The updated free trade agreement with Canada: what will change and what you should pay attention to

On September 22, Ukrainian President Volodymyr Zelenskyi and Canadian Prime Minister Justin Trudeau signed an updated Free Trade Agreement between Ukraine and Canada.

The agreement is expected to enter into force either upon ratification by both parties or on January 1, 2024, whichever occurs first.

Let’s try to figure out what the main new conditions were agreed upon and what should change in trade with Canada.

Canada’s tariff schedule has not changed significantly.

Nine tariff lines (various vehicles) were removed from the schedule, the import of which was initially fully liberalized for seven years.

At the same time, Canada has not opened its agricultural market to Ukraine, leaving 111 tariff lines of potentially important for Ukraine exports of poultry meat, milk, cream, ready-made poultry products, sugar, ice cream, dairy products, feed, etc. without liberalization.

At the same time, the tariff schedule of Ukraine has undergone significant changes.

First of all, let us remind you that according to the current agreement, the Ukrainian schedule provides for transitional categories: 1, 3, 5, 7 (where category 1 means that tariffs are completely canceled from January 1 of the second year of the agreement, and category 7 – that tariffs are canceled from January 1 of the eighth year of validity of the new agreement).

Given that the current free trade regime entered into force on August 1, 2017, the full elimination of tariffs for the 7th category should take place from January 1, 2024.

In addition, the current agreement provides for transitional categories with the letters A, B, C, E. The letters A, B, C mean partial liberalization, for example, 5C means that starting from the sixth year for a certain tariff code, half of the base rate is applied and further liberalization does not take place .

Category E means that the product is not subject to liberalization at all.

Now let’s see what changes have taken place with Ukraine’s schedule.

First, Ukraine completely excluded from the schedule of concessions and liberalized trade in all goods for which transitional categories 1, 3, 5 and 7 were foreseen, which is a technical formality, since in fact the transition period will end on January 1, 2024.

By the way, it is for this reason that the updated agreement no longer provides for the possibility of applying bilateral protective measures if the liberalization of customs duties leads to damage to national producers.

Secondly, in the updated schedule of Ukraine, only the letters A, B, C remain, which mean partial liberalization (for example, a number of tariff items on poultry meat have a transitional category A, i.e. a reduction of the base rate by one fifth, or C, i.e. reducing the base rate by half), and E, which means that there is no liberalization for these product categories (different types of sugar).

And finally, thirdly, Ukraine has set an annual quota for the import of pork at the level of 20,000 tons, since the transition period for the tariff quota will end on January 1 next year.

As you know, preferences provided by free trade agreements apply only to goods originating from the countries that are parties to the relevant agreement. If the product is completely produced in a certain country (for example, plants or animals are grown, ore is mined, etc.), there are no questions.

Instead, problems start when some materials/raw materials are imported for the production of goods, which are further processed into finished goods.

Usually, free trade agreements, like the current agreement, provide that the originating status is definitely maintained if the materials/raw materials are imported from the other party to the agreement. This is called bilateral cumulation.

At the same time, the current agreement provides for the possibility of applying diagonal cumulation. This means that materials/raw materials are supplied not only between Canada and Ukraine, but also from other countries, the list of which is agreed upon by the parties, and the status of origin from Canada/Ukraine remains.

Diagonal cumulation is important for building value chains.

Let’s imagine (simplified example) that rubber is produced in country A, country A plans to produce window profiles from it and then supply such profiles to country B. However, country A does not have a free trade agreement with country B before importing profiles from the country And country B applies a duty of 30%.

Along with this, country B has such a free trade agreement with country B, and such an agreement provides for the possibility of using diagonal cumulation. In this case, country A is definitely interested in production cooperation with country B: country A will supply rubber to country B, country B will process it into window profiles and supply it to country B with 0% duty.

The current agreement defines only the possibility of applying diagonal cumulation. Instead, this issue is now more clearly regulated.

It is envisaged that diagonal cumulation can be applied with the EFTA countries, the EU, Israel, the United Kingdom of Great Britain and Northern Ireland.

A prerequisite for using diagonal cumulation is that both Canada and Ukraine have valid free trade agreements with the respective countries.

Ukraine and Canada have free trade agreements with these countries. The updated agreement provides for the possibility of further expansion of the list of countries for cumulation (after the conclusion of new free trade agreements with Ukraine and Canada).

The updated version of the agreement suspends the Agreement between the Government of Ukraine and the Government of Canada on the Promotion and Protection of Investments of 1994 from the date of entry into force of the updated agreement for the period until this agreement expires.

However, the said 1994 agreement shall continue in force for ten years after the entry into force of the updated agreement in respect of any breach of obligations under the 1994 agreement which occurred before the entry into force of the updated agreement.

At the same time, the updated agreement fully regulates the issue of investment between Canada and Ukraine, including, but not limited to, the definition of “investment”, investment protection, principles (national regime and most favored nation regime), expropriation and even the procedure for resolving disputes between the investor and the state .

International trade in services between Ukraine and Canada is being regulated for the first time.

The updated agreement establishes the forms of provision of services that fall under its scope, as well as the national regime of international trade in services (which provides for the provision of services or service suppliers of the other party a treatment no less favorable than that which it provides in similar circumstances to its own services and suppliers services) and most-favoured-nation treatment (which provides for services or service providers of another party to be treated no less favorably than that which it provides under similar circumstances to services and service providers from all other countries).

In addition, neither Ukraine nor Canada can now restrict access to the services market by setting limits on the number of suppliers, the total value of transactions, the total number of operations related to services, and other restrictions.

If any formal requirements apply (eg licensing, certification, certain qualification requirements), they must be applied on a non-discriminatory basis.

The updated agreement regulates in detail the procedure for concluding agreements on mutual recognition of professional services. In addition, financial services and telecommunication services are regulated separately.

The updated agreement regulates in more detail the conditions of conducting electronic trade.

First, the parties have committed to carry out more transactions in electronic form, in particular, they cannot deny the legal validity of a transaction/contract only on the basis that they are in electronic form. In addition, regulatory transactions/contracts should not be overly regulated.

Secondly, it is assumed that Ukraine and Canada should encourage the use of electronic authentication and electronic signatures, which should be legally valid in relations and before courts and various administrative bodies.

Third, Canada and Ukraine have committed to implementing measures to protect consumers from fraudulent, deceptive, and misleading commercial activities when they engage in digital commerce.

Fourth, the updated agreement obliges the parties to ensure an adequate level of personal data protection, in particular: limitation of data collection; choice; data quality; definition of the goal; restrictions on use; security guarantees; transparency; individual participation; and liability for improper use of personal data.

Fifth, the updated agreement obliges the parties to create all conditions to prevent the sending of unsolicited commercial electronic messages to consumers, that is, messages that are sent without obtaining the consent of the consumer or to consumers who have opted out of such messages.

Sixthly,

the updated agreement prohibits the application of tariffs on a digital product.

Seventh, according to the terms of the updated agreement, Ukraine and Canada should not limit the cross-border transfer of information by electronic means, if such activity is aimed at conducting the economic activities of the enterprise.

The updated agreement regulates in more detail the procedure for interaction between Ukraine and Canada in the context of environmental protection.

First of all, the parties recognize that climate change is a growing threat that requires urgent and collective action. Accordingly, Ukraine and Canada agreed to work together to limit temperature rise to 1.5 degrees Celsius above pre-industrial levels and achieve zero greenhouse gas emissions by 2050.

In addition, the parties undertook framework commitments to build a circular economy; cooperation on limiting air pollution; regarding the rational handling of chemical substances; regarding taking measures to prevent and reduce plastic pollution and waste, including microplastics; preservation of biodiversity, etc.

Instead of declarative provisions on the fight against corruption, the updated agreement regulates this issue in detail.

Canada and Ukraine must now introduce various administrative measures that would make it impossible/significantly more difficult to commit bribery and corruption offenses, for example, strengthening control over the opening of bank accounts and carrying out operations on them; promoted the integrity of civil servants (through the introduction of objective procedures for selection, rotation, transparency of the activities of civil servants, implementation of a system for identifying and preventing conflicts of interest, declaration, etc.).

The involvement of private entities and civil society in the fight against corruption is also regulated.

In addition, the updated agreement also regulates many other issues, including new ones. Example, trade and gender issues, trade and small and medium enterprises, trade and indigenous peoples.

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