional trade agreements has undergone significant changes. In addition to reducing tariffs and lifting non-tariff barriers between the customs territories united into the free trade area, the agreements now regulate issues related to the intellectual property, sustainable development, investments, consumer rights and environmental standards. Thus, regional trade agreements go far beyond the GATT provisions and, by doing so, gradually shift the emphasis from the WTO multilateral trade system to the regional rules.

The major challenge for the WTO may be the establishment of a free trade area by entering into the mega-regional agreements covering several continents and weakening the WTO’s influence in the international trade.

The main reason for such quantitative increase in and qualitative growth of regional trade agreements is that year by year it becomes increasingly difficult to reach consensus when a large number of WTO members decides on any matter. At the same time, the bilateral agreement makes it much easier and quicker to find common ground on the new rules not yet adopted by the WTO, as well as to agree on the liberalization of trade and political concessions associated with such arrangements.

Pursuant to the WTO rules, the customs unions and free trade areas are the exceptions to the general WTO rule, since they provide certain privileges and preferences to a limited number of members, which violate the basic most-favoured-nation principle. The monitoring of compliance with this exception is entrusted to a special committee composed of all WTO members. The concerns about violation of the WTO provisions by the regional trade agreements were repeatedly expressed during the Committee’s meetings. Over time, the Committee’s functions were reduced to receiving notifications of agreements and gathering statistics. The dispute settlement body did not adopt any strict decision that conclusion of regional trade agreements violate the WTO provisions.

The lack of appropriate mechanism to monitor the implementation of Article XXIV of GATT 1994 led to a widespread conclusion of regional trade agreements that supersede the WTO’s influence in the international trade field.

Ukrainian experience

Ukraine is also benefitting from the free trade with a number of countries. In total, Ukraine has entered into 17 FTAs, 14 of which cover trade in goods and 3 regulate trade in goods and services.

Free Trade Agreements

In 1992 – 2006, before Ukraine’s accession to the WTO, Ukraine concluded bilateral FTAs with the CIS member states (Azerbaijan, Belarus, Armenia, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan and Uzbekistan), as well as FTA with the Republic of Macedonia.

These agreements do not provide for a real dispute resolution mechanism and are quite primitive as compared with the agreements concluded after Ukraine’s accession to the WTO.

EU-Ukraine Association Agreement

A perfect example of Ukraine’s participation in the classic regional trade agreement is the EU-Ukraine Association Agreement. From the very beginning it should have been an agreement containing trade provisions only, envisaging a common free trade area and covering trade in goods and services. However, at the time of its conclusion the text of the agreement was supplemented by a political part on cooperation in the field of justice, freedom and security in order to ensure the rule of law and respect for human rights and fundamental freedoms, as well as on economic and sectoral cooperation.

In addition to the classic free trade provisions, in its trade part the Association Agreement provides for the greater intellectual property obligations (in terms of geographical indications), possibility to apply bilateral safeguards related to the import of European cars to Ukraine, as well as a separate chapter on commitment to sustainable development.

The EU-Ukraine Association Agreement envisages a mechanism for disputes resolution through the ad hoc arbitration. The dispute review procedures are simplified, but similar to the WTO arrangements. It is worth recognizing that, in fact, the regional arbitration mechanisms are practically not used to resolve trade disputes. Having due regard to its significant influence, availability of the body of appeal and its practice of applying the rules of the multilateral trade system, the states usually appeal directly to the WTO Dispute Settlement Body.

However, in spite of the above, the EU took advantage from the provisions of the bilateral dispute settlement mechanism and has requested consultations in order to obtain evidence and explanations from the Ukrainian side regarding the restrictions on exports of round timber to further arrange an arbitration panel and resolve the dispute.

Still this Agreement remains the most important one for trade relations between Ukraine and EU.

Treaty on a Free Trade Area between members of the Commonwealth of Independent States

Equally important for Ukraine is the Treaty on a Free Trade Area dated 18 October 2011 with such CIS member states as: Belarus, Armenia, Kazakhstan, Kyrgyzstan, Moldova, the Russian Federation, Tajikistan and Uzbekistan.

The agreement came into force on 20 September 2012 and prompted changes into about one hundred bilateral documents regulating FTA between the CIS member states. In addition, the Treaty refers to the GATT 1994, envisages the complete zeroing of duties and elimination of the quantitative restrictions, and has its own mechanism for settling disputes between the contracting states.

However, experience show that Ukraine does not trust this dispute settling mechanism because of possible political influence on experts (arbitrators) appointed to consider the dispute. In particular, this became apparent after the Russian Federation unilaterally ceased to fulfill its obligations thereunder starting from 2016.

The Russian Federation has explained its actions as cased by “the exceptional circumstances affecting the interests and economic security of the Russian Federation and requiring the adoption of urgent measures” as related to the application of the trade and economic part of the EU-Ukraine Association Agreement starting from 1 January 2016.

Ukraine assessed the possibility to challenge this situation in the WTO and, in turn, adopted a political decision to raise import duty rates to the level envisaged by its WTO commitments.

Thus, this Treaty still remains important and regulates trade relations with all signatory states, except for the Russian Federation.

Other agreements on free trade area

Ukraine has certain trade preferences resulting from the conclusion of the Free Trade Agreement between Ukraine and the EFTA countries (Switzerland, Norway, Iceland and Liechtenstein) (came into force on 1 June 2012) and the Free Trade Agreement between the Government of Ukraine and the Government of Montenegro (came into force on 1 January 2013), the scope of which includes trade in goods and services.

The Free Trade Agreement between Ukraine and Canada has come into force on 1 August 2017 and regulates the trade in goods only. Recently the Free Trade Agreement was signed between the Cabinet of Ministers of Ukraine and the Government of the State of Israel. Currently the internal procedures are taking place to ensure its entry into force.

In addition, negotiations on FTAs with the Republic of Turkey and the Republic of Serbia are underway, which will only be completed when a balanced outcome is achieved for both parties.

Taking into account mentioned above, it’s worth recognizing that today regional trade agreements have become a standard, not an exception, designed only to complement universal regulation at the WTO level. And in view of the WTO crisis that has escalated in recent years, it remains to expect that regional trade agreements will only contribute to even more free trade flow between countries without barriers for trade with the outside. In other words, regional integration should complement the multilateral trading system and not threaten it.