Political, Free Trade and Strategic Partnership Agreement between the United Kingdom of Great Britain and Northern Ireland and Ukraine
Presented to Parliament by the Secretary of State for Foreign, Commonwealth and Development Affairs by Command of Her Majesty
November 2020
1) This report explains the governments approach to delivering continuity in the United Kingdoms (UK) trade relationship with Ukraine now that the UK has left the European Union (EU).
2) With our exit from the EU, the government has sought to deliver the maximum possible certainty to businesses and consumers through ensuring continuity in the UKs existing trade relationships. It is in no ones interests to disrupt existing trade flows.
3) To achieve this, the government has developed new bilateral agreements that replicate, as far as possible, the effects of the UKs existing trade agreements with existing partners. The new bilateral agreements provide for entry into force when the existing agreements between the EU and a third country cease to apply to the UK or as soon as possible thereafter. The agreements will form the starting point for the UKs future trade agreements with partners.
4) Wherever possible, the government has sought a technical replication of the existing EU agreements through these new bilateral continuity trade agreements, but in some cases, it has applied bespoke solutions for individual agreements as necessary to ensure continuity of effect and operability in a bilateral context.
5) This report gives details of, and explains the reasons for, any significant trade-related differences between:
a. The Political, Free Trade and Strategic Partnership Agreement between the United Kingdom of Great Britain and Northern Ireland and Ukraine (the UK-Ukraine Agreement or the Agreement); and
b. The Association Agreement between the European Union and its Member States, of the one part, and Ukraine, of the other part (the EU-Ukraine Agreement).
6) This report first sets out the general drafting changes which are consistent across all the UKs continuity trade agreements and which do not have a significant impact on the effect of the UKs current trade relationships. It then explains any significant differences between the trade-related provisions in the UK-Ukraine Agreement and the existing EU-Ukraine Agreement. To assist the reader, we have included some discussion of the economic impacts, as appropriate. This report focuses solely on the changes made to the trading arrangements between the UK and Ukraine in preparation for the UK ceasing to be bound by the EU-Ukraine Agreement and entering into the UK-Ukraine Agreement. Any wider economic impacts resulting from the UKs exit from the EU or the nature of the Future Relationship Agreement (the FRA) have been excluded from this report.
7) The UK and Ukraine have agreed that the most appropriate form of legal instrument to ensure continuity in this case is a long form agreement. To draft the UK-Ukraine Agreement, we have reproduced all relevant sections of the existing EU-Ukraine Agreement with the necessary technical and administrative changes to make it operable in a bilateral context.
8) This report is intended to aid businesses, consumers, and parliamentarians in understanding any significant changes made to the UKs trade or political, economic, or social cooperation relationship with Ukraine by the UK-Ukraine Agreement, the reasons for any changes, and their impact.
9) Should you wish to view the EU-Ukraine Agreement as originally published, it can be found online on the European Commissions website.
10) More detail, including decisions of the Association Council established under the EU-Ukraine Agreement, can be found on the EUR-Lex website. A consolidated version of the EU-Ukraine Agreement can also be found on the EUR-Lex website. The consolidated text is not an authoritative version of the EU-Ukraine Agreement but will assist readers to understand how the EU-Ukraine Agreement has been amended since its entry into force.
11) Should you wish to view the full text of the UK-Ukraine Agreement, it will be laid in Parliament alongside an Explanatory Memorandum as part of the UKs treaty ratification process in accordance with the Constitutional Reform and Governance Act 2010 (the CRaG Act). The text will also be available on GOV.UK.
12) This section provides a country-specific background analysis of trade between the UK and Ukraine.Trade between the UK and Ukraine.
13) Ukraine is the UKs 69th largest trading partner[footnote 1], accounting for 0.1% of total trade. Total trade in goods and services between the UK and Ukraine was 1.5 billion in 2019[footnote 2].
14) In 2019, UK exports to Ukraine were 0.7 billion, making it the UKs 71st largest export market (accounting for 0.1% of all UK exports). UK imports from Ukraine were 0.8 billion, making it the UKs 66th largest import source (accounting for 0.1% of all UK imports).
Source: ONS (2019), UK total trade: all countries, non-seasonally adjusted (accessed 25 August 2020). Totals may not sum due to rounding.
15) Using data from HMRC for trade in goods only, Table 2 shows that, in 2019, the top goods exported to Ukraine were vehicles other than railway or tramway rolling stock (HS87, 78 million) and aircraft, spacecraft and parts thereof (HS88, 77 million), together representing under a third of the total value of goods exported to Ukraine. The UKs top goods imported from Ukraine were iron and steel (HS72, 177 million) and cereals (HS10, 173 million), together representing over half of goods imported from Ukraine.
Source: HMRC trade statistics by commodity code (accessed 15 September 2020). Sectors classified according to Harmonised System chapters. Data presented is recorded on a physical movement basis where a good is recorded as an export (import) if it physically leaves (enters) the economic territory of a country.
16) Table 3 shows that, in 2019, travel services and other business services[footnote 4] were the largest UK service sectors exported to Ukraine (both 37 million). These two service sectors were also the largest import services from Ukraine, with other business services valued at 62 million and travel services valued at 54 million in 2019.
Source: ONS, (2019). UK trade in services: service type by partner country, non-seasonally adjusted (accessed 15 September 2020)
ONS data is recorded on a Balance of Payments or change of ownership basis where a good or service leaving (entering) the economic territory of a country is recorded as an export (import) only if it has changed ownership between the resident of the reporting country and non-residents. Goods exports (imports) are recorded by HMRC if a good physically leaves (enters) the economic territory of a country.
17) In 2019, HMRC estimated that around 2,300 VAT-registered UK businesses exported goods to and around 700 imported goods from Ukraine[footnote 5]. As these figures only include businesses trading in goods, they are likely to underestimate the total number of businesses trading with Ukraine.
18) For context, provisional survey data from the ONS shows that around 340,500 (non-financial) registered businesses in the UK traded in either goods or services, or both in 2018 with another country[footnote 6]. This was just under 15% of all VAT/PAYE registered businesses. There were around 211,100 (non-financial) registered businesses in the UK engaged in goods trade with another country and 188,400 (non-financial) registered businesses trading in services in 2018. Some of these businesses traded in both goods and services. There will be other businesses trading internationally, which are not identified by these surveys as they are not registered for VAT. Neither of these sources include businesses trading below the VAT registration threshold.
19) The EU-Ukraine Deep and Comprehensive Free Trade Area (DCFTA) entered into force in 2017 after being provisionally applied since 2016. The EU-Ukraine DCFTA is the main economic pillar of the EU-Ukraine Agreement.
20) A 2018 European Commission report looking at implementation of EU free trade agreements included information on the EU-Ukraine DCFTA[footnote 7]. It highlighted that total trade in goods between the EU and Ukraine increased by 24% between 2016 and 2017, although it is not clear how much of this resulted from the DCFTA versus trade which would have occurred regardless if the DCFTA was not in place. Ukraines trade with the world increased sharply in 2016. However, Ukraines trade with the EU increased at a faster rate than its overall trade in 2016.
21) A 2007 sustainability impact assessment was undertaken on an extended EU-Ukraine free trade agreement (FTA)[footnote 8]. The simulation, which used computational general equilibrium (CGE) modelling, estimated that an extended FTA[footnote 9] would result in additional 5.3% in the long run. This was expected to reinforce existing trends in trade flows and lead to gains for the sectors with a comparative advantage in both economies. In Ukraine, this applies to processed foods, agriculture, and various other goods sectors. In the EU, the growth in income was expected to be spread over a wide range of sectors. While the relative estimated potential economic gains were expected to be higher in Ukraine, the EUs gains were expected to be larger in absolute value, with overall gains in real income of around $8.5 billion[footnote 10].
22) Not being able to bring into force the transitioned Agreement would result in UK businesses losing the preferences negotiated in the EU-Ukraine Agreement. This would include the re-imposition of many tariffs, returning to World Trade Organization (WTO) Most-Favoured-Nation (MFN) treatment with Ukraine. The benefits derived from trading under preferences within the EU-Ukraine Agreement, such as increases in trade flows, may then be reversed.
23) It is unlikely that the entire effect of the EU-Ukraine Agreement would disappear. Tariffs would revert to MFN rates, discussed in further detail below, but it could take longer for some of the other benefits to be lost. Some gains might endure even in the long run. For example, the UK might still benefit from any regulatory arrangements agreed because of the EU-Ukraine Agreement. Business connections formed because of the EU-Ukraine Agreement might endure.
24) The size of the impact of not bringing into force the UK-Ukraine Agreement would depend on the responsiveness of trade flows to increased costs brought about by the loss of provisions within the Agreement[footnote 11].
25) Much international goods trade takes place in products for which MFN rates are already zero. However, an FTA provides additional opportunities by reducing tariffs in products where this is not the case. If the UK-Ukraine Agreement is not brought into effect, tariffs between the two countries would revert to MFN rates, other than where Ukraine benefitted from preferential access to the UK market under a unilateral preference scheme that the UK is implementing after EU exit (the UK GSP (Generalised System of Preferences), see below). This would lead to an increase in duties on some UK exports to and imports from Ukraine.
26) The UK is implementing a unilateral preference scheme as the transitional period agreed with the EU comes to an end. It is the governments intention that countries that currently benefit from preferential access to the EU through the Generalised Scheme of Preferences (GSP) would continue to receive the same access through a new UK trade preference scheme[footnote 13]. At the end of the transition period, we will follow the EUs eligibility criteria. Ukraine is classified as a Lower-Middle Income Country by the World Bank, and, as such, it would be eligible for unilateral preferences under the UKs GSP scheme. This would provide tariff reductions, but not the same level of access as that offered by an FTA. Higher-income partner countries would not benefit from unilateral preferences.
27) To estimate the potential impact of losing tariff preferences, assumptions have to be made. It is assumed that all current trade between the UK and Ukraine occurred at the negotiated preferential tariff rate and current patterns of trade remained unchanged in future. Without taking into account the effect of any unilateral preferences other than the UKs GSP tariff rates, reverting to Ukraines current MFN tariff rates and the UKs GSP tariff rates would result in an annual increase in total duties of around 21 million. This would predominately be duties on UK exports (17 million). Duties on imports would be estimated to increase by 4 million[footnote 14]. This is relatively small compared to the value of total trade with Ukraine of 1.5 billion in 2019.
28) These estimates assume that all tariff preferences offered under the current EU-Ukraine Agreement are fully utilised by exporters. This is unlikely to be true. For example, the Department for International Trades (DIT) estimates suggest that 91% of the UKs eligible goods imports from Ukraine in 2019 (defined as those which occurred under tariff lines where a preferential rate was offered under the EU-Ukraine Agreement) were imported utilising the preferences under the EU-Ukraine Agreement[footnote 15].
29) Similar data on UK eligible goods exports to Ukraine is not publicly available. The European Commission has recently published available data on preference utilisation of exports to selected partner third countries with FTAs in place[footnote 16]. For these countries, 68% of UK eligible goods exports were traded under preferences. This means that the actual increase in duties could be lower than the estimates above.
30) The total duty which would in fact be charged on exports and imports would depend on how quantities and prices of traded products adjusted to the imposition of tariffs. If UK producers were not previously utilising the preferential rates or producers and consumers changed their behaviour in response to higher tariffs, this cost would be lower than estimated above. These are strong assumptions, so this figure should be treated as an indicative estimate of the magnitude of the trade barrier under this scenario.
31) The indicative estimates show that the largest implied increases in UK export duties would be for beverages, spirits and vinegar (HS22) at around 4.8 million, vehicles other than railway or tramway stock (HS87) at 1.9 million, and nuclear reactors, boilers, machinery and mechanical appliances (HS84) at 1.6 million.
32) Accounting for unilateral preferences, the largest implied increases in UK import duties would be on animal or vegetable fats and oils (HS15) of around 1.8 million, preparations of cereals etc. (HS19) of 1.0 million, and articles of apparel and clothing, not knitted (HS62) of 0.3 million.
33) Indicative estimates of implied additional tariff duties are provided above to provide a sense of scale of possible additional costs of trade. Tariff duties are transfers, where the cost to business is equal to the extra tariff revenue collected by the UK Exchequer and Ukraines government. However, there could be wider effects of increased costs of trade, including negative impacts on consumer choice, prices, and ultimately economic growth and welfare.
34) Additional duties could be absorbed by either UK or Ukrainian businesses (depending on whether it is the importer or exporter paying the duty), passed on to consumers, or existing trade patterns could be interrupted. This could impact UK competitiveness, leading to disruptions in supply chains and job losses in the short term.
35) Businesses that rely on imports as part of their supply chains may be affected if import prices rise, including UK exporters that rely on Ukrainian inputs to export goods to the rest of the world. In 2016 (latest data), around 15.4% of the value added in UKs gross exports reflected imports from abroad, even though the data does not provide how much of this is from imports from Ukraine[footnote 17]. UK companies which rely on Ukrainian imports would become less competitive. Given the small share of UK trade under this Agreement, in this case we would expect these impacts to be relatively small but could be noticeable for some specific companies.
36) Imported products could be more expensive for consumers if retailers pass on additional duties to consumers through increases in domestic prices. This could disproportionately affect certain groups of consumers, for example, those at the lower end of the income distribution, depending on the specific sectors affected. Consumers might also see a reduction in choice of products and services available. Given the small share of UK trade under this Agreement, in this case we would expect these impacts to be relatively small but could be noticeable on specific product lines.
37) In the long run, the UK would forgo the longer-term benefits that the UK-Ukraine Agreement would have brought to UK. This could result in the long-term UK Gross Domestic Product (GDP) marginally decreasing if a deal is not reached. Given the small share of UK trade under this Agreement, we would expect the impact on GDP to be relatively small.
38) This section provides a discussion of the changes in the UK-Ukraine Agreement.
39) Technical transition of the EU-Ukraine Agreement with few changes means that the substance of the new UK-Ukraine Agreement is broadly the same as that of the EU-Ukraine Agreement. This includes on those issues of particular importance, such as human rights, democracy, and good governance. Some changes have been made to provisions referring to the Russia-Ukraine conflict and to Ukraines membership of international institutions to reflect the UKs foreign and security policy. Further details on those provisions are available in the Explanatory Memorandum.
40) The main effects of the EU-Ukraine Agreement have been to encourage greater trade and investment between the EU and Ukraine. It has addressed obstacles to trade in goods and services, eliminating almost all tariffs on trade in goods, banned anti-competitive practices, created a level playing field for the export of goods and services, increased transparency, moved towards international standards in a number of areas, developed small- and medium-sized enterprises (SMEs) and simplified requirements in customs. The UK-Ukraine Agreement contains clear commitments to international standards on Intellectual Property (IP), and UK Geographical Indications (GIs), such as Scotch whisky and Irish whiskey, which are protected in the Ukrainian market.
41) Where necessary, references to the European Union, the European Community, the EU, EU Party, and Member States are replaced by the UK. Similarly, references to EU institutions have been replaced with appropriate references to the equivalent institutions in the UK. All other references to European Union, the European Commission, the EU, EU Party, Member States and similar are explicitly changed.
42) In the existing EU-Ukraine Agreement, the territorial application article defines that Agreements territorial application to the EU by referencing the territorial application of the Treaty on European Union, the Treaty on the Functioning of the European Union and the Treaty establishing the European Atomic Energy Community (EURATOM Treaty). Article 416 of the UK-Ukraine Agreement applies the Agreement to the UK to the extent that and under the conditions which the EU-Ukraine Agreement applied.
43) In respect of the UK, the territories to which the UK-Ukraine Agreement will apply, other than the UK itself, are:
a. the Crown Dependencies (Isle of Man, Bailiwick of Jersey, Bailiwick of Guernsey), to which, broadly, provisions relating to trade in goods and customs apply; and
b. Gibraltar, to which, broadly, provisions not relating to trade in goods or customs apply
44) The European Atomic Energy Community (EURATOM) is a Party to the EU-Ukraine Agreement and Article 483 of the EU-Ukraine Agreement provides that such Agreement applies to the territories to which the EURATOM Treaty applies, under the conditions laid down in that Treaty. The EURATOM Treaty applies to all Overseas Territories for whose international relations the UK is responsible, excluding the Sovereign Base Areas of the UK in Cyprus. The government understands that EURATOM is specified because provisions relating to civil nuclear trade and co-operation (which make up only a small part of the Agreement) fall within an area of EURATOM competence. It was not intended that this should extend the application of the EU-Ukraine Agreement to territories to which such Agreement would not otherwise apply. The government has therefore amended the territorial scope of the EU-Ukraine Agreement to remove reference to territories to which the EURATOM Treaty applies, having consulted with relevant territories to ensure they would not be affected. We do not expect this change to have an impact.
45) As the EU-Ukraine agreement predated the Russia-Ukraine conflict, an amendment has been made to the application of the UK-Ukraine Agreement to the territory of Ukraine. Article 416(2) of the Agreement provides that the application of the Agreement, or of Title IV (Trade and Trade-related Matters) thereof, shall commence in the Autonomous Republic of Crimea, the city of Sevastopol and parts of the Donetsk and Luhansk Oblasts of Ukraine, once Ukraine ensures the full implementation and enforcement of the Agreement, or of Title IV thereof, on its entire territory. The Strategic Partnership Dialogue created under Article 400 of the Agreement shall adopt a bilateral decision on when full implementation and enforcement of the Agreement has been ensured.
46) Article 29(4) of the EU-Ukraine Agreement provides that from five years after its entry into force, at the request of either Party, the Parties shall consult one another in order to consider accelerating and broadening the scope of the liberalisation of customs duties in the trade between them. As this time period has now elapsed, the equivalent provision in the UK-Ukraine Agreement, Article 29(4), provides that either Party may request such review from two years after the entry into force of the UK-Ukraine Agreement.
47) In accordance with Article 29(4), the UK and Ukraine committed to a political (non-binding) Joint Declaration reiterating their intention to examine on a product by product basis, the possibility of further concessions with regards to agricultural and processed agricultural products, including poultry products imported under the tariff quotas poultry meat and poultry meat preparations. Further, during the second year after the entry into force of the Agreement, for poultry products imported under the tariff rate quotas poultry meat and poultry meat preparations only, the UK and Ukraine decided to consider entering into the consultations provided for in Article 29(4) immediately after Ukrainian imports of such poultry products exceed 80% of their respective quota volume determined in Appendix to Annex I-A. All other references to time periods in the EU-Ukraine Agreement have been replicated in the UK-Ukraine Agreement unamended.Institutions and Committees
48) Most of the institutional provisions and bodies provided for in the EU-Ukraine Agreement have been incorporated and adopted into the UK-Ukraine Agreement with some modifications to remain operable in a bilateral UK-Ukraine context. Changes have been made to the institutional provisions to reflect the bilateral context of the UK-Ukraine Agreement.
49) The primary bodies responsible for overseeing the operation and implementation of the UK-Ukraine Agreement are the Strategic Partnership Dialogue (the Dialogue) and the Trade Committee, which will both be comprised of representatives of the UK and Ukraine.
50) Article 4(1) provides that the Dialogue shall meet at least once a year in a specific configuration to address all aspects of bilateral cooperation, including security, economic and migration issues, as well as international and regional issues of mutual interest. Article 404(3) provides that the Trade Committee shall also meet at least once a year, or as otherwise agreed by the Parties.
51) Article 402(5) provides that, upon entry into force of the UK-Ukraine Agreement, any decisions adopted by the committees or sub-committees established by the EU-Ukraine Agreement before the EU-Ukraine Agreement ceased to apply to the United Kingdom shall, to the extent those decisions relate to the Parties to the UK-Ukraine Agreement, be deemed to have been adopted, mutatis mutandis. This approach provides for continuity of effect as it ensures that the decisions in force when the EU-Ukraine Agreement ceases to apply to the UK continue to apply under the UK-Ukraine Agreement.
52) The government is committed to ensuring the right level of Parliamentary scrutiny for all amendments to international agreements, whilst ensuring that the UK can keep agreements up-to-date and respond to changes in domestic legislation or wider economic considerations.
53) There is no overarching amendment article in the EU-Ukraine Agreement, however the parties to a treaty can always mutually agree to amend the text by way of an exchange of notes, in accordance with their internal procedures. In the UK, amendments to an agreement that are subject to a formal exchange of notes to confirm completion of internal procedures would engage the parliamentary scrutiny process set out in the CRaG Act 2010.
54) Article 400 of the UK-Ukraine Agreement establishes a Strategic Partnership Dialogue and a Trade Committee. These committees streamline the powers of the Association Council and the Association Committee (which had the power to sit in a trade configuration) under the EU-Ukraine whilst retaining the necessary sub-committees in Title IV (Trade and Trade-Related Matters). The Association Council under the EU-Ukraine Agreement has the power under Article 463(3) to update or amend the annexes to that Agreement. The Dialogue and the Trade Committee of the UK-Ukraine Agreement therefore also have the power under Article 403(3) and 404(7) respectively, to update or amend the annexes to the UK-Ukraine Agreement. It is in the UKs interests for the Committees to have this function, both to ensure continuity of effect of the EU-Ukraine Agreement as far as possible and to streamline the process of making changes to the UK-Ukraine Agreement, if required.
55) Entry into force provisions specify the date from which the terms of an agreement will bind the parties. Existing entry into force provisions have been replaced with new provisions to ensure that, whatever the scenario in which the EU-Ukraine Agreement ceases to apply to the UK the UK-Ukraine Agreement enters into force as swiftly as possible thereafter.
56) Article 418(2) of the UK-Ukraine Agreement provides that the Agreement will enter into force on the later of: (a) the date on which the EU-Ukraine Agreement ceases to apply to the United Kingdom, and (b) the date of receipt of the later of the Parties notifications that they have completed their internal procedures.
57) For the UK-Ukraine Agreement to enter into force between the UK and Ukraine, both Parties must first complete their domestic legal procedures required for entry into force. In UK domestic law, before an agreement subject to ratification may be brought into force, it must be laid before Parliament for scrutiny under the CRaG Act 2010.
58) Trade remedies provide a safety net for domestic industry against unfair or injurious trading practices caused by dumped, subsidised or unexpected surges of imports of goods.
59) Most WTO Members have a trade remedies system. The UK will operate its own system once the transitional period agreed with the EU comes to an end. The UK-Ukraine Agreement replicates the effects of the trade remedies provisions in the EU-Ukraine Agreement, with some amendments. The product-specific safeguard on passenger cars and the related provision on the application of multiple safeguard measures have been removed. This specific change is unlikely to have an impact, given that imports from the UK are much lower than the specified trigger volume.
60) The economic benefits of the UK-Ukraine Agreement can only be realised if the Agreement is faithfully implemented and complied with. A dispute settlement mechanism in an agreement signals the parties intention to abide by the agreement, thereby increasing businesses and stakeholders confidence that commitments set out in the agreement can, and will, be upheld. The dispute settlement mechanism serves an important deterrent function. It also provides an effective mechanism for enforcing those commitments, and for resolving any disputes that may arise in the future.
61) The UK-Ukraine Agreement replicates the effects of the dispute settlement provisions in the EU-Ukraine Agreement. The dispute settlement provisions are set out in Chapters 14 and 15 of the UK-Ukraine Agreement and its Annexes on the Rules of Procedure for Dispute Settlement and the Code of conduct for members of arbitration panels and mediators. Some amendments were necessary for the purposes of legal certainty and consistency.
62) Articles 294(1) and 307(2) of the EU-Ukraine Agreement state that the arbitral panel needs to share an interim and final report with the Parties setting out the findings of facts, the applicability of the relevant provisions and the basic rationale behind any findings and recommendations that it makes. We have made a small modification in the UK-Ukraine Agreement to ensure that the panel sets out the facts and the basis on which these findings were determined in order to have a clearer understanding of the basis for the decision. Article 320 of the EU-Ukraine Agreement requires panels to adopt an interpretation which is consistent with any relevant interpretation established in rulings of the WTO Dispute Settlement Body where an obligation under the EU-Ukraine Agreement is identical to an obligation under the WTO Agreement. Article 306 in the UK-Ukraine Agreement has softened the previous requirement and now only obligates panels to take into account relevant interpretations, in order to not bind the panels hands when making appropriate rulings, while maintaining the commitment to WTO jurisprudence. This language also replicates the wording used in the relevant provisions of the EU-Moldova and EU-Georgia agreements. One of the impacts of transitioning the dispute settlement chapters in the existing EU trade agreements is that, in the event where a dispute arises, the UK will be directly responsible for any appropriate costs associated with the dispute settlement process.
63) The existing EU-Ukraine Agreement contains a reference to the Entry Price System (EPS). The EPS provides for an additional specific import tariff to be levied on 28 kinds of fruits and vegetables entering the EU market if their price falls below specified price thresholds. Some of these fruits and vegetables are produced in the UK whilst others are not. Under Article 30(a) of the UK-Ukraine Agreement, the UK has preserved the right, but not the obligation, to introduce legislation replicating the EUs EPS on the same terms. To reflect this, the requirements of its application has been changed from shall to may. We do not expect this to have an impact on trade flows.
64) Approximation is the process by which EU partners must align their national laws, rules, and procedures in order to give effect to the entire body of EU law contained in the Acquis Communautaire (acquis).
65) Unless their removal affects market access, articles mandating or promoting the gradual approximation of legislation between the EU and Ukraine have been removed. Maintaining these commitments would require our partners to approximate their legislation to both the UKs and the EUs legislation, which would create an inappropriate commitment in a bilateral context. We do not expect this change to have an economic impact.
66) Goods chapters in trade agreements set out the treatment and the level of access to the domestic market granted to goods of the respective parties. Such provisions include setting tariff levels and quotas on various products, establishing agricultural safeguards and determining the rules of origin for goods to qualify for preferential treatment. Commitments on tariffs for both the UK and Ukraine have, other than in those cases detailed below, been transitioned without changes. This means that tariff preferences applied by the UK for products from Ukraine will remain the same as those applied by the EU and, likewise, Ukraine will continue to apply the same preferences to products from the UK that it is currently applying to products from the EU.
67) The only exception to tariff commitments being transitioned without modifications relates to the size of tariff-rate quotas (TRQs, see below), which can be found in Annex I-A and Appendix to Annex I-A to the UK-Ukraine Agreement (concerning Annex 1-A to chapter 1 and Appendix to Annex I-A of the EU-Ukraine Agreement, as incorporated) where these have to be resized to deal with the fact that the UK is no longer a Member of the EU. These changes are detailed further below.
68) TRQs allow a certain quantity of a product to enter the market at a zero or reduced tariff rate. Imports above that quantity are subject to a higher tariff rate usually the MFN rate. The EU has agreed TRQs, both for imports to the EU and to partner countries, in some of its trade and association agreements. In order for the products to be able to continue to benefit from the use of TRQs in trade between the UK and Ukraine, these quotas need to be present in the new UK-Ukraine Agreement.
69) TRQs administered by the UK and by Ukraine have been resized to reflect the fact that the UK is a smaller importer and exporter than the EU. Solutions were agreed with Ukraine to set quotas to a sufficient level that will allow for continuity of historical trade flows, in most circumstances, for importers and exporters from both sides.
70) The quotas given in the UK-Ukraine Agreement were calculated based on a mixture of customs and trade flow data.
71) In order to address future market access opportunities for the UK and Ukrainian businesses, it was also agreed that a minimum level of access should be provided for these quotas, based on a proxy measure relevant to UK trade. Doing so allows future market access opportunities for UK and Ukrainian businesses using a fair and evidence-based methodology.
72) Without transitioning these TRQs, and without any other mitigating actions, goods imported from Ukraine that are currently covered by TRQs in the EU-Ukraine Agreement could face MFN tariffs. This could make these imports more expensive. The nature of this impact will depend on a number of factors, including existing trading patterns and the behaviour and responsiveness of domestic consumers and businesses to the change in tariff. Historically, Ukraines usage of TRQs to export to the UK was mostly low. UK imports from Ukraine based on trade data (at HS6 level) of products that are currently covered by the 40 inward TRQs under the EU-Ukraine Agreement were worth 2 million in total in 2019. This is equivalent to less than 1% of total UK goods imports from Ukraine[footnote 18].
73) Overall, we would expect the impact on UK producers and consumers resulting from this approach to resizing TRQs to be limited.
74) See the UK-Ukraine Agreement text for more detail of the agreed TRQ, such as the tariff line.
Notes
*** Expressed in shell-egg equivalent.
*Expressed in net weight.
75) In free trade agreements, rules of origin are used to determine the economic nationality of a good. In order to qualify for preferential tariff rates, a good has to originate in the territory of one of the parties to the agreement. The trade pillar in a free trade agreement may also allow materials originating and/or processed in a country other than the exporting party to count towards meeting the specific origin requirements for preferential treatment, a process known as cumulation.
76) There are two main categories relevant to determining whether goods originate in the exporting country for the purposes of a free trade agreement:
a. Wholly obtained These are goods that are wholly obtained or produced entirely in a single country. Examples include mineral products extracted from the soil and live animals born and raised there.
b. Substantial transformation These are goods that are made from materials which come from more than one country, and the origin is therefore defined as that of the country where the goods were last substantially transformed. This can be determined in three ways:
i. Value added This type of rule requires that a particular proportion of the final value of the product be added in the exporting country.
ii. Change in Tariff Classification (CTC) This type of rule requires that the final product be sufficiently different from the imported materials so that it moves to a different tariff classification altogether.
iii. Specific processing or manufacturing These rules typically apply where value added or CTC rules may not adequately determine originating status, and where specific processes are required to meet originating criteria.
77) During the transition period, all UK content is currently considered as originating in the EU and UK exports are designated as EU origin. This means that originating materials from, and processing in, the UK and the rest of the EU can be used interchangeably in bilateral trade with existing EU free trade agreement partners. This will no longer be the case when existing EU free trade agreements stop applying to the UK at the end of the transition period.
78) At that point, the designation of UK exports will shift from EU originating to UK originating and EU content will (unless specific provision is made in new agreements) no longer count towards meeting the origin requirements for preferential treatment for either party. This would have implications for goods traded between the UK, EU, and Ukraine.
79) To address these implications and to provide maximum continuity for business, the UK-Ukraine Agreement provides that EU materials can continue to be used, and count as originating (e.g. cumulated), in UK and Ukrainian exports to one another. Furthermore, EU processing can continue to be used and count as originating in UK exports to Ukraine. The possibilities to cumulate with other third countries, as per the EU-Ukraine Agreement, are replicated in the UK-Ukraine Agreement on the same terms.
80) The cumulation arrangements are set out in detail in Title II (Definition of the Concept of Originating Products) of Protocol I to the UK-Ukraine Agreement and are subject to certain conditions specified in the Agreement being satisfied.
81) Ukraine and the UK (as it continues to be bound by agreements to which the EU is a party to) are currently contracting parties to the Regional Convention on pan-Euro-Mediterranean preferential rules of origin (PEM Convention) and apply the PEM Convention between them. The PEM Convention is a multilateral agreement that harmonises preferential rules of origin across the Euro-Med area and provides for cumulation between contracting parties to that Convention[footnote 19]. The UKs future relationship with the PEM Convention is yet to be determined, so the UK-Ukraine Agreement reflects the provisions of the PEM Convention in a bilateral context with modifications.
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Continuing the United Kingdom's trade relationship with Ukraine (web optimised version) - GOV.UK