Date of publication: 20 May 2016
Olena Omelchenko, Partner, Attorney at Law, Head of International Trade Practice
Source: European Pravda
On April 27, 2016 at its meeting Moldovan Government passed a Decree establishing a tariff quota for certain goods imported from Ukraine.
It means that towards the goods imported over the established quota Moldova will charge a duty at the level of its current “binding” tariffs in the WTO. Limitations are expected to become valid after their publication (which is expected to happen shortly) and will save validity till January 01, 2017.
In this connection it is important to remind that trade relations between Ukraine and Moldova are governed by international agreements and neither country has the right to unilaterally change the trade rules.
In case of violation of trade obligations the suffering party may resort to a dispute-settlement mechanism. In this case it is vitally important to define which agreement will be violated and under which procedure a violation may be appealed.
What did Moldova violate?
At the moment of its joining the WTO Moldova undertook obligations not to raise the level of duties higher than the level of “binding” tariffs which were recorded in the tariff schedule and provide a trade regime without discrimination for all the WTO member-countries, including Ukraine.
Pursuant to the WTO rules there is a possibility to apply a more liberal trade regime if in addition the parties enter into the Agreement on customs union or free trade area.
By ratifying the Agreement on CIS free trade area as of October 18, 2011 Moldova undertook to zero out the duties in its mutual trade with Ukraine on two-party basis. Articles 2 and 3 of the Agreement stipulate that the Parties will not use duties and quantity limitations in the mutual trade except those allowed by Articles 8 and 9 of the Agreement.
Thus, under certain conditions the Agreement allows to introduce special protection measures only as a result of an investigation when import is carried out in such quantities and under such terms which inflict harm or create an imminent threat of losses, as well as in connection with dumping or subsidized import. The same rules are stipulated by corresponding WTO agreements.
Special protection measures are introduced in the form of duties or quotas, and are applied towards all the countries, but not only to one particular country.
There are clearly-cut requirements towards notification of the WTO Committee about protective measures, start of an investigation, establishment of losses and upholding a decision on introduction of measures.
It means that an interested party – a WTO member – has the right to previously study the materials of the investigation, protect its interests within the established procedure, take part in public hearings and consultations, claim provision of concession relating to other goods etc.
So, if it is assumed that Moldavian manufacturers are suffering losses because of the steep increase of import from Ukraine, Moldova should have started a special protection investigation, but not ignore requirements of international agreements by unilaterally raising the amount of duties.
In view of the aforesaid our neighbors have violated the CIS Free Trade Agreement, as well as the principle of creation of free trade areas, stipulated by Article 24 of the General Agreement on Tariffs and Trade, as well as the WTO Agreement on Safeguards.
What are further options for Ukraine?
Ukrainian Government has assumed preventive measures to find a solution to this matter. Governmental officials held meetings at the ambassadorial level, sent official written requests, carried out consultations at an expert level. There was even a phone conversation at the level of Deputy Prime-Ministers.
Undoubtedly, it is advisable to further stick to diplomatic practice towards settlement of the problematic issue by requesting consultations, preferably at the level of Deputy Ministers, to increase the likelihood of attaining a desirable result.
If the limitations are not lifted within a reasonable period of time Ukraine may resort to adequate steps in the form of introduction of corresponding measures as a response to unfriendly and discriminatory actions, as Ukrainian Deputy Prime-Minister, Stepan Kubiv, declared.
In any case Kyiv will undoubtedly react to violations allowed by Chisinau. This question is a matter of principle from the point of view of “chain reaction” on the part of other countries – parties to the Agreement, as well as in the context of probability of further prolongation of measures over 2017 or extension of measures onto a wider list of products.
At the same time there is a need to hurry up – if limitations proposed by Chisinau the volume of quotes will be exhausted till autumn.
Let’s outline the legal mechanisms to which Ukraine may resort.
Is there any hope for arbitration in CIS?
The main complexity is that settlement of the dispute between Ukraine and Moldova must be carried out under the procedure stipulated by the CIS Free Trade Area Agreement.
Pursuant to Article 19 of the Agreement Ukraine may request consultations with Moldova to achieve mutually acceptable settlement of the current irregularities, if it comes to conclusion that Moldova is failing to perform its obligations under the Agreement and such failure inflicts or threatens to inflict harm to economic interests.
If the parties fail to achieve consent the dispute may be transferred for consideration of the expert committee pursuant to the procedure of settlement of disputes which constitutes an integral part of the agreement.
According to the established rules a dispute may be reviewed by an expert commission consisting of three persons picked from the list of experts published at the web-site of CIS Executive Committee.
Armenia, Belarus, Kazakhstan, Kirgizia, Moldova, Russia, Tajikistan and Ukraine provided their expert candidatures, but major part of them occupies official positions at state official authorities of the member-countries. For example, Moldova appointed three persons: one official from the Ministry of Justice and two employees from the Ministry for Economic Development.
Correspondingly, one cannot expect an impartial consideration of any matter without influence of certain countries onto the experts’ decisions.
Moreover, Ukraine will find it hard to promptly convene the committee of experts as soon as of Ukrainian state budget does not stipulate for expenses intended to compensate experts’ services, as well as there is no procedure of engagement of legal advisers for settlement of disputes.
In practice from the moment when the Agreement came into force Ukraine has had consultations regarding Article 19 of the Agreement (and then only upon Russia’s initiative) in connection with introduction by Ukraine of special duties applied to passenger cars. As a result Russia did not convene experts’ commission and preferred to join the WTO dispute initiated by Japan.
With consideration for the difficulties arising in view of realization of provisions under the procedure stipulated by this Agreement it is not to be expected that Ukraine will follow this path of dispute settlement.
Initiate proceedings in Moldova
One should not forget about the possibility to appeal the decision to Moldovan courts as soon as the Decree in question was passed in violation of the national legislation of this country.
Article 8 of the Constitution states that the Republic of Moldova is obliged to follow the requirements of the Charter of the United Nations Organization, as well as agreements to which it is a party, to build its relations with other countries under the generally accepted principles and norms of international law. One of the principles of international law established by UN Charter states that “the agreements must be observed”.
The Agreement on CIS Free Trade Area was duly ratified by Moldova and takes precedent over the Decree adopted by the Government.
A question to be asked is whether the court system of Moldova is ready to come to an independent and impartial decision.
WTO and corresponding response measures
According to the WTO agreement about the rules and procedures of settlement of disputes Ukraine has the right to request consultations for achievement of mutually acceptable elimination of discrepancies which originated by virtue of violation of WTO norms and further to convene a group of experts for settlement of corresponding disputes, if necessary.
Regarding this matter the EU is on Ukraine’s side as soon as such similar negative precedent may affect the interests of the EU as well, which recently entered into Association Agreement with Moldova, including in relation to free trade area.
Among the deficiencies of this procedure may be its longevity. So long as the case reaches the point of dispute settlement interim measured will have expired.
Moreover, Moldova did not apply the duty over the current WTO “binding” tariff and did violate its tariff obligations stipulated by WTO Agreements, that is why it will be harder for Ukraine to prove the fact of violation by just referring to WTO norms.
At the same time application of the mentioned mechanism will allow avoiding extension of measures onto 2017 and imposing an obligation onto Moldova not to take similar decisions in the future.
So, there is only one quick and viable step – taking adequate measures related to Moldavian imports.
Actually Ukraine may also withdraw from its international obligations and introduce adequate measures in response based on the Law of Ukraine “On foreign economic activities”. Practice of application of such measures already exists in Ukraine, for example, in the form of introduction of measures against Belarus and Uzbekistan in 2015.
Adequate measures may be undertaken in quite an expedient manner, but there will likely be the problems with determination of goods which will get under such measures, because, after all, according to the data of the State Statistical Service of Ukraine related to 2015 the total commodity turnover between Ukraine and Republic of Moldova amounts to USD 565.5 mln, of which export is USD 524.3 mln and import is USD 41.2 mln.
A weak point of this approach is that Ukraine will be in violation of the Agreement itself.
On the positive side of the mechanism is swift reaction to the problem and strong position at the negotiations.