Review of 2020 Trade Regimes

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

Source: Ukrainian Law Firms 2021

Against the backdrop of international trade liberalization, 2020 can generally be described as positive. Within the framework of the EU-Ukraine Association Agreement, mechanisms not previously used by the parties were tested and launched for the first time, and further expansion of mutual access to the markets was declared. The progress in bilateral economic cooperation between Ukraine and a number of other states is also worth noting.

EU-Ukraine Trade Relations have been Marked by the Following

(1) Change in Trade Preferences under the Association Agreement

At the end of 2019, by adopting Law of Ukraine No. 345-IX of 5 December 2019, the Verkhovna Rada of Ukraine ratified the Agreement in the form of an exchange of letters between Ukraine and the European Union, amending the trade preferences for poultry meat and poultry meat preparations provided for by the Association Agreement. According to the aforementioned agreement, which came into force on 1 February 2020, Ukraine and the EU have significantly increased the tariff quotas for poultry meat from 18,400 tons to 68,400 tons. Given the dynamic nature of the trade quotas that apply under the Association Agreement, Ukrainian exporters will be able to supply duty free up to 70,000 tons of poultry meat to the EU market in 2021.

The signing and ratification of the said Agreement result from the parties’ desire to improve the provisions of the Association Agreement by eliminating all loopholes used by the parties when exporting poultry meat.

It is of particular note that further to the 7th meeting of the EU-Ukraine Association Council, held at the beginning of 2021, the parties reaffirmed their commitment to start consultations on the further review of trade liberalization for goods under the DCFTA, in line with Article 29 of the Association Agreement, and to continuously update the relevant Annexes to the Agreement. Consequently, over the next two years, EU-oriented Ukrainian business should expect greater access to the European market, which in turn will contribute to an increase in goods turnover between Ukraine and the EU and further convergence of economies.

(2) First Dispute under the EU-Ukraine Association Agreement

On 11 December 2020, in Lugano (Switzerland), within the framework of the arbitration procedure provided for by Chapter 14 of Title IV of the Association Agreement, the Arbitration Panel awarded a decision in a dispute between Ukraine and the EU in connection with the introduction by Ukraine of a moratorium on the export of unprocessed timber (round logs). It should be noted that this is the first precedent of the application of Chapter 14 of Title IV of the Association Agreement.

The Arbitration Panel recognized the lawfulness of the permanent ban on the exports of timber and sawn wood products of valuable and rare types of wood. Supporting Ukraine’s position that forests are an exhaustible resource, the arbitrators acknowledged that the 2015 ban on the export of round timber does not comply with the provisions of the Association Agreement, and recommended that Ukraine take all necessary measures to implement this decision, taking into account all the relevant provisions of the Agreement, including the provisions of Chapter 13 (Trade and Sustainable Development), especially Article 294 (Trade in Forest Products), which obliges both Ukraine and the EU to improve forest law-enforcement and governance and promote trade in legal and sustainable forest products.

The dispute with the EU arose in connection with the introduction by Ukraine of a moratorium on the export of unprocessed timber. Back in 2015, the ban was imposed temporarily, for a period of 10 years, on the export of unprocessed timber of any species, with the exception of pine, for which the moratorium began on 1 January, 2017.

In January 2019, the EU requested consultations with Ukraine with regard to a temporary ban on the export of unprocessed timber. The consultations did not result in any mutually-agreed decision, and in June 2019 the EU initiated dispute resolution through arbitration and sent a request to establish an Arbitration Panel.

This was the first dispute within the framework of the EU-Ukraine Association Agreement and the second case in the EU’s history for a case to be resolved by ad hoc arbitration provided for by a bilateral interstate trade agreement. The case was about the legal issues of interpretation of provisions in the EU-Ukraine Association Agreement, particularly with respect to the right of each party to establish and regulate the levels of national environmental protection, sustainable forest management, as well as issues of the national policy of Ukraine in the field of forestry and environmental protection. It should be noted that based on the results of dispute resolution, Ukraine was left with the opportunity to choose the tools for implementing the recommendations of the Arbitration Panel. It is expected that these recommendations will be implemented by Ukraine in 2021 by way of developing and adopting a law aimed at regulating the timber market in the country.

It is worth noting that this arbitration enabled identification of a number of procedural problems requiring additional attention, and it is likely that in the near future we should expect changes to the existing rules for disputes resolution within the framework of the bilateral agreement. In general, the envisaged dispute settlement mechanism has demonstrated its potential to become an effective means of protecting the national interests of Ukraine in its relations with the EU.

(3) Industrial Visa-free Regime

In October 2020, the EU preliminary assessment mission began its work in Ukraine with regard to the conclusion of an Agreement on Conformity Assessment and Acceptance of Industrial Products (ACAA, or industrial visa-free regime). The purpose of this mission is to prepare a list of legislative and regulatory actions that may be required to be fully prepared for negotiations on the ACAA conclusion. An inception report will be prepared, which should consolidate all the available information and the expected further steps to follow. Later, in December 2020, Olha Stefanishyna, Deputy Prime Minister for European and Euro-Atlantic Integration, mentioned that Ukraine and the EU had previously agreed to sign the ACCA on certain types of products, namely: low-voltage equipment, electromagnetic equipment, machines and mechanisms.

Upon reaching agreements on the state of the relevant technical legislation of Ukraine, standards and infrastructure, the ACCA will be added as a Protocol to the EU-Ukraine Association Agreement.

Overcoming the technical barriers to trade in industrial products is an important precondition for the effective functioning of the Deep and Comprehensive Free Trade Area between the parties, as well as for an increase in Ukrainian exports of goods with high added value not only to EU countries, but also to third countries in the world.

(4) BREXIT After-Effects

BREXIT made it necessary to revise cooperation with the UK, which resulted in the signing of the Political, Free Trade and ­Strategic Partnership Agreement between the United Kingdom of Great Britain and Northern Ireland and Ukraine on 8 October 2020. This Agreement, which came into force on 1 January 2021, provides for duty free trade in goods, with the exception of items for which the rates are specifically listed in Annex 1-A, and also sets tariff quotas for certain goods. With regard to the above mentioned, UK tariff quotas were established for 36 types of goods, while Ukraine has provided quotas for only 3 types of goods.

(5) The State of Israel

In addition to the agreement with the UK, on 1 January 2021, the Free Trade Agreement between Ukraine and Israel also came into force. The Agreement is aimed at the gradual abolition of import duties on agricultural and industrial goods. At the same time, the rules of origin of goods will be partly determined according to the Regional Convention on Pan-Euro-Mediterranean Preferential Rules of Origin (Pan-Euro-Med), which suggests Israel’s ambitions to join the Convention.

By this Agreement, Israel canceled about 80% of import duties for Ukrainian industrial goods and more than 9% for agricultural products, while Ukraine canceled 70% of import duties for Israeli industry and more than 6% for the agrarian sector, which is considered to be much more than just parity.

(6) Canada

In 2020, the Canada-Ukraine Free Trade Agreement was not disregarded. At the beginning of last year, the Canadian government initiated public discussions of options for improving this agreement. Ukraine may well expect enlarged privileged access of Ukrainian goods to the Canadian market in the near future.

(7) Negotiations with the Republic of Moldova

That same January 2020, Ukraine and Moldova started the first round of negotiations to amend the Intergovernmental Free Trade Agreement between Ukraine and Moldova. The parties intended to ensure in their mutual trade relations the application of preferential rules of origin provided for by the Regional Convention on Pan-Euro-Mediterranean Preferential Rules of Origin, to which Ukraine became a party back in 2018.

(8) Turkish Gambit

Contrary to expectations, lengthy negotiations on a free trade area with the Republic of Turkey reached no logical end in 2020. However, in early March 2021, the Prime Minister of Ukraine announced the finalization of an agreement ahead of the meeting of the Presidents of the two countries. Despite the political statements, the question of conclusion of an agreement in 2021 remains doubtful.

(9) Commonwealth of Independent States Free Trade Area Agreement of 18 October 2011

Trade relations with the Russian Federation remained unchanged. Last year brought another expanded wave of goods falling under the embargo list, and the first half of 2021 witnessed the extension of sanctions against individuals and legal entities.

Trade relations with the Republic of Belarus became significantly more complicated. Amidst the political crisis, Ukraine unilaterally, at the initiative of business, applied a special duty of 16.08% for fittings and 35% for motor vehicles (MAZ trolleybuses). According to Ukraine, the actions of the Republic of Belarus were unfriendly and discriminatory taking into consideration the ban on the Belarusian export of scrap metal, and the application of a recycling fee and a local correction in public procurements. The decisions were taken behind closed doors, without any notifications and consultations of the parties, and resulted in the complete bewilderment and counter measures. In turn, the Republic of Belarus imposed licensing, which is actually a ban on the export of Ukrainian goods exceeding USD 100 million/year, in particular for agricultural machinery, wallpaper, beer, confectionery, radiators, paper, refrigerators, etc.

If the parties fail to reach an agreement and do not return to the legal framework of the CIS Free Trade Area Agreement, which is quite a difficult task due to the restrictions on official contacts between the countries, the situation may develop towards conflict escalation and lead to the bilateral blocking of trade, by the example of trade relations between Ukraine and the Russian Federation.

Therefore, in the second half of 2021, the government of Ukraine will face the task of not only finding new markets and expanding conditions for trade liberalization with other countries, but also preserving access to long-standing existing markets.