Ukraine–EU Association Agreement and its free trade component

Ukraine–EU Association Agreement and its free trade component as a step in the European integration process: the future agreement in comparative

perspective

Darius Žeruolis

Presentation for the conference on Ukraine-EU Free Trade Area as an instrument of European integration and internal

reforms

Verkhovna Rada of Ukraine9 April 2009, Kyiv

Contents• Origins of AA (FTA) with Ukraine• Deep FTA as a constituent part of the European Union global trade

strategy• New generation FTAs (linkages to multilateral framework, focus and

EU’s criteria for choice)• Content of the new competitiveness driven FTAs• Origins of AA (FTA) in the EU’s external policy towards new

neighbours• Association agreements in comparative perspective• Steps preceding FTA negotiations• Scope of the future AA (FTA) between Ukraine and European Union• Structural elements of EU-Ukraine deep FTA• EU-Ukraine AA(FTA) in comparative perspective• Flanking sector specific agreements• Impact of the future AA (FTA) for Ukraine• Implications to the planning system of legal approximation in

Ukraine• Approach in sectoral presentations (which will follow)

Origins of AA (FTA) with Ukraine

• The origins of the future Association Agreement (AA) between Ukraine and EU with a deep free trade area (deep FTA):

– Global Europe Strategy (2006) - the European Commission sets out new trade policy agenda (competitiveness driven)

– European Commission’s Communications on the European Neighbourhood Policy (and its most recent Communication on Eastern Partnership)

Deep FTA as a constituent part of the European Union global trade strategy

• It underscores the need to liberalise international trade further in the multilateral format

• Trade policies as an important contributing factor to the EU’s external policies (especially development and neighbourhood)

• Openness is no longer simply about the tariffs, but especially about – a) non-tariff barriers, – b) access to resources (“Europe needs to import to export”),

especially energy, – c) new areas of growth (intellectual property rights (IPR),

services, investment, public procurement and competition).

New generation FTAs

• Are envisaged to build on WTO and other international rules by going further and faster in promoting openness and integration, by taking issues (especially investment, public procurement, competition other regulatory issues and IPR enforcement) which are not ready for multilateral discussion

• Are driven by a primary role of economic factors in the choice of future FTAs

• Are based on four criteria in seravhing for new FTA partners of the EU– a) market potential (economic size and growth),– b) the level of protection against the EU export interests (tariffs and

non-tariff barriers), – c) potential partner’s negotiations with EU competitors (and the likely

impact of this on EU markets and economies), and – d) the risk that preferential access currently enjoyed by neighbouring

and developing partners may be eroded

Content of the new competitiveness driven FTAs

• Comprehensive and ambitious in coverage, aiming at the highest possible degree of trade liberalization including far-reaching liberalization of services and investment

• Seeks to eliminate quantitative import restrictions and all forms of duties, taxes and restrictions on exports

• Tackles non-tariff barriers through regulatory convergence wherever possible and contain strong trade facilitation provisions

• Include stronger provisions on IPR and competition• Include provisions of good governance in financial, tax and judicial

areas where appropriate• Simplify the rules of origin and make them more modern to reflect

realities of globalization• Contain internal mechanism to monitor implementation and results

of new FTAs• FTAs are an integral part of the overall relations with the country or

region concerned (wider institutional architecture to be established on the case by case basis).

Origins of AA (FTA) in the EU’s external policy towards new neighbours

• Upgrading of EUs contractual relationship, including trade, with Eastern neighbours was recognized already in 2003 (e.g. in the EC Communication on Wider Europe; proposals of individual EU member countries predate this)

• European Commission’s proposed “deep and comprehensive“ FTAs in 2006:– subject to sufficient progress in implementing ENP APs

(particularly in regulatory areas) – Ukraine as the model case– a possibility of creating a Neighbourhood Economic Community

(NEC - a network of bilateral deep FTAs) as a long term objective - this was formally incorporated in the recent Communication on Eastern Partnership

Association agreements in comparative perspective

• There are three types of association agreements between the EU and partner countries:

– Europe Agreements (with former candidate countries in Central and Eastern Europe) and Stabilization and Association Agreements with (candidate and potential candidate) countries of Western Balkans

– Euro-Mediterranean agreements with the countries of South Mediterranean

– Agreements with Latin American countries (Chile (2003) and Mexico (2000) are the most notable examples, negotiations with some other countries are ongoing)

• These agreements typically follow a certain regional pattern (Central and Eastern Europe, Western Balkans, Euro-Mediterranean, Latin America, and in the future - Eastern ENP countries).

Key similarities among the AAs

• their “building blocks” are similar, namely, trade, economic and social co-operation, regulatory convergence, political dialogue and EU assistance

• Their legal basis of Article 310 of the Treaty Establishing the European Community, which states that “Community may conclude with one or more states or international organizations agreements establishing an association involving reciprocal rights and obligations, common action and reciprocal procedure”

• If the same legal basis is applied for Ukraine-EU Association Agreement, then the decisions reached at the joint institutions would be legally binding for both parties, and not for voluntary implementation, as it is now under the Partnership and Co-operation Framework.

Key differences among the AAs

• Europe and Stabilization and Association Agreements are based on the concept of deep and comprehensive free trade area (free trade zone and regulatory convergence with the internal market acquis)

• They are based on the promise of EU membership perspective, while for Euro-Mediterranean agreements and Association Agreements with Latin American Countries this is excluded, and for Ukraine and presumably for other Eastern Partnership countries it will be left open ended (neither perspective, nor exclusion)

• Euro-Mediterranean Agreements aim to foster trade and economic relations, to provide improved regime for investment, to control migration and to increase security of the area

• Free trade, political and economic dialogue are the core elements of the Agreements with the Latin American countries

Key differences among the AAs

• however, neither LA nor Euro-Med AAs are as ambitious in regulatory convergence as Europe Agreements or SAAs

• Europe Agreements and especially SAAs provide for a general framework also to negotiate other (sectoral agreements), such as ACCA, EEC, Transport Community, and visa facilitation

• The detail aims and scope of regulatory approximation in priority areas are typically established through Association or Europe Partnerships (functional equivalents of the EU-Ukraine ENP Action Plan)

Steps preceding FTA negotiations

• WTO accession of the partner country is prerequisite

• EU autonomous preferential regime for the partner country (in general EU GSP/GSP+)

• Independent feasibility study on scoping of the possible FTA (CEPS, 2006, for Ukraine)

• Consultations with the partner country in order to understand the level of ambition as regards a possible future FTA

• Mandates for negotiation for the Commission and for the government of the partner country

• Sustainability impact assessment (social and environmental aspects, civil society dialogue) – ECORYS (2007) on Ukraine

• Launch of FTA negotiations (5 March 2008 for Ukraine)

Scope of the future AA (FTA) between Ukraine and European Union (1)

• AA will be based on the principles of respect for democratic principles, human rights and fundamental freedoms as well as the principles of a free market economy

• Reinforced political dialogue and cooperation on strengthening the institutions guaranteeing democracy, the rule of law and the fight against corruption

• Economic co-operation aims at the principles of

– sound macroeconomic and fiscal policies– improvements in the management of public finances and financial

control– gradual approximation of national tax legislation with the principles of

the EU acquis– adoption of statistical methods compatible with EU standards


• on trade: negotiated-standstill clauses, the dismantling of import duties with certain exceptions for sensitive products and the elimination of export tariffs and quantitative restrictions

• technical regulations, standards and conformity assessment – in line with EC procedures

• On sanitary and phyto-sanitary measures it aims at the gradual approximation of legislation in priority areas leading to the liberalisation of trade (and possibly a separate eventual SPS agreement)

• on trade in services, freedom of establishment and investment – aims at beyond the PCA and WTO commitments

• aims at complete liberalisation of the establishment rules (possibly with certain limitations); encouragement of the cross-border supply of services (gradual approximation)

• on competition policy – far reaching commitments, including on state aid, both in the industrial and in the services sectors

• binding provisions covering further approximation on intellectual, industrial and commercial property


• in terms of regulatory cooperation – the aim is ensure that Ukraine will have the necessary expertise in order to implement the regulatory approximation envisaged in the areas of the free movement of goods, sanitary and phyto sanitary measures, trade facilitation and customs, trade in services, intellectual property rights and public procurement

• regulatory approximation and cooperation in the energy sector• justice, freedom and security – with an emphasis on migration,

asylum and border management as well as on cooperation to fight organized crime and drug smuggling

• cooperation chapters will cover very many policy fields, including transport, environment, the business environment, agriculture and rural development, space, health, education and civil society

• institutional provisions (establishing the institutions of AA and their powers)

Structural elements of EU-Ukraine deep FTA (1)

• Free movement of goods

– Trade in goods (industrial goods, agricultural products, processed agricultural products and fishery products)

– Rules of origin– Trade facilitation and customs, including anti-fraud

measures– Technical regulations for industrial products,

standards and conformity assessment procedures– Sanitary and phytosanitary (SPS) measures


• Services and investment

– Trade in services, freedom of establishment and investment

– Capital movement and payments– Co-operation in trade of services– Recognition of diplomas


• Horizontal issues:– Competition and state aid– Intellectual, industrial and commercial property– Public procurement– Trade and sustainable development– Transparency of regulations– General exceptions– Safeguards– Anti-dumping and countervailing measures

• Institutional provisions:– Dispute settlement mechanism– Institutional provisions and implementation

EU-Ukraine AA(FTA) in comparative perspective

• This is a likely structure of the future AA (FTA) between EU and Ukraine

• In essence this agreement is comparable to Europe and Stabilization and Association Agreements (except for the differences in interpretation of its main purpose).

• Novelty of EU-Ukraine AA (FTA) could be – in the linkages between trade opening and regulatory

convergence – implementation of the trade and trade related acquis

communautaire are expected to be binding. Negotiated concrete lists of the EU legislation for legal approximation in the policy areas falling under the sectoral co-operation (in EAs and SAAs this was operationalized through Action Plans)

Flanking sector specific agreements

• Agreement on Conformity Assessment and Acceptance of Industrial Goods (ACAA), (expected to be negotiated by 2011)

• Ukraine’s accession to the European Energy Community (negotiations ongoing)

• Common Aviation Area Agreement (expected to be negotiated in 2009)

• and possibly some other agreements of such type

• Their contents imply legal harmonization

Impact of the future AA (FTA) for Ukraine

• Two impact assessment studies preceding deep FTA negotiations (initiated by the European Commission)

– on the scoping of FTA with Ukraine (CEPS 2006)

– on trade sustainability (economic, social and environmental) (ECORYS 2007)


• General equilibrium simulations (CEPS) show that because of deep FTA

– the trade flows between EU and Ukraine would double

– Ukraine would achieve 4-7% welfare gains (in static simulations) and three times as much with long-term dynamic simulations

– opening of financial and telecoms sectors would add 1.5% percentage point to the annual growth rate

– reduction in cost of capital would be in the range of 4-5% in GDP

– improved institutions and better governance would add 20-30% in GDP in the long term (extrapolation from other contexts)


Costs (investment):

– 100 billion USD (in 2006-2015), most of investment needed in energy and environmental areas (World Bank public finance review of Ukraine (2006))

– these are obviously only rough estimates (but they indicate the magnitude of investment to be made in order to comply with EU norms)


• Sector or regulation specific IA studies in the context of European integration still very few in Ukraine

– they would be very useful not only in establishing the overall balance of costs and benefits, but would help to plan and sequence legal approximation

– two pilot impact assessments were made in 2008 by the UEPLAC through a joint initiative with the State Department of Legal Approximation under the Ministry of Justice (road haulage and low voltage equipment (in the area of technical regulations))

– more of such studies is absolutely necessary in order to move from general and often extrapolated assessments to assessments based on truly Ukrainian empirical content and data which could be subsequently turned into concrete policy actions.

Implications to the planning system of legal approximation in Ukraine

• Legal approximation will be upgraded from the ‘best effort’ voluntary effort to a binding commitment (at least for FTA part)

• From Central Eastern European and Western Balkan (S)AAs it can be implied that

– legal approximation will become more structured, most possibly through a ‘jointly agreed’ programme

– monitoring from the EU side will step up (done by the European Commission);

• Current UA NPLA would have to be upgraded – in scope (to encompass also the institutional building and/or other implementing measures

to ensure that the harmonized legislation is not only passed, but also implemented) – as well as in programming methodology (for example, through introduction of interim targets,

cross-referencing against the budgetary sources of financing and EU technical assistance, more frequent monitoring etc);

• NPLA will have to rely more on regulatory impact assessment than is the case now;

• Some likely legal and or institutional impacts in concrete policy areas will be provided by Ukrainian and international colleagues during the next session

Approach in sectoral presentations (to follow)

• Technical background paper (Aide memoire) prepared by UEPLAC with contributions of colleagues from other EU technical assistance projects (transport and rural development)

• It contains a set of written briefs about the economic sectors and policy areas likely to be included in the deep FTA within a wider framework of AA

• Policy areas were selected on the basis of – relative importance for Ukrainian economy– availability of the expertise within UEPLAC

Structure of the Aide memoire

• short summaries of the existing Ukrainian situation• descriptions of EU requirements (law and institutions)• provisions of other EU AAs (where relevant)• Ukrainian commitments in the WTO framework and ENP

AP• (where known) socio-economic of impact of

approximation to the EU norms• (main focus) - legal and institutional implications of AA

(FTA) for Ukraine, as this will affect the day to day work of the Government and the Parliament

Business

Ukraine–EU Association Agreement and its free trade component