Ukraine-EU One Year after Signing Association Agreement: Economic Reforms Under Way

Euromaidan_01
"Euromaidan 01" by Evgeny Feldman - Own work. Licensed under CC BY-SA 3.0 || Wikimedia Commons

In June 2014, Ukraine finally signed the Association Agreement with the EU. A provisional application of the Agreement started on November 1, covering such areas of Ukraine-EU cooperation as respecting human rights, fundamental freedoms and rule of law; political dialogue and reform; justice, freedom and security; and economic and financial cooperation.1 The application of Title IV – deep and comprehensive free trade agreement (DCFTA) – will start in January 2016 as its implementation was postponed under the pressure from Russia. To compensate the delay in the implementation of the DCFTA, the EU prolonged a regime of autonomous trade preferences (ATPs) till the end of 2015.

The ATPs mean unilateral opening of the EU market for the Ukrainian products under trade regime envisaged for the first year of the implementation of the DCFTA itself. According to the Ministry of Economic Development and Trade of Ukraine, the ATPs allow duty-free access to the EU markets for 95% of industrial products (HS 25-97) and 84% of agricultural products (HS 1-24). Tariff rate quotas (TRQs), an instrument of partial liberalization envisaging zero tariffs within quota limits and regular MFN tariffs outside, are applied to the rest of agricultural products.

Survey of exporters conducted by the Institute for Economic Research and Policy Consulting (Kyiv) showed that about one third of exporters have used the ATPs, and 65% of the ATPs’ users said that it was beneficial for them, while the rest reported neutral result. Moreover, 56% of exporters expect that they will gain from the implementation of the DCFTA immediately in the first year of its implementation.

In 2014, Ukrainian exporters fully utilized only six out of 36 existing TRQs, another 14 TRQs were used partly, and the rest were not used at all.2 Non-compliance with the EU standards, insufficient domestic production, and existence of other (more attractive for a particular product) export destinations are among reasons for incomplete usage of the TRQs. Among TRQs fully utilized in 2014 and already in 2015, TRQs on processed tomatoes, wheat and poultry meat are potentially limiting meaning that duty rate outside TRQs is prohibitively high and thus exports stop as soon as TRQ is filled.

The delay with the implementation of the DCFTA had caused some concerns that important economic reforms associated with the Agreement could be delayed. However, one year after the Agreement signature, reforms are moving forward. Important progress was achieved in such areas as technical barriers to trade (TBT), government procurement, and energy reform. For instance, in the sphere of the TBT, the country has already harmonized its horizontal legislation (i.e legislation cuts across all sectors) with the EU acquis. The Laws on Standardization and on Metrology and Metrological Activity were passed in June 2014, the Law on Technical Regulations and Conformity Assessment was approved in January 2015. The current task is to establish institutions able to implement changed policies, build necessary infrastructure and also to progress in harmonization of vertical (sectoral) legislation and adaptation of standards.

Still, the implementation of the Association Agreement is facing at least several challenges. On the one hand, there is a growing risk of populism or sectoral lobbyism causing violations of Ukraine’s obligations and thus potential backlash of the EU partners. For instance, on July 7, 2015, the President signed the law envisaging ten-year moratorium (i.e. ban) on exports of logs.3 The law envisages no exemption for log exports to the EU thus de facto violating provisions of the Association Agreement that stipulate the Parties’ standstill commitment. According to Article 31.1, “Parties shall not institute or maintain any customs duties, taxes or other measures having an equivalent effect imposed on, or in connection with, the exportation of goods to the territory of each other”. In March, a draft law suggesting increase in export duty on metal scrap – the suggestion also violating the provision of the DCFTA – was registered in the Parliament. Nevertheless, it was withdrawn later on.

On the other hand, there is the Russian issue. The provisional application of the DCFTA was postponed largely in attempt to pacify Russia. Currently, triparty consultations among Ukraine, the EU and Russia are taking place with the aim to identify and find practical solutions regarding the Russian concerns over impacts that Ukraine-EU DCFTA could have on the Russian economy. The consultations covering three topics, namely TBT, sanitary and phytosanitary measures and customs control, are reported to bring some progress.4

Meanwhile, the ratification of the Association Agreement has been progressed. Out of 28 EU member states, 18 have already completed all ratification procedures and deposited the Agreement, another 8 are in the process, and two – Cyprus and Greece – have not started necessary procedures. Ukraine ratified the Agreement on September 16, 2014.

Veronika Movchan