Escaping from Europe: Ukraine agreed on conflict with WTO, avoiding scandal with EU

Author : Yuriy Panchenko

On Friday, Ukrainian Ministry of Economic Development and Trade adopted the draft law which violates the Association agreement between Ukraine and the EU
23:14, 20 June 2017

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112 Agency

Ukraine’s government has invented a mechanism that should prevent a loud conflict with the EU.

On Friday, the Ministry of Economic Development and Trade announced its position on the extension of adopted Draft Law No. 6382 which provides the increased export duty on scrap metal - EUR 30 per ton instead of EUR 10.

This bill violates the agreements between Ukraine and the EU. It is no coincidence that on the eve of the Verkhovna Rada voting, the EU's representatives in Ukraine issued a statement expressing the hope that the deputies will respect the international commitments that Ukraine has publicly committed, "and will avoid another bilateral trade dispute with the EU."

It seemed that the answer to the question of whether a scandal would start depended on the presidential veto. However, the government has found a compromise option.

Welcoming the "wide discussion of the bill with interested parties: MPs, associations of metallurgists, representatives of metallurgical enterprises, the Government Office for European and Euro-Atlantic Integration," the Ministry of Economic Development and Trade decided to recommend the president to sign the said law.

"The bill aims to stabilize the work of Ukrainian metallurgical enterprises in a situation of military aggression, saving 25 thousand jobs. According to the existing calculations, the metallurgical industry generates 15 billion UAH of tax revenues each year, and thus provides uninterrupted financing of the needs of defense and reconstruction of separate territories of Donetsk and Luhansk regions ", the ministry emphasizes.

But even more important was the explanation of the Ministry about how exactly it would be possible to avoid Ukraine's violation of its international obligations.

"If the law enters into force, its provisions will be applied without prejudice to the obligations under the Association Agreement between Ukraine and the EU. For scrap metal exported to the EU, the export duty rates set by the Agreement will remain valid," the statement said.

The arguments of Ministry of Economic Development and Trade are based on the principle of dominance of international agreements on domestic law.

At first glance, the arguments of officials look convincing. Especially considering that the EU is not really an important buyer of Ukrainian scrap metal.

According to the State Statistics Service, in 2015 (the last year before the introduction of increased duties), Ukraine exported scrap metal worth $ 289.5 million, of which $ 6.3 million - to the EU. The lion's share of this export ($ 227.1 million) was shipped to Turkey.

A similar situation was registered by the State Statistics Committee last year, as well as at the beginning of the current year. In recent years, there has been a very small amount export of Ukrainian scrap metal to the EU. Turkey remained its main buyer, and this year it was also Russia.

According to this, Ministry’s solution looks like a lifeline. Ukraine avoids breaking the agreement with the EU, but leaves scrap inside the country.

It should be noted that the principle of dominance of international agreements in Ukraine is working very rare.

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Customs officers do not read international law, but are guided by departmental orders, therefore, in practice, the implementation of relevant norms in Ukrainian legislation is required. For example, according to the same logic, precisely this exclusion for the EU should be also applied to the current moratorium on the export of timber. However, for wood, this principle does not work for some reason.

In the end, the increased duties on scrap that have been operating during the last year are also valid regarding exports to the EU, which contradicts the logic of the government.

In addition, according to this, the same principle should be applied to exports to other countries that have free trade agreements with Ukraine: all CIS countries, Georgia, Norway, Iceland, Switzerland, Liechtenstein, Macedonia and Montenegro. This is not mentioned in the Ministry’s statement.

Finally, such a logic further exacerbates the issue of Ukraine's violation of the WTO norms.

After all, the WTO Accession Agreement is also an international document ratified by Verkhovna Rada, and it also has an advantage over domestic law. And in this document, we also undertook to refrain from increasing export duties.

At the same time, during the discussion of the bill on the eve of voting, the authors referred of the WTO Article XXI of the General Agreement on Tariffs and Trade "Exceptions due to Security Considerations", explaining that the new increase of export duties is not a violation of the WTO norms.

Is there a threat to the national security of Ukraine from the export of scrap – it’s a controversial issue. However, Ukraine can use this argument while working with WTO to protect its actions, because WTO principles provide for such a mechanism.

More precisely - it would be possible to use it. After all, the creation of exclusion for exports to the EU completely alters the logic of the XXI article of the GATT (General Agreement on Tariffs and Trade).

Such restrictions should be non-discriminatory, but the exception for EU Member States creates discrimination. Thus, Ukraine will almost certainly be the subject of a complaint to the WTO. With the corresponding consequences.

In particular, the frequent use of Article XXI of the GATT (and we refer to it in the matter of moratorium on the export of timber) can significantly weaken our position in an extremely important dispute with the Russian Federation. After all, exceptions should not be regular.

But what about the EU? Does the initiative of Ministry of Economic Development and Trade block our potential conflict with the European Union?

"Formally, we do not violate the interests of the European Union. On the other hand, in our agreements with the EU, in particular in the memorandum on providing macro financial assistance, Ukraine has undertaken to refrain from increasing export duties on scrap metal, without specifying that it concerns only supplies to the EU ", says scientific work director of the Institute for Economic Research and Policy Consulting Veronika Movchan.

EU position on this issue has not yet been voiced. This leaves hope for an opportunity to reach a compromise.

However, if earlier the EU firmly insisted on fulfilling Kyiv's commitments, even without its own interest, why the exclusion proposed by the Cabinet should change this position?

And at last - the scheme proposed by Ukraine’s Ministry, creates many opportunities for abuse.

After all, controlling the final flow of Ukrainian exports is much more difficult than the place of origin of goods imported into the country. And accordingly, it is almost impossible to control the situation when exports, which should be sent to the EU according to documents (for example, by sea to Bulgaria or Romania), will not actually appear in the same Turkey.

A similar scheme has already worked in the case of cattle leather export, when it was subjected to export duties, recalls Taras Kachka, who participated in negotiations on a free trade area with the EU. "All exports of leather began to flow to Macedonia, which had a free trade regime with Ukraine, and then went to Greece", he recalls.

Who can guarantee that this scheme will not be realized with scrap metal?

"The only question is whether the possibility of non-payment of increased customs duties compensates expenses on cargo carriage and document correction," informally says the one of the metallurgical companies’ representative.

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