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7 April 2022

Analysis of the free trade agreement between Ukraine and Turkey: general review

Source: Ukrainian law firms

After almost 15 years of negotiations, on 3 February 2022, Ukraine and Turkey signed the Free Trade Agreement between the Government of Ukraine and the Government of the Republic of Turkey (UA-TR FTA). This article is focused on the analysis of the potential effect of the UA-TR FTA for Ukraine. 

General overview

The UA-TR FTA consists of 9 titles and 8 annexes, covering both trade in goods and services. In addition, the document provides for measures to be taken by the parties to promote mutual commercial presence, in particular, by simplifying procedures to facilitate business activities, as well as encouraging mutual investment and removing barriers to the use and development of e-commerce. Competition and dispute settlement are also regulated in the UA-TR FTA.

Before going into the details, it is worth noting that we can see the difference in the level of liberalisation of the two countries simply by looking through their tariff schedules. First, Ukraine’s tariff schedule consists of 3685 lines, while Turkey’s tariff schedule has 2659 lines (it is worth noting that lines with 0% are not covered by the schedules). Second, Ukraine has excluded from the liberalisation 97 lines, while Turkey has excluded 526 lines. Third, Ukraine and Turkey have agreed to eliminate all customs duties for approximately the same quantity of lines (1044 for Ukraine and 1103 for Turkey), but Ukraine must liberalise 731 lines within 3 years, while 579 lines must be liberalised by Turkey within 5 and 7 years (i.e., longer transitional period). Forth, the same disproportion can be traced to the reduction of tariffs by the countries. Ukraine has to reduce 122 lines by 50% and more, while it is only 55 lines for Turkey to reduce tariffs by 50% and 75% and this is in situation when Turkey has considerably higher duties as compared to Ukraine. Fifth, Turkey applies not only tariff rates quotas (TRQ) but also compound tariffs which are more restrictive than the ad valorem tariffs. Ukraine does not have compound tariffs in its schedules, only TRQs.

Review of the level of Turkey’s liberalisation for the Ukrainian imports

Now let’s look deeper into sectors where Ukraine retains sufficient opportunities and resources to meet Turkish demand in the long run. To select such sectors, we took the sectors identified in the research “Assessment of Prospects of Concluding a Free Trade Agreement between Ukraine and Turkey” (Research), available at the website of the Federation of Employers of Ukraine.

The following HS codes constitute sectors for which Ukraine retains sufficient opportunities with the suggestions of researchers to negotiate full liberalisation in these sectors or TRQs as was established in the Research: 

  • 0102 00 Cattle; live
  • 0713 10 Dried peas
  • 1001 99 Soft wheat
  • 1005 90 Corn
  • 1512 11 Sunflower crude oil
  • 7202 21 Ferrosilicon manganese
  • 7208 51 Flat-rolled products of steel
  • 7213 91 Bars and rods of steel
  • 8544 30 Ignition wiring sets
  • 8607 19 Parts of railway or tramway locomotives or rolling stock

Now we can look through Annex I “Tariff schedule of Turkey” of the UA-TR FTA to understand the rules negotiated for these sectors. 

It is also very important to look at Annex II “Exceptions to Article II.14 on Exports Duties and Charges Having Equivalent Effect” that provides TRQ for 120600 Sunflower seeds, whether or not broken in the amount of 50000 tonnes. However, there were 41511 tonnes of sunflower seeds exported in 2020 to Turkey, while in 2021 this amount increased to 49188 tonnes even with application of the export duty. This means that most probably, Turkey will double its export of oil seeds after the application of the UA-TR FTA that is not in the interests of the Ukrainian oil processing companies. Moreover, Ukraine has excluded some types of metal scraps from the application of export duties that could be not in the interests of the Ukrainian steel producers.

Review of the level of Ukraine’s liberalisation for the Turkish imports

To select the sectors of the Ukrainian economy most sensitive to import liberalisation, we also took the sectors identified in the Research.

After the analysis of the Ukrainian imports from Turkey in these sensitive sectors, the Research demonstrated that:

  • the main losses from the liberalisation are expected for Ukrainian textile and clothing producers; 
  • significant pressure on Ukraine’s industrial sector may be caused by the rejection of tariff protection of the automotive industry; 
  • it is advisable to maintain the duty on nitrogen fertilisers, as well as to seek the preservation of duties or at least the introduction of transitional periods for the abolition of duties on rubber and plastic products; 
  • Turkey increases supplies of tomatoes, cucumbers, grapes, apricots and other fruits to the Ukrainian market, which is in direct competition with the products of Ukrainian producers.

The Research also advises that it is necessary to protect these goods and maintain applied duties or, in some cases, at least negotiate longer transitional periods for the above-mentioned four industries. The other products of the sensitive industries either do not have an increase of imports or have low bound rates, so abolishment of the duties will not cause harm.

Now we can look through Annex I “Tariff schedule of Ukraine” of the UA-TR FTA to understand the rules negotiated for these sensitive industries and respective goods. 

First, twenty 4-digits HS codes were identified for the most sensitive light industry (Ukraine imported from Turkey 20368 tonnes in 2020 and 29626 tonnes in 2021), for which Ukraine applies 0-12% tariffs. Three 4-digits HS codes are subject to the full liberalisation. For the other seventeen 4-digits HS codes, all customs duties shall be eliminated for 252 lines within three or five years from the entry into force of the UA-TR FTA. It is worth mentioning that two fully liberalised 4-digits HS codes (6006 and 6004 HS codes) are top-2 sectors by the value of imports from Turkey in 2020. 

Second, eight 4-digits HS codes were identified for the automotive industry (Ukraine imported from Turkey 6205 tonnes in 2020 and 8213 tonnes in 2021), for which Ukraine applies 0-20% tariffs. One 4-digits HS code has already had 0% bound rate. For the other seven 4-digits HS codes, all customs duties shall be eliminated for 71 out 100 lines (29 lines are excluded which means either that 0% import is already applied or that Ukraine will maintain its duties with regard to such lines) within three or five years from the entry into force of the UA-TR FTA. It is worth mentioning that 28 excluded lines relate to top-3 sectors by the value of imports from Turkey in 2020.

Third, ten 4-digits HS codes were identified for the chemical industry (Ukraine imported from Turkey 352198 tonnes in 2020 and 404696 tonnes in 2021), for which Ukraine applies 0-13% tariffs. Regarding the identified in the Research the most sensitive chemical industry sectors, all customs duties shall be eliminated on 7 lines of nitrogen fertilisers (3105 HS code) within three to five years. The same also applies to rubber (4011 HS code) and plastic products (3920, 3921 and 3917 HS codes), all customs duties on which shall be eliminated for all 23 lines within three to five years. 

Fourth, as for tomatoes, cucumbers, grapes, apricots and other fruits, unfortunately, tomatoes (0702 HS code), cucumbers (0707 HS code) and grapes (0806 HS code) are subject to 0% liberalisation. Even with 10% tariffs for tomatoes and cucumbers, import thereof from Turkey increased by 30% from 2018 till 2020, counting for 80-97% of all imports. However, imports of eggplants, peppers, pumpkins (0709 HS code) must be liberalised in three different ways, i.e., all customs duties shall be eliminated for all 24 lines (1) within three to five years; or (2) be reduced by 20, 30 or 50% from the entry into force of the UA-TR FTA; or (3) be reduced by 50% in six equal annual stages, the first one taking place on the date of entry into force of the UA-TR FTA and the other five on January 1st of each successive year. For apricots, for only three lines of cherries, sweet cherries, fresh peaches (0809 HS code) all customs duties shall be either eliminated within five years or reduced by 20% from the entry into force of the UA-TR FTA.

Instruments to protect Ukrainian producers against imports from Turkey

It is worth emphasising that the UA-TR FTA sets out traditional trade defence remedies to be used to protect the domestic industry from Turkish exports, namely: anti-dumping, countervailing and safeguard measures. The UA-TR FTA provides for application of the WTO rules with regard to the conduct of investigations and application of trade remedies measures.

Unlike the WTO, the UA-TR FTA also provides for possibility to apply bilateral safeguard measures which is subject to the same investigation as safeguard measures under the WTO Agreement on Safeguards, if goods are being imported in such increased quantities, in absolute terms or relative to domestic production, and under such conditions as to cause or threaten to cause serious injury to the domestic industry of like or directly competitive products as a result of the reduction or elimination of a customs duty under the UA-TR FTA. It is worth emphasising that even in the absence of the UA-TR FTA, imports from Turkey hinders the Ukrainian producers of different products. Particularly, in 2020 Ukraine applied two anti-dumping duties against imports of cement and devices (mechanisms) for window and balcony door units from Turkey. Moreover, quite a few Ukrainian producers have considered a possibility to initiate trade defence proceedings against different products originating in Turkey. This is because Turkey has replaced Russia on many products after application of different sanctions.

The difference of the bilateral safeguard measure is that instead of applying it to all countries, the parties can apply it to each other as in anti-dumping or countervailing investigation. The importing county may take measures consisting of increasing the rate of customs duty for the product to a level not to exceed the lesser of: (1) the MFN rate of the customs duty applied at the time the action is taken and (2) the base rate of customs duty specified in Schedules. Bilateral safeguard measures shall be taken for a period not exceeding two years. In very exceptional circumstances, after review by the Joint Committee, measures may be taken up to a total maximum period of three years. No bilateral safeguard measures shall be applied to the import of a product which has previously been subject to such a measure. 

Five years after the date of entry into force of the UA-TR FTA, the Joint Committee shall review whether there is need to maintain the possibility to take bilateral safeguard measures between them.

Institutional capacities under the UA-TR FTA

The UA-TR FTA provides for the establishment of the Joint Committee. If necessary, Joint Committee can set up sub-committees and working groups to assist it in accomplishing its tasks. The Joint Committee supervises and reviews the implementation of the UA-TR FTA, keeps under review the possibility of further removal of barriers between the parties, considers amendments to the UA-TR FTA, etc. The Joint Committee is not a permanent institution. It shall meet whenever necessary upon request by the either Party but normally at least once a year at the agreed date and place. 

For instance, the UA-TR FTA also provides the possibility of the review of the provisions of the UA-TR FTA no later than two years after the date of its entry into force. After receiving such request, the Joint Committee shall examine the possibility to negotiate replacing, modernising any existing areas of the UA-TR FTA and expanding the coverage of the UA-TR FTA to additional areas of the UA-TR FTA and where appropriate, to make recommendations to Ukraine and Turkey.

Moreover, one working group has been established by the UA-TR FTA from the beginning. It is a Working Group on Facilitation of activities through commercial presence. This Working Group meets as needed but at least once a year for the purpose of affording Parties the opportunity to raise any matters related to issues such as: facilitation of activities through commercial presence; transfer of funds, personnel mobility and logistical matters, among others; activities through commercial presence and other relevant stakeholders, when applicable, on specific issues, etc.

Dispute settlement under the UA-TR FTA

The UA-TR FTA’s dispute settlement mechanism is based on the WTO’ dispute settlement procedures with the specifics pertaining to the free trade agreements. For example, absence of appellate review stage, exclusion of trade remedies disputes from the consideration, shorter deadlines for consideration of dispute, own rooster of arbitrators.

If a Party fails to implement the Report of Arbitrators, the UA-TR FTA also provides, firstly, to agree on compensation and if failed to suspend the benefits under UA-TR FTA. The complaining Party shall be entitled to suspend the application of benefits granted under the UA-TR FTA but only equivalent to those affected by the measure or matter that the Arbitration Panel has found to be inconsistent.

Other advantages of the UA-TR FTA

As both Parties are also Parties to Pan-Euro-Mediterranean (PEM) Convention and have agreed to apply the rules of PEM Convention mutatis mutandis, Ukraine can benefit from the application of diagonal cumulation. The PEM Convention has a system of cumulation and uniform rules for the origin of goods. Cumulation means that goods/raw materials/components that have received the status of origin in one of the PEM countries can be used in production in any of the other participating countries without losing the status of preferential origin, even when these goods have not been subjected to sufficient working or processing in the latter country. Diagonal cumulation means that preferential origin and, thus, preferential rate, can be retained between three or more countries. This could be very helpful for the Ukrainian textile industry that uses imported cloth mostly from Turkey and thus, under other FTAs textile products do not comply with rules of origin of bilateral FTAs e.g., with the EU.

Conclusions

The UA-TR FTA will enter into force on the first day of the second month, following the date of the receipt of the latter written notification through diplomatic channels, by which the Parties inform each other that all necessary requirements foreseen by their national legislation for the entry into force of the UA-TR FTA, have been fulfilled.

The Ukrainian national legislation requirements foresee the adoption of the law which ratifies the free trade agreement. To date, no draft law on such ratification was registered in Ukraine. As you can see from the history of other FTAs of Ukraine, the FTA with Israel entered into force after two years from signing, while the FTA with Canada after one year. The last Ukraine’s FTA with the UK was ratified within three months. However, it could be hardly the case for the UA-TR FTA, taking into account the war in Ukraine.

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