12 November 2020
Professor Erika Szyszczak is a Fellow of UKTPO
In its avowed Global Britain Project the UK promised that Ukraine would be given preferential status in the post-Brexit trade landscape. Finally, on October 8, 2020 the UK and Ukraine signed a Political, Free Trade and Strategic Partnership Agreement (the Agreement).
This is the first comprehensive strategic and trade agreement signed by the UK since the creation of the Foreign, Commonwealth and Development Office, but one of several continuity agreements. The political symbolism of the Agreement is of greater significance than the economic impact of the Agreement, with Ukraine and the UK keen to show that they are independent, sovereign trading nations.
According to the UK Press Release, trade between the UK and Ukraine was worth only £1.5bn in 2019. The main UK goods exports to Ukraine were aircraft (£79m), medicinal and pharmaceutical products (£61m) and cars (£52m). The Agreement is of significance to the UK for securing food supplies: in 2019 £177m of cereals were imported which amounted to over 14% of UK imports of cereals (Source: UN Comtrade). The other major import was iron and steel (£182m). Overall Ukraine benefits by increasing its access to export finance support and technical assistance from the UK, alongside increasing its capacity to export to the EU and the UK market. It is estimated that 98% of Ukrainian goods will now be accessible to the UK market without tariff quotas.
But the aim of the Agreement is to increase UK-Ukraine trade. Ukraine is the UK’s 69th largest trading partner. The share of Ukraine in the UK’s exports and imports of goods in 2019 was 0.14% and 0.11% respectively (Source: UN Comtrade). In 2019, UK exports to Ukraine were £0.7bn, making it the UK’s 71st largest export market. UK imports from Ukraine were £0.8bn, making it the UK’s 66th largest import source. Trade in goods has greater significance than trade in services.
The new Agreement has been adapted for bilateral trade from the Deep and Comprehensive Free Trade Area (DCFTA) Agreement between the EU and Ukraine which formally entered into force on September 1, 2017. This Agreement was lauded as an example of the new EU approach to its neighbourhood policy, by increasing trade in goods and services through tariff reductions but also by including conditionality clauses relating to democracy, human rights and good governance and, most importantly, by Ukraine adapting its internal harmonising standards in industrial and agricultural products to EU standards.
The UK-Ukraine Agreement is regarded as a continuity agreement to maintain trade between the UK and Ukraine after 31 December 2020. Thus, the Agreement covers a wider range of areas not normally found in a basic trade Treaty.
Significantly, a major change in the UK-Ukraine Agreement is that Treaty Articles mandating or promoting the gradual approximation of legislation between the EU and Ukraine have been removed in the UK-Ukraine Agreement, unless their removal would affect market access. However, I have argued that the EU has established itself as a regulatory magnet by requiring approximation to its own standards as a condition of trade and this impacts on future trade deals made by third states, either with countries which have a trade agreement with the EU, or are contemplating a future agreement. The UK argues that the removal of the approximation/harmonisation provisions will not have an economic impact.
It is worth noting that over 90% of UK imports from Ukraine are classed as intermediate goods, and hence are likely to be used as inputs, in part, in UK sales to the EU. Immediately after the end of the transition it is likely that producers in the UK will continue to adhere to EU standards and, while there will be additional regulatory costs, this will facilitate continued access to the EU market, and the use of inputs from countries such as Ukraine that have adapted to the EU norms. But issues may arise if producers start to conform to a distinct UK line of production, perhaps with lower or different standards than the EU standards.
Tariff rates for bilateral trade in goods between the UK and Ukraine will continue to apply, but some non-preferential applied rates may be lower because of changes in the UK’s Most Favoured Nation tariff schedule.
The Rules of Origin have been altered, replacing the EU with the UK as place of origin, with the same certification in place. Interestingly, the UK and Ukraine have allowed for the diagonal cumulation of inputs with any of the countries that have signed up to the Regional Convention on Pan Euro-Mediterranean preferential rules of origin, as well as, Iceland, Norway, Turkey or the EU. This does not give full trilateral cumulation with the EU however, and that is likely to depend on the outcome of the UK-EU negotiations, but it does open the door for the possibility.
With few exceptions, tariff preferences applied by the UK for products from Ukraine, and vice versa, remain the same as those applied in the EU-Ukraine Agreement. Tariff Rate Quotas been adjusted to reflect the fact that the UK is a smaller importer and exporter than the EU, based on customs and trade flow data.
The attempt to create continuity with the earlier EU-Ukraine Agreement has also allowed adapted procurement and competition rules in the new Agreement. Reference is now made to UK domestic competition provisions (Chapter 10). Given that state aid has become one of the snagging points in reaching an agreement between the EU and the UK it is even more remarkable to see the inclusion of a state aid clause in the Agreement (Article 250). The obligations of Ukraine in the EU DCFTA require an independent regulator for State aid, with regular Reports to the European Commission.
The UK will be under some pressure to create a form of regulation of state aid to satisfy the requirements of the new Agreement, perhaps as a minimum complying with WTO requirements.
The institutional provisions and bodies provided for in the EU-Ukraine Agreement have been incorporated and adopted into the Agreement so that they are operable in a bilateral UK-Ukraine context. The primary main bodies responsible for overseeing the operation and implementation of the UK-Ukraine Agreement are the Strategic Partnership Dialogue and the Trade Committee, comprised of representatives of the UK and Ukraine.
The UK-Ukraine Agreement replicates the effects of the trade remedies provisions in the EU-Ukraine Agreement, with some amendments, for example, the product-specific safeguard on passenger cars and the related provision on the application of multiple safeguard measures have been removed. The UK has already established a Trade Remedies Investigation Directorate within the Department of International Trade.
The UK-Ukraine Agreement also replicates, with some adaptation for the UK, the dispute settlement provisions in the EU-Ukraine Agreement.
The economic benefits of the UK-Ukraine Agreement can only be realised if the Agreement is faithfully implemented and complied with. A dispute settlement mechanism in an agreement signals the parties’ intention to abide by the agreement, thereby increasing businesses’ and stakeholders’ confidence that commitments set out in the agreement can, and will, be upheld. The dispute settlement mechanism serves an important deterrent function. It also provides an effective mechanism for enforcing those commitments, and for resolving any disputes that may arise in the future. [para 60]
This signifies that the UK may be able to find a way of accepting Dispute Resolution Mechanisms avoiding the European Court of Justice, in any future UK-EU Agreement.
The UK is running out of time to sign new trade agreements before the Transitional Period ends. This Agreement with Ukraine is a substantial and lengthy document replicating the depth of co-operation on a wide range of areas already agreed between Ukraine and the EU.
The Daily Express hailed the new agreement as Boris Johnson’s brutal swipe at EU as new trade agreement secured.
This misses the point that the Agreement merely adapts a sophisticated economic and political Agreement developed by the EU to secure trade on its eastern border.
But one cannot help but conclude that the UK is duplicating the work previously performed by the EU through a new web of bilateral agreements. This will create additional costs for the UK in the application and enforcement of future trade deals, as well as creating administrative and adaptation costs for traders. Using the EU-Ukraine Agreement as the base for the new UK-Ukraine Agreement the EU has book-ended trade agreements, based on its own needs and values, on its eastern and western borders. The EU continues to hold a firm influence over the content of future UK trade deals.
The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.
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