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Analysis: Status of the DCFTA implementation after one year

Ricardo Giucci

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Dr. Ricardo Giucci is managing director at Berlin Economics. The business consultancy carries out the German Consultant Group Ukraine project, which supports the Ukrainian government in economic reform processes and is financed by the BMWi.

Veronika Movchan

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Veronika Movchan is Scientific Director at the Institute for Economic Research and Policy Advice (IER) in Kiev. She graduated from the National University of Kiev-Mohyla Academy. Her main research interests are trade policy and impact assessment of the DCFTA with the EU

At the moment, the free trade agreement between the EU and Ukraine is only provisionally applied. It should then be fully ratified in September of this year. Here is a balance of the previous application, as well as violations and successes.

In 2014, the Ukrainian President Poroshenko signed the Association Agreement between the EU and Ukraine, which also includes the free trade area. (& copy AP)

In January 2016, the deep and comprehensive free trade area (DCFTA) between the EU and Ukraine came into force on a provisional basis. We want to assess the implementation of the agreement after the first year. We focus on the seven areas of market access, product safety, food safety, customs, public tenders, protection of intellectual property and competition policy.

Prehistory of the DCFTA

The provisional application of the DCFTA (as part of the Association Agreement) should start in autumn 2014, as in Moldova and Georgia. However, the date has been postponed to January 2016 due to the trilateral consultations between the EU, Ukraine and Russia. The provisional application will apply until the ratification of the Association Agreement is imminent. The agreement is to come into force permanently on September 1, 2017.

In the following, we provide an overview of the progress made in implementing the agreement in seven areas of the agreement that are particularly relevant to the trade in goods.

Market access

As agreed, Ukraine began gradually lowering its import and export tariffs in January 2016. In the first year, import duties against the EU fell from 4.5 to 1.7 percent. However, there have already been two violations of the agreements.

In 2015, a ten-year log export ban was imposed, giving local wood processing companies an unfair competitive advantage. A revision of this ban was made a condition for further financial aid from the EU. In addition, a law was passed in September 2016 to temporarily raise export tariffs on scrap iron.

Product safety

In order to remove non-tariff trade barriers vis-à-vis the EU, Ukraine has committed itself to aligning its laws and procedures with regard to the safety of food and industrial products to those of the EU.

Given the complexity of this task, surprisingly rapid advances have been made to date. In the area of ​​product safety, Ukraine harmonized its horizontal case law with the EU acquis before 2016. Eight out of 27 technical regulations have been aligned with those of the EU. Another 16 have already been decided, but still need to be brought up to date with the latest EU regulations. Today, 60 percent of Ukrainian standards already comply with international guidelines.

Institutionally, the sector has been strengthened through the establishment of the State Agency for Food Safety and Consumer Protection (SPSA) as the institution primarily responsible for market surveillance and the independent national standardization authority.

Ukraine has already asked the EU for an assessment of the harmonization process in order to base the negotiations on the agreement on conformity assessment and recognition of industrial products on this.

Food safety

In 2016, as agreed, the comprehensive strategy for the harmonization of legislation regarding sanitary and phytosanitary standards (SPS) was adopted. The strategy has a very ambitious goal with the plan to harmonize 225 regulations and directives with those of the EU by 2020. The solution to this task requires thoughtful prioritization, especially given the speed with which bills in the SPS area are adopted by parliament.

In parallel to the legal harmonization aimed at uniform regulation of food safety on the markets of the EU and Ukraine, the government and private companies are working together to review supply chains for animal products that are still difficult to export to the EU. Many Ukrainian companies already have an export license for most animal products intended for human consumption, including fish and fish products, poultry, eggs, raw milk and dairy products.

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Cross-border transport of goods in Ukraine remains relatively expensive, mitigating the potential benefits of gradually lowering import tariffs.

In August 2016, the government introduced the so-called "single windows" and the principle of tacit consent for customs in order to facilitate trade. However, due to a lack of coordination within government and conflicting laws, these changes are only partially successful.

Accession to two transit agreements and the New Computerized Transit System (NCTS) has been postponed, which delays the integration of Ukraine into the EU's unified transit system.

Competition and Protection of Intellectual Property

Competition and intellectual property protection policies are similarly troubled. The case law has not yet been fully aligned in the two areas, but it largely corresponds to international "best practice".

What is more deficient is their effective application, which among other things requires strengthening the institutions in both sectors. The recently increased transparency in the decision-making processes of the antimonopoly authority and the simplified procedures represent a success for Ukraine in terms of competition policy. In the area of ​​intellectual property protection, a comprehensive institutional reform has started on the basis of the roadmap that has been adopted.

So far, however, these changes have neither resulted in a lower monopoly of the economy nor in the country being removed from the USA's "Priority Watch List" for piracy.

Public tendering

The adoption of the new public procurement law and the roadmap for further reforms pave the way for the implementation of the first phase of mutual opening of the public procurement market between the EU and Ukraine.

The establishment of a mandatory online posting system for purchases that exceeded a certain limit was another important step that made public spending more efficient and transparent.

However, major challenges remain. Some firms have reported harassment by government institutions after winning government tenders. Should such occurrences increase, they can destroy the advantages of the transparent and competitive tendering system. Strengthening the rule of law is therefore of paramount importance to the country.

Summary

The table gives an overview of the implementation of the DCFTA in seven areas. In general, Ukraine is making good progress in implementing the agreement and is largely on schedule. The greatest success story is that of public procurement, where new laws and procedures have created the conditions for the mutual opening of the public procurement markets between Ukraine and the EU.

The two most serious violations of the agreement are in the area of ​​market access: the export tariffs for scrap iron were raised and a ten-year export ban on logs was passed, giving local wood processing companies an impermissible competitive advantage.

In the areas of intellectual property protection and competition policy, most of the laws are already in line with international standards. In practice, however, there are numerous implementation weaknesses that should be addressed.

This text was first published as a newsletter (No. 103 from May 2017) of the German Advisory Group Ukraine. The editorial staff of Ukraine-Analyzes thanks for permission to reprint.

Reading tip:

  • Movchan, Veronika; Giucci, Ricardo: "DCFTA implementation in Ukraine: Progress achieved and challenges ahead", Policy Paper Series [PP / 04/2016]: German Advisory Group / Institute for Economic Research and Policy Consulting, Berlin / Kyiv, November 2016.

The Ukraine analyzes are carried out by the Research Center for Eastern Europe at the University of Bremen and the German Society for Eastern European Studies. The Federal Agency for Civic Education / bpb publishes them as a licensed edition.