How to Liberalise EU-Ukraine Trade under DCFTA: Tariff Rate Quotas

This policy brief focuses on trade relations between Ukraine and the EU amid preparations for the review of the Deep and Comprehensive Free Trade Agreement (DCFTA) due in 2021. In particular, it analyses Ukraine’s utilization of the DCFTA tariff rate quotas (TRQs) over 2016-2019. According to the results, Ukraine has been steadily increasing the level of TRQs usage – in terms of the number of utilized TRQs and export volumes within and beyond TRQs. For some DCFTA TRQs, total exports to the EU far outweigh quota volumes, while for other TRQs supply is limited by quota volume. The brief provides arguments and recommendations for the DCFTA TRQs update to increase Ukraine’s duty-free access to the EU market.

Why Update DCFTA TRQs for Ukraine?

EU-Ukraine trade under the Deep and Comprehensive Free Trade Agreement (DCFTA, in effect since January 1, 2016) progressed considerably. Ukraine’s exports of goods to the EU reached $20.8 billion in 2019 – a 54% increase compared to 2016 and a 24% increase compared to pre-crisis 2013.

According to the EU-Ukraine Association Agreement/DCFTA, the parties may initiate a review of its provisions in five years from its implementation – in 2021. So far, both governments confirmed their readiness to start such negotiations next year.

Ukraine advocates for further trade liberalisation with the EU through reducing the existing tariff and, most importantly, non-tariff barriers. This is an imperative for maintaining positive trade dynamics and providing new impetus to deepening bilateral economic integration.

Updating duty-free tariff rate quotas (TRQs) under the DCFTA is at the top of the EU-Ukraine 2021 negotiations agenda. Current quota volumes are based on outdated statistics, as it has been 10 years since the DCFTA negotiations (2008-2011).

Many TRQs are too low in terms of Ukraine’s current export and production capacities. For example, Ukraine’s total exports of grains (annual averages) increased from 19 million tons in 2008-2010 to 42.3 million tons in 2016-2018. Honey exports increased from 5.9 thousand tons in 2008-2010 to 58 thousand tons in 2016-2018. As a result, some TRQs are fully exhausted in the first days or months of the year.

High competition for access to duty-free quota volumes is a barrier first of all for SMEs that cannot compete effectively for it with large companies, while out-off-quota tariffs may be too restrictive for them.

Ukraine’s TRQs Utilisation During 2016-2019

DCFTA TRQs grant partial liberalisation of market access to the EU. Zero tariff rates are only applied to a specified quantity of imported goods inside a TRQ, while beyond TRQ imports to the EU are dutiable on a regular basis (subject to third-country tariff rates).

The EU applies TRQs for 36 groups of agro-food products originated in Ukraine plus 4 additional TRQs for certain product groups (in total 40 TRQs under DCFTA) – see Table 1. Ukraine applies TRQs for 3 groups of products plus 2 additional TRQs.

By the level of utilisation, TRQs fall into three groups: 1) fully utilised. They, in turn, can be divided into TRQs with and without over-quota supply; 2) partially utilised; and 3) not utilised.

The data indicate a general upward trend in Ukraine’s utilisation of TRQs under the DCFTA. In general, Ukrainian exporters utilised 32 TRQs in 2019 (80%) comparing to 26 TRQs in 2016 (65%).

Figure 1. Number of DCFTA TRQs utilized by Ukraine during 2016-2019.

Table 1 shows Ukraine’s utilization of 40 DCFTA TRQs over 2016-2019 – in tons and %. The main findings include:

The number of fully exhausted TRQs has been increasing. In 2019, Ukraine filled up 12 TRQs including honey; processed tomatoes; wheat; maize; poultry meat; barley groats and flour, other cereal grains; sugars; grape and apple juice; butter and dairy spreads starches; starch processed; as well as malt-starch processed products. For 9 of them, Ukraine’s supplies exceeded TRQs volumes.

The number of partially utilized TRQs increased from 16 in 2016 to 20 in 2019. In 2018-2019, Ukraine began using new TRQs such as fermented-milk processed products; malt-starch processed products; sugar syrups. High TRQs utilization rates (over 80%) in 2019 were observed for malt and wheat gluten; cereal processed products; eggs (main); barley, barley flour and pellets.

Moreover, Ukraine increased utilisation of TRQs for processed products. For example, utilisation of a TRQ for cereal processed products increased from 2.7% in 2016 to 99.5% in 2019. This signifies the growing ability of Ukrainian producers to comply with the EU food safety requirements and standards for processed products. Exports of processed starch increased significantly in 2019 and exceeded TRQ volume by a lot.

Ukraine’s utilisation of some TRQs has decreased. For example, a TRQ for oats gradually decreased from 100% in 2016 to 31% in 2019 due to a decrease in total exports and domestic production of oats in Ukraine during this period. Low utilisation of other TRQs may also be attributed to high price competition and quality requirements in the EU, complex quota allocation procedure, etc.

The number of not utilized TRQs decreased from 14 in 2016 to 8 in 2019. For instance, no exports within TRQs were observed for beef, pork, sheep meat, as Ukraine has not yet been authorized to export these meat products to the EU.

Moreover, since October 2017, Ukraine has been able to use provisional TRQs that were granted by the EU as autonomous trade measures (ATM) for 3 years. They increased duty-free access for 8 groups of Ukrainian products – in addition to the relevant DCFTA TRQs. So far, Ukraine fully utilises 5 ATM TRQs including honey; processed tomatoes; barley groats and meal, cereal grains otherwise worked; wheat, flour and pellets; maize, flour and pellets.

Total Exports to the EU vs Duty-Free Exports Within TRQs

For most fully utilized DCFTA TRQs, Ukraine’s total exports of the covered products exceeded TRQ volumes during 2016-2019. Considerable over-quota supply occurred for: honey; processed tomatoes; barley groats and meal, cereal grains; apple and grape juice; maize, flour and pellets; poultry meat; wheat, flour and pellets; sugars; butter and dairy spreads; starch processed.

For instance, over-quota exports of processed tomatoes from Ukraine to the EU in 2019 (31.2 thousand t) more than doubled the quota volumes (10,000 t of the DCFTA TRQ and 3,000 t of the provisional ATM TRQ). See Figure 2 for more examples.

Figure 2. Ukraine’s exports to the EU within and beyond certain TRQs, 2016-2019.

Increasing exports beyond TRQs indicate significant demand for these Ukrainian products in the EU, and their competitiveness in terms of price and quality on the EU market.

It also signifies that volumes of these fully utilised DCFTA TRQs with increasing over quota exports are rather low in terms of Ukraine’s export and production potential. Therefore, these TRQs are the primary candidates for updating.

At the same time, for certain DCFTA TRQs (malt-starch processed products; starch, malt and wheat gluten), exports to the EU were about 100% of TRQ volume but did not go far beyond. This may indicate a significant restrictive impact of those TRQs and out-of-quota tariffs for Ukrainian exports. These TRQs also need to be further analysed and revised.

Тable 1. Utilisation of DCFTA tariff rate quotas by Ukraine, 2016-2019.

Source: European Commission, own calculations   * Note: We consider 99.9% usage rate as fully utilized TRQ.

Conclusion

The EU and Ukraine confirmed their readiness to initiate the update of the DCFTA due in 2021. Ukraine is interested in increasing duty-free trade under DCFTA with the EU in line with the current state of Ukraine’s production and export capacities, as well as EU-Ukraine bilateral trade developments.

Although many DCFTA TRQs did not limit over-quota exports, Ukraine wants to revise DCFTA TRQs to secure permanent broader duty-free access to the EU market and reduce access barriers for SMEs (as SMEs are more affected by TRQs and other non-tariff barriers). So far, the EU temporarily increased certain TRQs in 2017 for three years as autonomous trade preferences for Ukraine. The primary candidates for the update should include DCFTA TRQs demonstrating high utilization rates, with or without over-quota supply (honey; processed tomatoes; barley groats and meal, cereal grains; apple juice; sugars; butter and dairy spreads; starch processed, etc.).

Amid future DCFTA update negotiations, Ukraine should conduct a detailed analysis for each DCFTA TRQ (taking into account temporary ATM quotas) to prepare its suggestions how and to what extent to liberalise them. It is worth considering different options of such liberalisation – by either increasing TRQs’ volumes or setting up preferential tariff rates for Ukraine instead, etc.

In the framework of the future negotiations with the EU, a special emphasis should be placed on increasing duty-free access for Ukrainian processed goods to promote their exports to the EU – as stipulated in the Export Strategy of Ukraine. For this purpose, Ukraine may explore possibilities for modifying the structure of certain TRQs (such as wheat, flour and pellets; maize, flour and pellets; barley, flour and pellets) to separate primary and processed products and to ensure more duty-free volumes for processed products.

References

• European Commission, 21.04.2020. DG Agriculture and Rural Development. “AGRI TRQs – Allocation Coefficients and Decisions”.
• European Commission, 12.02.2020. Remarks by Commissioner Várhelyi at a press conference with Prime Minister of Ukraine, Oleksiy Honcharuk.
• European Commission, DG Taxation and Customs Union, 21.04.2020. Tariff quota consultation.
• European Commission, 21.04.2020. “Trade Helpdesk Statistics.”
• OECD, 2018. “Fostering greater SME participation in a globally integrated economy”.
• Official Journal of the European Union, 2014. “EU-Ukraine Association Agreement”.

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