The nearby market of distant Canada: free trade and its opportunities for Ukrainian exporters

The first day of the last summer month was marked by the long-awaited launch of a free trade agreement between Ukraine and Canada. Finally, upon completion of ratification procedures, the Canada-Ukraine Free Trade Agreement (CUFTA) came into effect.

Let us take a look at the Agreement from a practical standpoint and analyse the following:

  • how to work under the Agreement and properly understand the meaning of staging categories in the tariff schedules of Ukraine and Canada;
  • how to confirm the origin of goods; and
  • what are regulatory requirements to your goods.

Canadian market is diverse and rather heterogeneous. Therefore, interesting facts are provided at the end of this article for you to get oriented when looking for a niche for your goods at Canada’s store shelves.

Staging categories in tariff schedules of Canada and Ukraine

As a rule, Ukrainian manufacturers are interested in two things:

  • whether zero-rate import duty will be applied for exports to Canada;
  • how will import duty change for imports into Ukraine.

If you decided to review the Agreement yourself in order to find answers to those questions, please, note the staging categories in the tariff schedules of Ukraine and Canada.

The Tariff Schedule of Canada contains the goods with the import duty rate other than “0” as of the effective date of the Agreement (only 2% of goods). That is, if your goods are not listed in the Tariff Schedule of Canada this means that a zero import duty is applied to them since 01.08.2017. Therefore, there are only two staging categories in the Tariff Schedule of Canada: “7” and “Е”.

Staging category “7” applies to certain vehicles and means that the import duty will become zero in the eighth year of the Agreement (according to the estimates, in 2024) by getting gradually reduced in eight equal stages starting on 01.08.2017. Let us take, for instance, “Non-amphibious all-terrain vehicles of a weight of less than 227.3 kg, having fewer than six wheels and designed to carry only one passenger” (8703.21.10), for which the base rate of import duty is 6.1% and the staging category is “7”. The order of gradual reduction of import duties is shown in the graph below.

It should be noted also that the first year of the Agreement is 01.08.2017 through 31.12.2017. That is, the second year and the next phase of import duty liberalization will start already on 01.01.2018 (and last through 31.12.2018).

The goods in staging category “Е” in the tariff schedules of both states are excluded from the scope of the Agreement. This means that the free trade regime does not apply to those goods and the import duty will continue to be applied at the MFN rate (relevant rates of import duties may be found in Canada’s Customs Tariff).

In the case of Canada, Category “Е” includes the goods subject to Canada’s global tariff quotas. These are mainly certain grain crops and meat and dairy products. The idea of the tariff quota is that a zero or a very low import duty rate is applied within a tariff quota. When the quota is exhausted, however, a higher duty rate is applied (MFN rate in accordance with the Agreement).

It should be noted that Canada’s tariff quotas are international and applied to all countries of the world rather than Ukraine only. Canada reserved the right to set tariff quotas when it became a member-state of the World Trade Organization (WTO). Those quotas are available for all exporters from all countries that are WTO members. Depending on the goods, the tariff quotas are administered on the basis of either of the following principles:

  • “first-in-first-served” (the control of compliance with this principle is exercised by Canada Border Services Agency, CBSA);
  • through a preliminary distribution of tariff quotas by Global Affairs Canada based on applications.

In both cases, the tariff quota is received by an importer in Canada. The list of tariff quota holders may be found on the website of Global Affairs Canada. Following this link, for example, you may see the lists of companies that received a tariff quota for cheese in 2017.

The Tariff Schedule of Ukraine contains a much larger number of staging categories. In particular, this is due to the fact that Ukraine succeeded in claiming the asymmetric nature of the Agreement. Therefore, Ukraine will liberalize import duties for about 80% of the goods of Canadian origin on 1 August already (while Canada will ensure free access to the market for 98% of Ukrainian goods).

That is why, zero-rate import duty will apply to the goods under staging category “0” in Ukraine’s Tariff Schedule as soon as the Agreement comes into force. The plan for the goods under staging categories “1”, “3”, “5” and “7” is shown in the table below.

For the goods under Staging Categories “5А”, “5B”, “5С”, “7А” and “7В”, the import duty rate will be liberalized only in part. As an example, let us take: 1517 90 91 00 – Fixed vegetable oils, fluid, mixed; Base Rate – 15%, Staging category: 5В. The import duty rate will be liberalized as follows (as we can see, the rate will only drop by 4.5% in 6 years):

Staging category “Е” (exclusion from the scope of the Agreement) in the Tariff Schedule of Ukraine applies to sugar.

Rules of origin

Similarly to any other free trade treaty, CUFTA contains provisions on definition of origin of goods. For instance, the rules of origin determine, which Ukrainian goods are granted preferential access to the Canadian market within the CUFTA framework, and which are not (and vice versa).

In compliance with the Agreement, goods are recognized as originating from Ukraine if they are:

  1. fully manufactured in Ukraine;
  2. manufactured exclusively from the materials originating from Ukraine;
  3. processed in Ukraine to a sufficient extent.

Definitely, the most complex are the rules of sufficient production that

  • require changing the tariff classification, or
  • impose requirements to the relation of the cost of foreign materials to the transaction cost, or
  • impose a requirement to the relation of the cost of foreign materials to the goods price on the Ex Works terms.

Therefore, exporters should review in detail the rules of origin contained in Chapter 3 and Annex 3-А to the Agreement.

The document confirming the origin of goods is the Declaration of Origin (a template is contained in Annex 3-В to the Agreement). That is, exporters themselves provide information on the origin in the invoice or any other document containing the goods description.

Thus, for the confirmation of the goods origin, Ukrainian exporters do not need any certificates/marks of customs authorities, which reduces the cost and time for customs clearance of goods.

Where to find regulatory requirements to your goods?

Canada is a developed country that sets rather strict requirements to the safety and quality of goods. For those requirements not to become non-tariff barriers for export, it is worth studying them in detail. There is a number of useful resources for that purpose.

For instance, Canada Food Inspection Agency ensures compliance with all regulatory acts dealing with foodstuffs, animals, and plants imported to Canada. There is a very convenient resource on the Agency’s website that allows generating the requirements for import to Canada using the code (or even the name) of goods. The system is called Automated Import Reference System (AIRS) and is somewhat similar to the European Export Helpdesk resource.

For manufacturers of consumer goods, medicines, foodstuffs, medical equipment, health products, the website of Health Canada will be of use.

Manufacturers of washing machines, dish washers, freezers, electric ovens, and refrigerators should review the details of EnerGuide certification requirements on the website of Natural Resources Canada.

If you are a manufacturer of textile, it is worth visiting the website of Canadian Competition Bureau to learn, for instance, about the textile marking requirements.

In fact, there are specific marking rules applied in Canada.

Labels on the packing must be in Canada’s two official languages: French and English, and both texts must occupy the same area.

Therefore, we recommend reviewing the provisions of Consumer Packaging and Labelling Act.

One should be very careful with statements concerning the goods. For instance, under Canadian rules the skin antiaging agent may only prevent signs of aging rather than reducing wrinkles. The same refers to foodstuffs where statements concerning the goods may be of three types only:

  • general impact on health,
  • functional impact on health,
  • reduction of disease exposure.

For each type of statements, individual rules are applied. For instance, if you position your goods as “natural” you have to make sure they do not contain any additional vitamins, minerals, nutrients, artificial flavours or food supplements, and no elements were excluded (except water) or significantly modified, while the physical, chemical or biological condition of the goods remains unchanged.

Usually, your Canadian partner would tell you about all regulatory requirements to the goods and how to prove compliance with them because it will be the Canadian importer who will be liable in case of incompliance. Therefore, when developing a bilingual label remember that the final word of the design approval rests with your partner.

Concerning the search for partners, Canadian Importer Database is an extremely useful resource that contains lists of companies that import their goods to Canada with a breakdown by products, cities and countries of origin.

Canada: Facts and Opportunities

Finally, some words about Canada and Canadians. Canada is the second largest country in the world. However, about four fifth of its population live in the area 150 km away from the US border.

More than 6 million Canadian citizens are those who immigrated from other countries; they represent about 20.6% of the country’ entire population (35.9 million people in total).

In Canada, there are 1.3 million Ukrainians; Ukrainian community is one of the largest in Canada. Originally, Ukrainians immigrated to the prairie provinces (Manitoba and Saskatchewan) but lately have been also discovering Ontario and Quebec.

Canada’s multiculturalism opens broad opportunities for business on condition of detailed market analyses aimed to detect target consumers. For example, cosmetic manufacturers export skin bleachers to British Columbia because of many people of South Asian descent living there.

Due to the increase of the Muslim community, demand for Halal products is steadily growing. Interestingly, more than 95% of Canada’s Muslim population live in cities.

According to the latest research of Business Development Bank of Canada Canadian consumers prefer:

  • Internet search before purchasing the goods (they carefully study other buyers’ reviews and feedback);
  • health lifestyle (as estimated, almost 31% of Canadian consumers are ready to pay more for healthy goods);
  • individual approach; and
  • good quality at lower price.

Also, about 6 of 10 Canadians consider themselves to be “ethical consumers” and are willing to spend their money for the goods produced under certain ethical standards. For instance, Canadians are ready to pay more for the goods that are not connected with the use of children’s labour.

Canadian market of organic goods is the fifth largest in the world and 56% of Canadians buy organic products every week.

Thus, Canadian market is closer than it may seem in the beginning, and the Free Trade Agreement does bring many opportunities for Ukrainian exporters considering significant and immediate cancellation of import duties and a large Ukrainian diaspora in Canada that may become a bridge to Canadian consumers, distributors, agents, retail operators, etc.

So don’t be afraid to capture new markets even though they are located far.

Author: Oleksandra Brovko, CUTIS Senior Trade and Investment policy expert

Source: European Pravda