Oleksandra Brovko: Free trade triangle. What are the benefits of Сanada-Ukraine free trade agreement

Free trade agreements or custom unions are a global trend. Their number increases every year, regional agreements evolve into multiregional and even transcontinental.

According to the World Trade Organization (WTO) each of its 164 members had at least one free trade agreement as of June, 2016.

So far, the WTO has information about 635 agreements on preferential trade, 423 of them are effective. 90% of those agreements are about free trade zones and 10% are about customs unions.

Recently, after 7 years of negotiations the EU – Canada Comprehensive Economic and Trade Agreement (CETA) was signed. EU defines the agreement as the largest one because it stipulates cancelation of 99% of the entry charges thus facilitating access to service markets, governmental purchases and promote investments.

Potentially, CETA is beneficial for Ukraine as well. On one hand the Deep and Comprehensive Free Trade Area (DCFTA) came into effect in January 2016. Moreover, Ukraine dramatically enhanced its transcontinental trade by signing the Canada-Ukraine Free Trade Agreement (CUFTA).

When coming into effect the CUFTA will open up to 98% of the Canadian goods markets for Ukrainian exporters. Moreover, the agreement has provisions on elimination of the non-tariff barriers, promotion of the trade, participation in governmental purchases, etc.

The question arises: what are the benefits of Ukraine-Canada-EU free trade triangle for Ukraine?

Mutual Non-Tariff Barriers Elimination

Both EU and Canada are highly developed countries with the high quality of goods and safety, packaging, labeling, etc. standards. Those standards are often turning into non-tariff barriers in the international trade.

CETA contains important provisions on alignment of the EU and Canada standards without compromising the quality and safety requirements by either side.

The agreement has an unprecedented section on approximation of the technical regulations and standards covering even their development stage. That allows bringing the regulatory approaches in Canada and EU closer.

At the same time CUFTA clearly stipulates that technical guidelines and evaluation procedures must not impede the free trade between Ukraine and Canada. Moreover, there is a strict requirement of transparency of appropriate regulations development.

Approximation and mutual recognition of the technical regulations by the EU and Canada is of special importance for Ukrainian exporters as Ukraine is facing a challenging task of harmonization of Ukrainian legislation with the EU one. The approximation impact will not be limited by the exporters activities only but rather affect all the manufacturers because it introduces universal rules.

So far Ukraine has developed the sanitary and phytosanitary regulations approximation strategy. It also adopted strategy of the technical regulations reform, cancelation of the Soviet GOSTS (USSR technical guidelines) and implementation of the European requirements to goods quality and safety.

Goods manufacturing in Ukraine according to the European standards will facilitate the access of Ukrainian goods to the Canadian market, promote recognition of the evaluation results and reduce the export costs by saving on the administration costs.

Even nowadays those exporters which have EU certificates have advantages in negotiating with their Canadian partners.

From – To: Rules of Origin of Goods

Bilateral free trade agreements establish better trading conditions but only for the parties of the agreement. E.g. goods brought from Ukraine to Canada could not be re-exported to the US customs free because they are of Ukrainian origin rather than Canadian.

Origin of goods rules are the filters for the goods which are allowed to export with zero or considerably reduced duty rates. Each free trade agreement has its own rules of origin which take into account the peculiarities of the international trade of those agreements parties.

Usually, manufacturers have to prove that their goods are 100% domestically made/grown or imported materials of the so-called substantial transformation are added up. Each agreement contains its own substantial transformation criteria. The list may include:

(1)   Classification code changes, e.g. first 4 signs in export commodities classifications;

(2)   Cost of goods change when foreign goods share in final products does not exceed the set limits. Let’s discuss apparel as an example.

According to the Protocol I of the EU – Ukraine Association Agreement containing the main origin of goods requirements, apparel is considered to be of the Ukrainian origin if the fabric’s cost imported from the third countries like Morocco or Turkey does not exceed 8% of goods’ price.

Free trade agreement with Canada recognizes transformation substantial when the commodity line is changed at the level of 2 signs of the export commodity classification.

Origin of goods rules are integral part of free trade agreements because it is the ultimate instrument for identifying partners’ goods. On the other hand, when free trade agreements overlap, they may be difficult for exporters especially because of global value chains.

Asian and Latin American countries experience show that different sets of rules undermine the performance of free trade zones. Nearly 90% of trade in Latin America are preferential however the analysis of the free trade agreements between Mexico, Chili and Peru prove that only 40% of goods follow similar transit of goods rules.

Similar situation is in the South East Asia where the countries are interlinked by the free trade agreements. In 2008 the initiative of reviewing origin of goods rules for their unification was launched within the ASEAN.

Cumulation may be a good solution e.g. bilateral cumulation is stipulated by the CUFTA, the DCFTA, and the CETА. Cumulation means that if raw materials are imported to Ukraine from the EU, the substantial transformation rules do not apply. For example, if apparel is manufactured of the fabric imported from the EU rather than from Morocco, and its share in the cost of goods exceeds 8%, the apparel will be recognized as Ukrainian and exported to the EU without payment of custom duties.

Cumulation is important for the DCFTA – CUFTA – CETA triangle because Ukraine may benefit from the so called cross-cumulation which further reduces the raw materials and goods transit barriers.

In such cases if apparel is manufactured in Ukraine with the fabric imported from the EU, it will be recognized Ukrainian and the rules of substantial transformation do not apply when it is exported to Canada. However, in such cases conditions and rules of goods transit between Canada, Ukraine and EU require additional negotiating.

The free EU-Ukraine-Canada trade cumulation will facilitate the links between the three independent free trade agreements (DCFTA, CUFTA, CETA), will assist in furthering trade between Ukraine and Canada and will promote Ukraine’s integration into global value chains.

Service Trade and Raising Investments

As any comprehensive free trade agreement, the CETA has clauses on services and investments. Trading in services is substantially liberalized because Canada and the EU drew the exemption lists of several sectors like health care and provided free market access for the rest. In addition, the CETA promotes mutual recognition of qualifications which will soon make for the Canadian engineers, healthcare professionals, lawyers, etc. possible to work in the EU and visa versa.

Unlike CETA and the EU-Ukraine association agreement the Canada-Ukraine Free Trade Agreement does not stipulate trading in services and investments. However, in two years after it comes into effect the CUFTA could be revised and amended. Those amendments could well be the provisions on trading in services and on investment protection.

Ukrainian services providers could considerably benefit from the access to the multimillion Canadian market especially when trading services is an essential part of the global value chains.

Experto Crede or Trust the Experienced one

Free trade agreement between the EU and Canada is an important signal for Ukrainian exporters.

First of all, it is a one more “pro” for the trade with Canada as the EU would not waste 7 years on negotiation for nothing. There is an ocean between us and the severe competition with the US but in the XXI century it is a challenge rather than a problem. If you smartly market quality goods, you will adequately address those challenges.

Secondly, there is no time to waste because free trade between the EU and Canada will enhance the competition. Ukrainians would better start looking for their places in the sun right now.

Free trade agreements open many paths because our success will much depend on the businesses’ proactive approaches and readiness to long-term investments.

Oleksandra Brovko, CUTIS Senior Trade and Investment Policy Expert

Source: European Pravda