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Buy American. Why Ukraine protects EU and US manufacturers instead of domestic ones?

Author : Anna Peshkova

Source : 112 Ukraine

Travel by Ukrainian planes and domestic trains. For some, this does not sound very tempting, while others, on the contrary, consider the support of a domestic producer important for the growth of the well-being of every Ukrainian. This means that he expects a lot from the adopted Law 3739 "On Localization"
17:45, 22 December 2021

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On the one hand, protectionist measures are needed in a pandemic, especially in conditions when the component of imported goods in Ukrainian public procurement is 7 times higher than in the United States. Thousands of Ukrainians are interested in protectionism, who, instead of migrating abroad, can earn money in production in our country. On the other hand, if you buy only Ukrainian goods, the quality of the goods produced may suffer, the price may rise because Ukrainian enterprises will not have any incentives to do the opposite. In particular, Dozorro thinks so.

But it seems that today this discussion does not make sense. We are not in danger of protectionism, as it’s a long way to go to a full-fledged transition to Ukrainian production. The Localization Law changed so much by the second reading that some of its measures were turned upside down.

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Localization selectivity

According to the adopted law, only those goods that are at least partially produced in Ukraine will be able to participate in public procurement auctions (municipal or state orders). We are talking exclusively about mechanical engineering products: transformers, public transport, locomotives, airplanes, etc. The deputies could also support the domestic production of oxygen concentrators, for example, but decided to choose only one industry.

In the General Legal Department of BP, this fact is called a violation of the principle of state protection of competition, and in the Federation of Employers, they reassure that one job in the machine-building sector is another ten jobs in related industries.

The localization will include clearly spelled out names of goods, and not all mechanical engineering products. This is necessary so that the import of goods that are not produced in Ukraine at all does not suffer. Also, localization will apply only to products in the price bracket between EUR 8,000 and EUR 133,000. That is, there is no "obligation" to at least partially produce aircraft in Ukraine for state orders.

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But the most important thing is that the Europeans have achieved their goal by publicly condemning the Ukrainian initiative. By the second reading, goods and services manufactured in countries with which Ukraine entered into international agreements on public procurement were removed from the law. We are talking about the signing of a multilateral Agreement within the WTO, which regulates the purchase of goods, works, and services by state bodies of the signatory countries, based on the "principles of openness, transparency, and non-discrimination." Restrictions on the purchase of engineering products will not apply to the EU and the USA.

It is not clear whether it was worth making concessions for Western partners, which almost completely neutralizes the whole idea of ​​supporting domestic producers. According to lawyers, it would be possible to adopt the law in its original form, and if the arbitration determined violations on the part of Ukraine, then it would already be obliged to bring the legislation in line with international treaties. Thus, our country would have gained time, since the law at that time would have worked for several years. The fear of not respecting Western partners, in this case, looks like fears of losing cheap loans.

Thus, the country will buy Ukrainian, American, and European. While municipal equipment for Ukraine will be assembled on a Mercedes chassis, Turkey, Belarus, Russia, and China will be forced to at least partially localize production in Ukraine, or not participate in tenders at all.

Indeed, for 6 years, the import of freight cars from the Russian Federation has actually strangled the domestic industry, and with it a number of related ones. We also actively buy from Belarus municipal equipment, ground public transport, agricultural vehicles that we could produce on our own. Turkey and China are, according to official information, 40% of government orders, and according to the Federation of Employers - and all 80%. But is it fair to dwell only on these countries? Moreover, the PRC, according to the latest statements from the authorities, is the country's No. 1 trading partner.

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What part of foreign products should be produced in Ukraine?

A special Authorized Body should be created, which will confirm the degree of localization of production in Ukraine. Initially, it was assumed that the minimum requirement would be from 25 to 60% localization, depending on the type of product and the stage of implementation of the law. But in the end we will see only a phased increase from 10 to 40% over 10 years. That is, 5% will be added to the localization requirement every year. However, it is not clear how to check the degree of localization.

"This is the basis for corruption. It is not known how the required level of localization of goods will be confirmed," Dozorro representatives say.

Everything may end with painting of General Electric locomotives in the colors of Ukrzaliznytsia, thanks to which localization on paper was 20%.

"You can just screw the wheels - and it will be the same 10%. In general, the first year will not give any effect at all. Then there is a very slow build-up of the cumulative effect. And even if we reach the maximum size of 40% of localization, this is also not enough," financial analyst Oleksiy Kushch comments.

Even such minimum requirements can be delayed. The law will come into force in six months, but the General Legal Department says it will probably take a year to wait. Additional financial resources will be needed to create a body that will monitor compliance with localization requirements. According to the Budget Code, if certain provisions increase budget spending, then they should be implemented in a year after the planned one, that is, in our case, already from 2023.

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Further, localization indicators will be able to change in manual mode. The law prescribed that the Cabinet of Ministers, in agreement with the relevant BP committee, can change the degree of localization of production for the next year every year: decrease by 5% or increase by 10% relative to each individual product that is the subject of procurement.

How in this form the law will stimulate the localization of foreign production in Ukraine is not clear. After all, localization is already impossible without improving the investment climate. Business will want to place capacities in Ukraine only when it is clearly known that it is possible to "recoup" investments here and make money. The lack of a normal judicial system does not add confidence to the business.

The risk is not excluded that in conditions of manual adjustment, benefits will be received by representatives of the industry, who will give a bribe for this, or will be politically correct in relation to the current government.

"This situation actually means delegation of powers to the Cabinet of Ministers of Ukraine and the corresponding committee of the Verkhovna Rada of Ukraine to amend legislative acts," writes the experts of the Main Legal Department.

Lawyers remind that the Constitutional Court recognized the granting of such powers to the Cabinet of Ministers as a violation of the principle of separation of powers. And the committees of the Rada do not have the right to agree on the decisions of the Cabinet - they can only preliminarily consider issues that belong to the powers of parliament. Actually, therefore, the conclusion of the Main Legal Department of December 10 read: "the bill requires revision."

***

As you can see, the real effect of the introduction of such an important law for the Ukrainian machine-building industry is doubtful in the near future. Against the background of state investments in the air carrier, which could not fly at all on Ukrainian planes, if not for the public outcry, we have to admit that, alas, there will be less protection for the manufacturer than we would like.

So, the industry of our country and the economy as a whole will still be very difficult to keep up with those countries where there is real help to business in connection with the pandemic and cheap energy resources are available.

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