Cover Story (#06 June 2019)

Serious Concern

Ukraines trade policy is among the most sensitive areas of international cooperation due to its vivid geopolitical flavor. These past years became truly turbulent for business and no less for those who shape policy. Ukraine might feel the consequences of ongoing tensions between global leaders, and also maintains its own trade war front with its northern neighbor, Russia. The state has, of course, been diversifying trade marketing efforts in favor of the EU and other markets around the globe.

Anzhela Makhinova, partner of Sayenko Kharenko, explained her serious concerns, as in the absence of a working Parliament the business sector is deprived of efficient trade defense instruments for protecting domestic industry. At the same time, we talked about additional means available through membership in the WTO to protect the national interests in export markets, which are currently not being used to the full.

UJBL: With rising tensions and trade wars between the United States, EU and China, how can this affect Ukraines trade policy? Do you see any threats for our country?

Anzhela Makhinova: It goes without saying that the trade war begun in March 2018 by the US via adoption of import tariffs on steel (25%) and aluminum (10%) had a negative impact on the entire international trade environment as it caused a wave of various protectionist measures around the world. Specifically, the EU, Canada, Turkey, and the Eurasian Economic Union have all initiated safeguard and anti-dumping investigations against steel products that have already resulted in application of provisional and/or definitive measures.

As a world-leading steel supplier, Ukraine has inevitably been heavily hit by additional quotas and duties applied in major export markets. This is not the only negative consequence. There is another side of the coin. When acceding to the WTO, Ukraine considerably decreased import duties applied to different industrial products. Steel products were no exception, with 0% import duties applied to most of them. This situation is very dangerous for Ukrainian steel producers because the Ukrainian market could be flooded with exports of steel products from third-party closed export markets. Hence, Ukrainian steel producers will protect their internal market as soon as possible.

Unfortunately, as of today, it is quite difficult to do this efficiently in view of the fact that effective trade defense laws were adopted in 1998. Thus, they are outdated and do not allow Ukraine to overcome new international trade challenges. Particularly, in almost all cases there are no evident dumping or prohibited/actionable subsidies. Instead, most of them are hidden and, in order to be efficiently counteracted, it is crucial to apply different adjustments. While Ukrainian law is silent on how to counteract the above situations, other countries have already amended their legislation quite considerably. For instance, the EU has set out precisely cases when investigating authorities can apply higher anti-dumping or countervailing duty rates in the event of different market distortions (e.g. government intervention, export duties and bans influencing prices of raw materials); the necessity to take into account differences in labor standards, requirements in the field of environment protection, etc. The hope exists that the Ukrainian Parliament will soon follow the above approach and grant efficient trade defense instruments to domestic industry.

UJBL: Ukraine is a member of the WTO working group on the accession of Belarus. How can the state support its exporters focused on this market?

A.M.: The WTO is usually associated by businesses just with the dispute settlement system, but this is not true. The WTO stipulates many other opportunities for business to protect its interests in export markets. One is the participation of Ukraine in WTO working groups on the accession of other countries to the WTO.

The accession process begins with the submission by the relevant state of a written application to the WTO. Based on this application, a working group is established that will further analyze in detail the legislation of the country and its implementation in terms of compliance with WTO rules. Thereafter, multilateral and bilateral negotiations take place. In the course of negotiations, participating countries negotiate the elimination of different barriers to trade. For instance, during its own accession process, Ukraine abolished many tax privileges applied in the field of auto-production, minimum prices applicable to agricultural products, etc.; Russia was obliged to abolish its duel-pricing policy in the field of natural gas; Georgia was obliged to eliminate discrimination in application of taxes to tobacco products. Notably, it will be impossible for a state to accede to the WTO until the elimination of all barriers in trade, as the decision on accession is adopted by consensus of all WTO members and WTO members whose requirements have not been heard during the negotiation process can block adoption of the relevant decision.

As of today, accession negotiations are being conducted by many countries, including Belarus, Uzbekistan and Azerbaijan. As for Belarus, the country started negotiations in 1993 and now they are almost complete (Belarus expects to accede at the 12th WTO Ministerial Conference in June 2020). Ukraine is a member of the working group of accession of Belarus to the WTO. Therefore, the Ukrainian business sector has the chance to eliminate all trade barriers on the Belarusian market. It goes without saying that there are many different stumbling blocks there. To name but a few: state regulation of prices for natural gas for specific industries; provision of state loans at privileged interest rates to domestic industry; burdensome mandatory licensing of imports (e.g. beer, confectionary products, cheese); requirements as to mandatory share of domestic products in supermarkets, etc. Now it is time to put all these issues on the table.

Moreover, for Ukrainian business it is also crucial that Belarus participates directly in adoption of decisions by the Eurasian Economic Union following the results of anti-dumping, anti-subsidy and safeguard investigations. There have already been several successful examples when the relevant decisions on application of measures were blocked by Kazakhstan (for instance, decisions on application of anti-dumping measures against imports of herbicides from the EU, of rebars from Ukraine, etc.). At present, there are three active proceedings against Ukraine (namely: anti-dumping investigation against imports of galvanized sheets from China and Ukraine; safeguard investigation against the import of a wide range of steel products, including from Ukraine; sunset review of anti-dumping measures against imports of mill rolls from Ukraine). Therefore, now Ukrainian business can raise its concerns about all the above proceedings in the course of the Belarus WTO accession process.

UJBL: What is the role of dispute settlement clauses in FTA agreements?

A.M.: Until 15 January 2019, nobody had ever thought about dispute settlement clauses of FTAs, as Ukraine had never applied the relevant proceedings. However, the situation changed when the EU initiated the first dispute in Ukraines history with respect to an export ban applied to unprocessed wood and potential replacement thereof by export duties under the DCFTA.

Ukraine currently has 16 FTAs covering 45 countries. All the said agreements are divisible into two groups: old generation and new generation agreements. The first group covers FTAs concluded in the nineties (e.g. with Georgia, Turkmenistan, Azerbaijan). The above agreements set out settlement of any disputes exclusively by negotiation, leaving in doubt their efficiency.

It is a different story with new generation agreements such as with the EU, Canada, the European Free Trade Association, CIS and Israel (negotiations have been already completed). These agreements stipulate comprehensive dispute settlement proceedings elaborated on the basis of WTO procedure. Particularly, they cover (a) consultations between the parties to try to find amicable solution; (b) establishment of arbitration and appointment of arbitrators; (c) consideration of the case by arbitrators; (d) implementation of the adopted recommendations either voluntarily within a reasonable period of time or, if not, voluntary compensation for violations caused and even retaliation (e.g. suspension by the winning party of concessions in respect of the losing party by application of additional import duties, embargo, etc.).

It is worth emphasizing that dispute settlement proceedings under FTAs have several advantages compared with the WTO (especially now, when the system is going through a serious crisis): (a) there is no appeal stage, making the procedure considerably shorter; (b) third parties are not allowed to participate in contrast to the WTO where usually many third parties participate, considerably complicating the whole procedure; (c) there is no necessity to translate reports into the three official languages of the WTO, significantly influencing the length of the procedure; (d) there is no need to wait a long time for consideration of the case by the panel and the Appellate Body due to the limited resources of the WTO Secretariat. International trade experts believe that if the problems with appointment of the Appellate Body members are not solved in a short space of time and, thus, the WTO dispute settlement is blocked, most probably disputes will be solved at bilateral level.

Therefore, it is high time for Ukrainian businesses to think about such new opportunities to eliminate different stumbling blocks in export markets. However, there is also homework for the Ukrainian Government to be done as there are no legal acts in place regulating cooperation between business and the Government in the course of dispute settlements under existing FTAs. At present, there is only the Cabinet of Ministers of Ukraine Resolution No.346 of 1 June 2016 addressing very briefly how businesses can cooperate with the Ukrainian Government in the course of WTO disputes.

UJBL: How would you explain Ukraines failures in its disputes with Russia in the WTO?

A.M.: As of today, there are several disputes between Ukraine and Russia in the WTO. Ukraine has initiated three disputes Russia Railway Equipment (DS499), Russia Traffic in Transit (DS512), Russia Measures Concerning the Importation and Transit of Certain Ukrainian Products (DS532), while Russia has initiated two disputes Ukraine Ammonium Nitrate (DS493) and Ukraine Measures relating to Trade in Goods and Services (DS525).

In our view, it is worth commenting on disputes where the panels have already issued their reports DS499, DS512 and DS493. Following official publication of the above reports, the Ukrainian Government has been heavily criticized over the results.

First of all, in order to comment on the results of any disputes, one should understand in-depth the whole situation and the major reasons for dispute initiation. WTO disputes are usually initiated in relation to one hot issue. However, the complainants challenge not only this specific issue, but many others too. For instance, in DS493 one of the major issues challenged by Russia was cost adjustment for the market gas price used in the course of calculation of dumping margins that resulted in application of higher anti-dumping duty rates. Russia has made 20 claims against Ukraine and only part of these claims were linked to cost adjustment. Russia has also challenged many procedural aspects of the relevant sunset and interim reviews, in the course of which cost adjustment was applied. This approach could be explained by the following reasons. Firstly, if the panel does not agree with the central argumentation, there is a possibility that the additional argumentation may help to challenge the measure. Moreover, the dispute settlement procedure is very burdensome for states. Therefore, WTO members usually use all disputes to gain additional preferences to the maximum extent possible (e.g. to improve anti-dumping procedure, as in DS493). As a result, there are very few cases in the WTO that are fully won or lost. Usually, both complainants and defendants can claim to have won the dispute.

And now about Ukraines disputes. In the case DS493, the major success for Ukraine was that the panel has not declared cost adjustment as non-WTO compliant as such. Instead, some violations related to collection of evidence were revealed and served as grounds for the panels recommendations to review anti-dumping duties. Therefore, the Ukrainian industries where natural gas constitutes a large share of production costs could further benefit from cost adjustments that allow the application of anti-dumping duties at rates sufficient to eliminate material injury. At the same time, the panel did not agree with Ukraines arguments in respect to the inclusion of one Russian exporter in the above sunset and interim reviews. This issue has been challenged before the Appellate Body, with the final report expected by the end of this year.

In the case DS499, Ukraine has managed to prove that Russia has violated its obligations under the Agreement on Technical Barriers to Trade by suspension of certificates of conformity and annulment of application for certification. The panel has ruled that, indeed, all the above activities discriminate against Ukrainian producers compared with Eurasian producers and producers from third countries. However, at that time, Ukraine was not in a comparable situation. Specifically, due to the conflict in the Eastern part of Ukraine, Russian inspectors could not hold inspection controls in Ukraine and without such controls, it was impossible to conduct certification. This issue appears quite controversial and was challenged before the Appellate Body. However, bearing in mind that the WTO is a trade/economic organization, it is evident that it is reluctant to adopt decisions linked to the health, lives and safety of people. Meanwhile, Ukraine has managed to prove Russias violations in terms of undue process rules (e.g. in the absence of any advance notifications, Ukrainian producers were deprived of their rights to object to relevant decisions and to submit their arguments). Moreover, the panel has ruled that Russias refusal to accept certificates of conformity issued by other members of the Customs Union/Eurasian Economic Union are not WTO compliant. This represents a success for Ukraine, as Ukrainian producers from different industries can now refer to this conclusion and use the certificates of other members of the Eurasian Economic Union to export to Russia.

One of the most landmark cases, not only for Ukraine, but also for the whole WTO community, is DS512, because the panel has considered and interpreted Article XXI of GATT (Security exceptions) for the first time in the history of the WTO! In DS512, Ukraine challenged transit restrictions/bans applied by Russia on 1 January 2016 (as amended on 1 July 2016) to transit from Ukraine to Kazakhstan and Kyrgyzstan. As a result, Ukraine lost almost 100% of its exports to this region. The panel has ruled that Russia violated its obligations under Article V of GATT, specifically the obligation to ensure freedom of transit via the routes most convenient for international transit; Russia has made distinctions of transit from the territory of Ukraine based on the place of origin, departure, entry, exit or destination, etc. However, Russia has invoked Article XXI (b) (iii) of GATT and claimed that all of the above measures were applied in time of war or other emergency in international relations. Unfortunately, the panel has followed Russias arguments and concluded that there were no violations. Ukraine has already officially announced that the panel report will not be appealed. The following reasons were behind this decision. Firstly, it is virtually impossible to predict how the Appellate Body will interpret Article XXI. The fact is that Russia has insisted that the panel does not even have jurisdiction to interpret Article XXI and that this Article is fully self-judging. The same approach was pushed by the US because the whole trade war currently waged by the US is based on the national security argument. The panel has ruled that it has jurisdiction on the matter. The worst case scenario could be that the Appellate Body could accept a position similar to the US and Russia. Secondly, one could predict with very high probability that Russia would not comply with the recommendations of the Appellate Body, even if Ukraine won. Unfortunately, such examples are not rare. Thirdly, the above interpretations mean that Ukraine has justification for all its sanctions already applied (and those that will be applied) against Russia, which have been challenged by Russia in DS525 and which will not go on.

UJBL: What WTO tools could be further used by business in Ukraine?

A.M.: As I have already said, unfortunately the WTO is only associated in business aspects of the dispute settlement procedure. However, the WTO provides other additional opportunities to solve issues of serious concern. For instance, it is possible to raise such issues at different WTO committees or in the course of trade policy reviews. Moreover, nowadays many initiatives (e.g. e-commerce) are discussed in the WTO at different levels. So Ukraine can raise its concerns on the WTO platform in order to negotiate better conditions for our business, etc.

Moreover, according to our experience, many decisions are, unfortunately, still applied without bearing in mind Ukraines WTO obligations. Lets analyze in detail the export ban on unprocessed wood. When the export ban was applied for the first time, an explanatory note to the relevant draft law set out only protectionist grounds Ukraine needs to protect Ukrainian furniture producers and other companies involved in wood processing, that is necessary to create new jobs, to attract more investment, etc. Under pressure from the international community, Ukraine has amended its export ban to bring it into compliance with WTO rules. For this purpose, restrictions for internal use of unprocessed wood were additionally applied. This time an explanatory note indicated that the measure does not contradict WTO regulations as it is in compliance with Article XX (g) of GATT setting out the possibility to derogate from obligations with the purpose of conserving exhaustible natural resources. Thereafter, an additional draft law appeared on potential replacement of the export ban with export duties. The explanatory note to this draft law specifically indicates that the export ban is not WTO compliant. Of course, in such circumstances it would be very difficult for Ukraine to substantiate its position in its dispute with the EU. If the relevant authorities had known how relevant WTO exceptions are applied, Ukraine would not have entered into the current dispute with the EU. This example demonstrates that Ukrainian businesses must learn WTO rules properly and understand how they work.

Key Facts

Sayenko Kharenko

Year of establishment: 2004

Number of partners/lawyers: 14/92

Core practice areas

  • Antitrust & Competition
  • Banking & Finance
  • Bankruptcy & Debt Restructuring
  • Capital Markets
  • Corporate & M&A
  • Corporate Security
  • Government Relations
  • Intellectual Property
  • International Arbitration
  • International Trade
  • Labor & Compliance
  • Litigation
  • Private Wealth Management
  • Real Estate & Construction
  • Tax
  • White Collar Criminal Defence
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