Ukraine: the Most Recent Novelties in Export-import Regulatiom of Sugar Market
Ukraine and the World Trade Organization
The Ukrainian market of agricultural products becomes increasingly overregulated. Following the imposing the quota system on grain exports, the Cabinet of Ministers goes on by planning to make amendments to the Procedure for distributing the tariff quota on imports of raw cane sugar into Ukraine.
Talks about some possible amendments to the above Procedure and preparation of a respective Draft Regulation of the Cabinet of Ministers of Ukraine have been going on since as far back as early September 2010. As per statements by representatives of the Ministry of Economy of Ukraine, the main aim of the development of that document has been the harmonization of the procedure for distributing the quota with the commitments undertaken by Ukraine when acceding to the WTO.
Before the country’s accession to the WTO, the distribution of the quota on imports of raw cane sugar was carried out by means of auctions. As such a mechanism for distribution of quotas is in breach of the relevant WTO norms, among other, Articles II and VIII of GATT 1994, as well as Article 4 of the Agreement on Agriculture, Ukraine has committed not to use any mechanism of conducting auctions for distribution of the quota on import of sugar starting from the date of its accession to the WTO. In addition to the above, the item 136 of the Report of Working Party on the Accession of Ukraine to the WTO explicitly states that Ukraine would adopt a system of allocating raw cane sugar quotas on a first-come first-served basis within three years of the date of its accession.
The Draft Resolution of the Cabinet of Ministers of Ukraine “On making amendments to the Procedure for distributing the tariff quota on imports of raw cane sugar into Ukraine,” published on the official web site of the Ministry of Economy of Ukraine, at the first sight, is aimed at the very same target – the harmonization of the Procedure with the commitments undertaken when acceding to the WTO. This is a notable fact that it is not clear from the text of the Draft Resolution what the total volume of the above tariff quota will be. In accordance with the commitments before the WTO, the annual tariff quota should be set forth in the volume of 260 thous tons and the rate of the import duty, within the above quota, should be 2 per cent. The import duty out of the quota was kept at the level of 50 per cent. According to the draft, the amendments have to be made to Article 5 of the procedure currently in force, under which 260 thous tons of the total volume of the quota should be assigned to Paraguay within the framework of §35 of the Ministerial Declaration approved in Doha and understandings that were reached at the accession of Ukraine to the WTO in regard to the full integration of small vulnerable economies to the world’s multilateral trade system, whereas the allocation of the rest of the quota from January 1, 2011 should be carried out on a first-come first-served basis. The volume of this remainder has not been set forth in the Draft Resolution.
A number of reservations follow in the Draft Resolution: licenses for the total volume of 210 thous tons should be issued to business entities engaged in foreign economic activities that have provided, together with their application for a quota, an agreement (contract) to pledge their white sugar to the State Material Reserve, which was signed with the State Committee for State Material Reserve; licenses for the volume of 40 thous tons should be issued to business entities that have provided contracts to buy the sugar to the State Intervention Fund. The fate of the remaining 10 thous tons of sugar has not been determined in the Draft Resolution. These terms in fact nullify the attempts of the Government to harmonize the procedure for distribution of the sugar quota with the WTO norms by creating some additional complications to conducting imports, which is in breach of the commitments stipulated in item 136 of the Report of Working Party on the Accession of Ukraine to the WTO.
In accordance with the Procedure currently in effect, which was approved by the Resolution of the Cabinet of Ministers No. 1002 of November 12, 2008, imports of sugar of Ukraine is only permitted if there are contractual relations between business entities engaged in foreign economic activities of Ukraine and their foreign contractors that produce sugar. At the same time, as it had been repeatedly noted by the Ministry of Economy itself, the procedure currently in effect makes it practically impossible to import raw cane sugar “without the content of the Ministry of Agrarian Policy of Ukraine, the Ukrtsukor (Ukrainian Sugar) Association or sugar producers and business entities engaged in foreign economic activities that are connected with them with contractual relationships.
If the proposed amendments are approved, the key link of the chain, business entities engaged in foreign economic activities (FEA), will be replaced with the State Committee for State Material Reserve and the Agrarian Fund, which will act as intermediates between importers and customers. In other words, the very right of a business entity engaged in FEA of Ukraine to import sugar will be in a direct dependence on the availability of contracts of this producer with the State Committee for State Material Reserve or the Agrarian Fund.
Such terms for distribution of quotas are not in conformity with a number of provisions of the WTO Agreement on Import Licensing Procedures, among other, the principles of transparency, predictability and impartiality, as well as non-automatic import licensing are violated. Also, the requirement to sign contracts with the State Committee for State Material Reserve or the Agrarian Fund makes the procedure more burdensome in administrative sense, which is not in conformity with the aims of the Agreement, either.
In the present circumstances, there is no ground to talk about any surplus in the supply of sugar in the market of Ukraine. This is confirmed by data of the Analysis of Regulatory Influence of the Resolution of the Cabinet of Ministers: according to data of the Department for State Regulation of Foreign Economic Activity at the Ministry of Economy of Ukraine, the annual underproduction of white sugar from sugar beet comes to 20 – 30 per cent, which in turn lead to an extremely low level of sugar reserves in the state material reserve – just 3 – 7 per cent of the established level. Also, quite a good number of national producers predict some deficit of the product on the market in the new marketing year because of a poor harvest, which can cause a significant growth in prices for sugar. In addition, according to information from Minister of Agrarian Policy Mykola Prysyazhnyuk, Ukraine is currently in the negotiations with Russia in regard to granting the quota for duty free export of sugar in the volume of 100 thous tons. On the one hand, this is a good prospect for Ukraine’s national producers, but at the same time that can lead to an increase in the sugar deficit and growth in prices in the domestic market.
In view of the above stated, the State Committee of Ukraine for State Material Reserve made a statement that they intend to buy out all the product produced from imported cane raw material and then sell it in the domestic market in case of a deficit of sugar.
In such a case, the mechanism of purchasing of cane sugar is only possible if sugar mills have in advance signed contracts to sell sugar to be produced to the State Committee of Ukraine for State Material Reserve. It is possible to assume that the price of this purchasing will be somewhat lower than the market price. Thus, sugar mills will be able just to reimburse their expenses for processing.
In our opinion, such methods of filling up the deficit of sugar in the state reserve are not efficient and can lead to a distortion of trade. A possible alternative to such voluntary-but-forced contracts with the state bodies would be a temporary decrease in the customs duty on imports of the product out of the quota in order to stimulate the import of it into Ukraine. In addition, the introduction of the new administrative procedures in the form of signing contracts by far does not assists in simplification of imports procedures and filling up the deficit. Actions of the Government, quite the contrary, have to be aimed to simplify and speed up import procedure to the maximum extent.
The most recent novelty in the history of export and import restriction in relation to sugar was the Daft Instruction of the Cabinet of Ministers “On some matters pertaining to exports of certain kinds of agricultural products,” which was posted at the official web site of the Ministry of Economy on November 30, 2010. Among other plans, the Draft Instruction provides for the possibility of exports of sugar to countries that Ukraine has free trade agreements with.
There is no doubt that Ukraine has the right to grant a more favorable treatment, as stated in provisions of Article XXIV of GATT 1994, to countries that Ukraine has free trade agreements with. The said norm is an exception to the most favorable nation treatment as the latter stated in Article I of GATT 1994, which is the key principle of the multilateral trade system.
At the same time, still there is not yet a clear mechanism for selling agricultural products to these countries. It is not yet known whether or not sugar will be exported by a state-owned company or this will be carried out by some private producers. In the latter case, it is quite important how the state will ensure the equal right of access for all stakeholders to the process of exports.
In general, it is worth noting that the state recently has very much stepped up its activities on regulation in the market in both the sugar market and many other markets of agriculture products.
Andriy Zabolotskyy, lawyer at the Volkov & Partners law company, Kyiv