Deep and Comprehensive Free Trade Area: Substance Course number: EUI_S14/A-12

1. Deep and Comprehensive Free Trade Area: SubstanceCourse number: EUI_S14/A-12 SLAF TetianaAnakina STF LyudmylaChernyaha

2. Plan of the module • Scope of DCFTA • Notion of DCFTA, FTA and DCFTA, main principles of DCFTA (general overview), DCFTA dispute resolution mechanism 2.Elements of DCFTA (general legal analysis) • movement of goods under AA, movement of services under AA, movement of capital and current payments under AA 3. DCFTA (general economic analysis) • Background for signing AA/DCFTA, key features, benefits and challenges of the DCFTA for Ukrainians (trade and business opportunities) • Tariffs and non-tariffs barriers 4. Policy implications • Sectors overview, benefits and costs for business, consumers and government

3. Part 1. General scope of DCFTA

4. aims of Association (art. 1 (2) AA) d) to establish conditions for enhanced economic and trade relations leading towards Ukraine's gradual integration in the EU Internal Market, including by setting up a Deep and Comprehensive Free Trade Area as stipulated in Title IV (Trade and Trade-related Matters) of this Agreement, and to support Ukrainian efforts to complete the transition into a functioning market economy by means of, inter alia, the progressive approximation of its legislation to that of the Union;

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

7. Forms of international economic integration (under B.Belassa)

8. DCFTAart. 1(2.4) AA+ art. 25-336 AA Deep Aim: Integration in EU Internal Market How? Through legal approximation (art. 474 AА)+ proper implementation + regulatory approximation – through EU standards ,metrology, competition rules, state aid, market supervision, accreditation etc. Comprehensive Wide scope of regulation Free movement of goods (95%) Free or significantly liberalized movement of services Free movement of capital and current payments

9. EU-Ukraine DCFTA

10. Main principles of DCFTA • Equal treatment • Fair competition • Limited state aid • Conditionality • Gradual liberalization • Transparency • Safeguard (protective) measures of Parties

11. DCFTA dispute settlement mechanism • Aim: avoid and settle, in good faith, any dispute between the Partieson interpretation and application of Part IV • Based on WTO Dispute Settlement Understanding • Offers dispute settlement under the WTO as alternative • Consultations • Arbitration • Binding decision • Does not cover disputes dealing with trade remedies, trade and sustainable development and antitrust and mergers; • quicker procedure for energy disputes • Mediation • Lighter and quicker mechanism • non-binding decision

12. Part 2 Elements of DCFTA (general legal analysis)

13. Element 1. Free movement of GOODS Customs privileges Up to 10 years, gradually Status quo (art. 30 AА) – the minimum customs level. Possible participation in other customs unions with no collision provisions to AA/DCFTA (Art. 39 AА) Safeguard measures to protect national or public interest.

14. Customs privileges 1) No customs – 0% (agro products 82,2%, food 83,4%, manufactured goods94,7%): - animals, plants, fish, cheese, nuts, fruits…. 2) No customs in the frames of quotas (40 quotas, including 36 on agro products) – principle “who is the first”! Above quota – customs (limited or full) (beef meet, pork meet, lamb meet, poultry meat, milk, yoghurt, honey …) Schedule in Annex І-А AА Unilateral additional customs privileges – Regulation of European Parliament and the Council 2017/1566

15. Requirements for goods Food and feed safety Animal health Plant health Public health Marketing standards Technical requirements Ecological requirements Sanitary and fit sanitary requirements Respect for intellectual property and for geographical titles

16. Concept of “originating products”Protocol 1 AA Principle of state of origin vegetables animals goods of maritime fish production Principle of fulfillment of conditions of production • sufficiently worked or processed products (Annex ІІ to Protocol 1) • insufficientlyworked or processed products (art. 6(2) Protocol 1) • Special conditions: total value of 3rd country material does not exceed 10 % • principle of “double cumulation” EU-Ukraine • Pan-Euro-Med Convention (valid for Ukraine since 01.02.2018)

17. Documents for approval • Certificate EUR.1 Protocol 1 to AA, art. 17 Порядок заповнення та видачі митницею сертифіката з перевезення товару EUR.1 відповідно до Угоди про асоціацію між Україною та ЄС (Наказ Мінфіну №1142 від 18.11.2014 р.) • Declaration invoice • for export not exceed 6000Є • authorized exporter Protocol 1 to AA, art. 22 Про затвердження порядку надання та анулювання митницею статусу уповноваженого (схваленого) експортера (Наказ Мінфін від 07.10.2014 № 1013)

18. Element 2. Liberalization of movement of services • establishment of commercial activity (art. 87-91 AA); • cross-border supply of services (art. 92-96 AA); • temporary stay of natural persons providing services (art. 97-102 AA). Does not cover: mining, manufacturing and processing of nuclear materials; production of or trade in arms, munitions and war material; audio-visual services; national maritime cabotage and domestic and international air transport services etc. computer services (art. 108 AA) postal and courier services (art.art. 109-114 AA) electronic communication services (art.art. 115-124 AA) financial services (art.art. 125-133 AA), transport services (art.art. 134-138 AA), electronic commerce (art.art. 139-140 AA).

19. Reservations to free movement of services Annex XVI – A to Chapter 6 EU reservations on establishment Annex XVI – B to Chapter 6 List of commitments on cross-border services Annex XVI – C to Chapter 6 Reservations on contractual services suppliers and independent professionals (EU Party) Annex XVI – D to Chapter 6 Ukraine reservations to establishment Annex XVI – E to Chapter 6 Ukraine commitments on cross-border services Annex XVI – F to Chapter 6 Reservations on contractual services suppliers and independent professionals (Ukraine)

20. Part 3. DCFTA (general economic analysis)

21. Background conditions economically unfavorable period for Ukraine; serious macroeconomic and geopolitical challenges recently, including military conflicts; the suspension of production in the occupied territory and the failure of financial and logistical support; rapid depreciation of the hryvnia (32.8% in 2014 and 45.6% in 2015); a relatively weak manufacturing sector (concentrated mostly in commodities (metals, fuels), agricultural and food products); critically dependent on foreign trade for their economic growth and development; large trade deficits; exports to the EU represent about one third of their total exports

22. Trade balance Export and Import of Ukraine, 2005 – 2015, billon USD Source: UNComtrade

23. The geographic orientation of trade before signing AA/DCFTA

24. AA/DCFTA Agreement and Custom Union Sovereignty (any customs union implies a loss of sovereignty in determining the rates for customs duties and their redistribution); Customs duties (AA reduces customs rates in general); Sales markets (AA provides for a significant liberalization of trade with the EU Member States and does not prohibit trade with Russia); Modernization (AA commits Ukraine to approximate national legislation to EU legislation, to increase the standards of goods and services, environmental standards, food safety, consumer protection)

25. Myths about the AA implementation Myth No. 1: “Ukrainian companies will not be able to cope with the implementation of EU standards and rules and lose competition to the EU companies” Myth No. 2: “The signing of the Agreement will cause an influx of EU goods into Ukrainian markets. Ukrainian manufacturers will not be able to compete with them and will be forced out of the business” Myth No. 3: “Today, the goods produced by Ukrainian companies do not meet EU standards, so they will not be able to export their products to the European Union. Therefore, the Association Agreement will bring more benefits to the European Union rather than Ukraine”

26. The other myths about the AA implementations ………………………………………….

27. Free trade agreements Since its independence, Ukraine has concluded 17 free trade agreements covering 45 countries. The negotiations are ongoing with Turkey, Israel and Serbia (Source: MERT)

28. The key features of the DCFTA (1) • Liberalizes most tariffs both way • In line with the provision of the WTO/GATT principles ("substantially all the trade") • Customs dismantling in an asymetrical manner: Ukraine has usually more time to reduce or eliminate tariffs on EU imports • EU imports from Ukraine basically duty free from day of entry into force (with some exceptions) • With (tariff rate) quotas (TRQs) for certain agricultural products • Large approach for FTAs, similar for instance for EU-Vietnam and EU-Korea FTA

29. Key features of the DCFTA (2) extends beyond the liberalisation of trade (it envisions a closer integration via legal approximation to the EU acquis); non-tariff barriers in the EU have been among the highest in the world and for countries specialising in agri-food production represent a particularly significant obstacle to trade, which are to be effectively tackled by the DCFTA; certain restrictions remain, including tariff rate quotas (TRQs), anti-circumvention mechanism and entry-price regulation transition period is up to 10 years in some cases allowing for a gradual liberalisation of imports in sectors deemed ‘sensitive’ from their perspective

30. Aspects of the DCFTA Trade-related aspects The “deep” aspects The “comprehensive” aspects

31. Benefits and shortcomings of the DCFTA 1. Market expansion (> 500 million consumers) 2. Increasingcompetitiveness - cheaperandsaferproducts 3. Increasing production and sales in the country, at the EU level and in the world 4. Improvingthebusinessclimate

32. DCFTA outcomes short term perspective (the implications that could be observed immediately after the signing of the agreement) the medium term ( the effects expected after the transition period) and the long-term term (possible outcomes following the transition period, after 10-15 years, depending on specific articles of the agreement and the speed of its implementation)

33. Benefits of the DCFTA signing Source: Adarov & Havlik, 2017

34. The long-term effects: • creation of a global value chain for goods, • increase in competitiveness and efficiency, • growth of foreign direct investment, • reduction of product costs, increased quality and safety as well as diversification of markets, • growth of production, job creation, productivity increase, • improvement of welfare and quality of life, • increasing of tax revenues for the national budget.

35. Part 4. Customs and non-tariff barriers of trade

36. Regulation of international trade Tariff methods: Customs Tariff (tax on goods and other items moving across the customs border of the state); Fiscal function (introduced in order to obtain money for the state. This function applies to both import and export duties); Protectionist, when introduced to reduce or eliminate imports, thereby protecting domestic producers from foreign competition; Balanced, when introduced to prevent unwanted export of goods, domestic prices are lower than the world Non-tariff methods (economic and administrative measures aimed at limiting foreign trade, applied by the state) import subsidies - negative import tax or customs tariff, which is paid directly to the national producer of competing goods; export taxes, like import duties, may be specific and ad valorem, but their impact on foreign trade is practically the same; export subsidy - cash payments aimed at supporting national exporters and indirect discrimination of imports; import quota is a restriction on the quantity of goods imported into the country (allocation of quotas is carried out by the state with the help of import licenses, they are provided for payment or free of charge)

37. Tariffs tariffs for 94.7% of product groups were abolished industrial goods and raw materials Ukraine imposes a preferential regime for only 49.2% of goods exported from the EU special rules for the automobile sector of Ukraine (import tariffs decreased from 25% to 10%) were introduced agricultural products (Ukraine has the obligation to abolish duties by 88.5% for agricultural products) After signing of the DCFTA the EU has fully and immediately carried out tariff liberalization for most of the goods, while Ukraine will do so 3-7 years in order to create competitive conditions on the domestic market and to benefit from increased exports to the EU market.

38. Duty-free quotas The establishment of duty-free quotas for EU is provided for 36 types of goods (beef, pork, lamb meat, poultry, milk, cereals, bran, honey, sugar, starch, mushrooms, garlic, malt, grape and apple juice, butter, cigars, eggs and others) A summary list of tariff quotas is set out in the Appendix tо Annex І-А to the Association Agreement.

39. Non-tariff barriers

40. Principle of quotas Information on the current EU tariff quotas balances, administered on the basis of the "first one who came is the first one who is provided with service" principle is available on-line in the appropriate section on the official website of the European Commission. This information is updated at the end of each working day. Information on current balances of tariff quotas of Ukraine is available on the website of the State Fiscal Service of Ukraine in the section "Тariff quotas".

41. Part 4. Policy implications

42. Sectors overview (1) The main gain from the establishment of the DCFTA, including from trade liberalization, is expected for light industry, agriculture, food industry and electrical equipment production. In particular, the calculations of the Institute of Economics and Forecasting show that agricultural production may grow by 40%, and this outcome is mostly not contingent upon Russia’s behavior. Establishing the DCFTA will result in high growth rates of electronic equipment production (an increase of 34.1%). It should be noted that, if no serious modernization is carried out, machine manufacturing in general will not benefit from the DCFTA with the EU. This sector has already faced significant competition from imports

43. Sectors overview (2) The metallurgical sector will also not benefit from liberalization of trade with the EU. This is primarily due to the lack of significant trade barriers for the sector prior to the signing of the agreement since major trade barriers were removed after Ukraine became a WTO member, when the industry was among the important beneficiaries. And correspondingly, the liberalization of trade with the EU creates certain risks for metallurgy, primarily due to increase in the cost of factors of production. The services sector will receive significant benefits from the DCFTA, especially in such areas as financial activity, telecommunications, real estate transactions, trade, and these benefits will persist even in the event of a rapid deterioration of trade relations with Russia

44. Policy Implications a stable and supportive macroeconomic and political environment; DCFTA awareness issues in the private sector; to sequence reforms carefully to avoid excessive adjustment pressures on businesses and the population and to prioritize reforms focusing on access to the EU market, industrial competitiveness and attractiveness for FDI inflows, and integration into global value networks; Strong cooperation at the national and regional levels implementing social related issues; financial support from the EU

45. Benefits and costs DCFTA (Adarov & Havlik, 2017)Business

46. Benefits and costs DCFTA (Adarov & Havlik, 2017)

47. POLICY RECOMMENDATIONS FOR THE DCFTA COUNTRIES (1) Establish supportive macroeconomic and political background conditions Institutional reforms directly relevant for the business environment should be prioritised and accelerated More effort should be devoted to increasing specific rather than generic awareness of the AA/DCFTA by stakeholders Cross-border dialogues between the business communities of the EU and the DCFTA countries should be enhanced Careful sequencing of reforms to target competitiveness and market access challenges Better accounting of adjustment costs and pragmatic gradualism of implementation is needed to balance costs and benefits over time

48. POLICY RECOMMENDATIONS FOR THE DCFTA COUNTRIES (2) A long-run economic strategy should be developed or adjusted with the medium-run and long-run impacts of AA/DCFTA in mind Diversify export markets and attempt to normalise relations with Russia More financial and technical assistance should be provided to the private and the public sectors in the DCFTA countries Strict conditionality of financial assistance should be enforced Effective monitoring should be enforced and a functional scoreboard system developed to systematically track progress of reforms along multiple dimensions Related to the above, a competition element for EU funding needs to be introduced and a mix of merit-based and need-based financial aid opportunities should be further developed