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Partner, Head of International Trade Practice, Ilyashev & Partners,
PhD in Law, Attorney at Law
Mrs. Omelchenko enjoys the reputation of a top-three individual for international trade, trade remedies and WTO in Ukraine. Who’s Who: Trade & Customs 2018 says: Clients of Olena Omelchenko are “most impressed by her responsiveness and integrity
as a practitioner”.
Free Trade Area — Better Access to Markets
Regional trade agreements have become one of the most serious challenges facing the WTO over the many years of its existence. WTO rules do not prevent the conclusion of Free Trade Agreements (FTAs) and Agreements on Customs Unions, provided that such agreements promote the development of free trade and do not hamper trade between its member states and third countries.
Overwhelming Majority of Regional Trade Agreements are Concluded as FTAs
Article XXIV of the General Agreement on Tariffs and Trade (GATT) 19941 provides that a free trade area shall mean a group of two or more customs territories in which the duties and other restrictive trade regulations for goods originating from such territories shall not be higher or more restrictive by nature than duties and other restrictive regulations of commerce applicable in the same constituent territories before the free trade area was established.
Upon entering into a Free Trade Agreement the customs tariffs for trade between the countries of such an area are significantly reduced, while the countries still retain their right to regulate their own relations and customs tariffs with third countries. This is precisely the difference between the free trade areas and a customs union, which represent a more sophisticated form of economic integration and provide for a common tariff policy to third countries, as well as for uniform customs legislation.
Besides, the system of dispute resolution in customs unions and free trade areas is different. Customs unions may have a permanent court to resolve disputes between member states and to exercise control over the lawfulness of acts adopted by the supranational body governing a common tariff policy vis-à-vis third countries. Within the free trade areas all disputes between countries are resolved through ad hoc arbitration.
Global trends show that the number of FTAs has a tendency to rise from year to year, and WTO statistics are a clear case in point; in particular, according to the WTO as many as 37 FTAs were in force in 1993, and by the end of 2018 there were already 467 FTAs in force2.
The top five WTO members by number of FTAs concluded are: the EU (40), the European Free Trade Association (31), Chile (30), Singapore (24) and Turkey (23)3.
Number of Agreements Changed, As Did Their Content
Bilateral free trade agreements were more frequent in the past, and now multilateral agreements (so-called “regional”) are being concluded more often.
The content of regional trade agreements has undergone significant changes. In addition to reducing tariffs and lifting non-tariff barriers between the customs territories united into a free trade area, agreements now regulate issues related to intellectual property, sustainable development, investments, consumer rights and environmental standards. Thus, regional trade agreements go far beyond GATT provisions and, by doing so, gradually shift the emphasis from the WTO multilateral trade system to regional rules.
The major challenge for the WTO may be the establishment of a free trade area via the conclusion of mega-regional agreements covering several continents and weakening the WTO’s influence in international trade.
The main reason for such a quantitative increase in and qualitative growth of regional trade agreements is that with every year it is becoming increasingly more difficult to reach consensus when a large number of WTO members tries to decide on any issue. At the same time, a bilateral agreement makes it much easier and quicker to find common ground on the new rules not yet adopted by the WTO, as well as to agree on the liberalization of trade and political concessions associated with such arrangements.
Pursuant to WTO rules, customs unions and free trade areas are the exceptions to the general WTO rule, since they provide certain privileges and preferences to a limited number of members, which violate the basic most-favored-nation principle.
The lack of an appropriate mechanism to monitor the implementation of Article XXIV of GATT 1994 led to widespread conclusion of regional trade agreements that supersede the WTO’s influence in the field of international trade.
The Ukrainian Experience
Ukraine is also benefitting from free trade with a number of countries. In total, Ukraine has entered into 17 FTAs, 14 of which cover trade in goods and 3 regulate trade in goods and services.
Free Trade Agreements
In 1992 — 2006, before Ukraine’s accession to the WTO, Ukraine concluded bilateral FTAs with CIS member states (Azerbaijan, Belarus, Armenia, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan and Uzbekistan), as well as a FTA with the Republic of Macedonia.
These agreements do not provide for a real dispute resolution mechanism and are quite primitive compared with the agreements concluded after Ukraine’s accession to the WTO.
EU-Ukraine Association Agreement
A perfect example of Ukraine’s participation in the classic regional trade agreement is the EU-Ukraine Association Agreement4. From the very beginning it should have been an agreement containing trade provisions only, envisaging a common free trade area and covering trade in goods and services. However, at the time of its conclusion the text of the agreement was supplemented by a political section on cooperation in the field of justice, freedom and security in order to ensure the rule of law and respect for human rights and fundamental freedoms, as well as on economic and sectoral cooperation.
The EU-Ukraine Association Agreement envisages a mechanism for disputes resolution through the ad hoc arbitration. The dispute review procedures are simplified, but similar to WTO arrangements. It is worth recognizing that, in fact, the regional arbitration mechanisms are practically not used to resolve trade disputes. Having due regard to its significant influence, the availability of a body of appeal and its practice of applying the rules of the multilateral trade system, the states usually appeal directly to the WTO Dispute Settlement Body.
However, in spite of the above, the EU took advantage of the provisions of the bilateral dispute settlement mechanism and requested consultations in order to obtain evidence and explanations from the Ukrainian side regarding the restrictions on exports of round timber to further arrange an arbitration panel and resolve the dispute5.
Yet, this Agreement remains the most important one for trade relations between Ukraine and EU.
Treaty on Free Trade Area between Members of the Commonwealth of Independent States
Equally important for Ukraine is the Treaty on a Free Trade Area6 of 18 October 2011 with such CIS member states as: Belarus, Armenia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan and Uzbekistan.
The Treaty refers to the GATT 1994, envisages the complete zeroing of duties and elimination of quantitative restrictions, and has its own mechanism for settling disputes between contracting states.
However, experience show that Ukraine does not trust this dispute settling mechanism because of possible political influence on experts (arbitrators) appointed to consider the dispute. In particular, this became apparent after the Russian Federation unilaterally ceased to fulfill its obligations under the agreement starting from 2016.
The Russian Federation has explained its actions by “the exceptional circumstances affecting the interests and economic security of the Russian Federation and requiring the adoption of urgent measures” as related to the application of the trade and economic part of the EU-Ukraine Association Agreement from 1 January 2016.
Ukraine assessed the possibility of challenging this situation in the WTO and, in turn, adopted a political decision to raise import duty rates to the level envisaged by its WTO commitments.
Thus, this Treaty still remains important and regulates trade relations with all signatory states, except for the Russian Federation.
Other Agreements on Free Trade Area
Ukraine has certain trade preferences resulting from the conclusion of the Free Trade Agreement between Ukraine and EFTA countries (Switzerland, Norway, Iceland and Liechtenstein)7 (came into force on 1 June 2012) and the Free Trade Agreement between the Government of Ukraine and the Government of Montenegro8 (came into force on 1 January 2013), the scope of which includes trade in goods and services.
The Free Trade Agreement between Ukraine and Canada came into force on 1 August 2017 and regulates trade in goods only9. A Free Trade Agreement was recently signed between the Cabinet of Ministers of Ukraine and the Government of the State of Israel10.
In addition, negotiations on FTAs with the Republic of Turkey and the Republic of Serbia are under way, which will only be completed when a balanced outcome is achieved for both parties.
Taking into account the above, it’s worth recognizing that regional trade agreements have now become a standard, not an exception, designed only to complement universal regulation at WTO level. And in view of the WTO crisis that has escalated in recent years, it remains to be expected that regional trade agreements will only contribute to even greater free trade flows between countries without barriers for trade with the outside. In other words, regional integration should complement the multilateral trading system and not threaten it11.