Trade free, but remember about restrictions

28.12.2015

Trade free, but remember about restrictions

The governments of Ukraine and Canada have prepared a set of documents on free-trade zone between the countries. Recently a subject-matter of the treaty was presented in Kyiv. The predictably boring event has unexpectedly found a wide response and appear

The governments of Ukraine and Canada have prepared a set of documents on free-trade zone between the countries. Recently a subject-matter of the treaty was presented in Kyiv.

The predictably boring event has unexpectedly found a wide response and appeared to be not only very interesting but also extremely useful. A small conference room of the Chamber of Commerce and Industry was packed, and some guests settled right on the stairs between the rows of seats.

Participation of the status speakers, including the Canadian Ambassador to Ukraine Roman Vashchuk, the Ukrainian Ambassador to Canada Andriy Shevchenko, heads of the Ministry of Economic Development and Trade, Chamber of Commerce and Industry, Ukrainian League of Industrialists and Entrepreneurs (ULIE), Canadian-Ukrainian Chamber of Commerce (CUCC), domestic and Canadian entrepreneurs, was not the least reason for such excitement.

The detailed report on the event where Canadian ambassador himself and the representatives of local companies which approached the overseas market already give advices on nuances of doing business in the North American continent.

The set of documents on free-trade zone between Ukraine and Canada is ready. The treaty opens up wide opportunities for our businessmen, which can be hindered only by their own greed and inexperience, as well as unclear investment policy of domestic government.

At the end of October, the conference "Ukraine - Canada, looking into the future: free-trade zone" was held at the Chamber of Commerce and Industry (CCI). The Canadian Ambassador to Ukraine Roman Vashchuk, the Ukrainian Ambassador to Canada Andriy Shevchenko, heads of the Ministry of Economic Development and Trade, CCI, Ukrainian League of Industrialists and Entrepreneurs (ULIE), Canadian-Ukrainian Chamber of Commerce (CUCC), representatives of Ukrainian and Canadian entrepreneurs took part in theevent.

It is obvious that potential of commercial relations between our countries has not been exploited to the utmost yet. The process of creating bilateral free-trade zone (FTZ) between the countries started in 2010.

Since then six rounds of negotiations have passed and ended with the full agreeing and initialing of the treaty on free-trade zone on 14 July 2015 in Kyiv. However, to enter into force it has to be signed and ratified by the parliaments of both countries.

It is worth noting that the treaty is asymmetrical, that is Ottawa will cancel 98% of import duties on food commodities for Ukraine, and our country – only about 80%. Thus, national producers will get better access to Canadian market, than Canadian ones to Ukrainian market. At that the Ministry of Economic Development expects dramatic growth of supply of our products with the high added value.

For manufactured products Canadians envisaged 99.9% cancellation of import duties. The only exception is Ukrainian automobiles. Special seven-year              transition period was set up to reach full liberalization of their supply.

Among the main Ukrainian products which will get advantages of duty-free access to Canadian market there is sunflower oil, sugar, confectionery and chocolate, alcoholic drinks and beer, juices, clothes, ceramics, metals  and chemicals.

Besides, the Ministry of Economic Development anticipates that the treaty will facilitate development of cooperation in the aircraft construction sector. In the long-term increase of supply of advanced technology equipment and products is expected. The treaty provides technical assistance to Ukraine for improvement of Ukrainian goods access to Canadian market and development of agricultural complex.

It is important to know that it is only goods (not services) of proved Ukrainian or Canadian origin which are subject-matter of the treaty on free-trade zone.

Negative balance

In 2010-2014, the volume of bilateral trade between our countries amounted $ 280 mln per year, which includes import of Canadian goods equal $ 214 mln and Ukrainian export equal $ 86 mln. It is worth noting that supplies of the national products to European Union for 7 months of 2015 amount to $ 7.16 bln and this is despite the fact that export to EU decreased by 33.9% from the same period last year.

“During the first semester of 2015 our supplies decreased and amounted to 65% from the same period last year. And it is just $ 13 mln,” YuriyLazorenko, Acting Director of “Derzhzovnishinform” (State establishment providing monitoring of external merchandise market), noted. During last five years Ukraine has negative balance of trade with this North American country. Thus, last year we supplied to Canada by 2.6 times less than we bought there.

The goods with low added value, mainly raw materials such as copper wire and rod, forge coal – anthracite (supplies were carried out before the conflict in Donbass, now they are prohibited), titanium dioxide, ferrous metals, honey and sweet butter, prevail in commodity nomenclature of the national export to Canada.

Last year our ironworks sold to Canada products for almost $ 7 mln, but raw materials (basic ferroalloys) composed 70% of them. In the first half of 2015 such export was not carried out.

High quality coaking coal for iron and steel industry, medicines, fish and agricultural machinery were imported from Canada to Ukraine. “At that, many products were supplied by intermediate parties,” YuriyLazorenko said, “about 19% of our goods were exported to Canada through the third countries, and 40% of goods were imported to Ukraine this way.”

“We hope that free-trade zone will open new opportunities,” Lazorenko continues, “where do we see perspectives? Pipes, ferrous metals, agricultural products and consumer goods. We exported these products even when import duties were established. Under new conditions such export may be dramatically increased.”

The expert pays attention to essential potential of titanium dioxide (SE “Sumyhimprom” is the biggest manufacturer) and copper export. Indeed, due to the armed conflict in Donbass the main producer of copper products Artyomovsk Non-ferrous metals processing works (AZOCM) has problems with logistics and significant volumes of undistributed stocks even notwithstanding the fact of its location in the territory under control of Kyiv. However, many participants of the meetings said about the necessity of growth of the products with the high added value export.

“Success of our enterprises in Canadian market will depend only on their wish and proactive attitude,” ValeriiKorol, Vice-President of the CCI says, “it is hard to overestimate importance of Canada as our trade partner, especially under conditions of current foreign economic environment. We lot upon cooperation in the sectors of the aircraft construction, space exploration, chemical industry and consumer goods manufacturing.”

“For example, Kirovohrad enterprise “Radiy” (manufacturer of reaction control systems) has working experience in Canada,” Serhiy Prokhorov, First Vice President of the ULIE, noted, “there are associations in wood-working industry. Let us find Canadian partners who have advanced technologies of added-value wood processing for them not to throw out 50% of materials.”

National Technical University “KPI” cooperates with the University of Toronto on issue of the theory of sustainable development of the state (discipline combines industrial development, social sphere and ecology). “We must expand and push on the process,” Serhiy Prokhorov considers.

YuriyKrivosheya, member of the Board of Directors of Canadian-Ukrainian Chamber of Commerce, echoes: “The common bright future of Canadian and Ukrainian business may be based on investment into people – education, trainings, business teams and job creation.”

Andriy Shevchenko appointed to position of Ukrainian Ambassador to Canada at the end of September has somewhat different point of view. He thinks that uniqueness of the country for western businessmen involves big market, relatively cheap energy sources and low percent of wages in the product costs. “These components are a good base for cooperation,” he said.

Beyond statistics

The total sum of aid allocated to Ukraine by the Canadian government during last two years amounts to 700 mln Canadian dollars. 400 mln of them is a credit, but at 1.5% deferred interest. Besides Ottawa is going to allocate another 30 mln intended to develop small and medium-sized businesses in our country. At last, in some regions of Ukraine local economic development projects are being prepared – Canada will provide a grant of EUR 200 thous. to support National Reforms Council.

“This year Ukrainian supplies to our country decrease and this is sad,” Canadian Ambassador to Ukraine commented statistics, “after all, current indices of business activities are disproportionate even to volume of our financial aid and level of political partnership. But at the same time this data demonstrates the huge potential between the countries.”

“There is a large Ukrainian Diaspora in Canada,” Roman Vashchuk noted, “but 97% of population do not have Ukrainian origin. It is necessary to build economic relations too. And big Canadian investment funds whose representatives visited Ukraine this year consider the possibility of investments in local economy. It says that a brand new stage both in trade and investment sphere has started”.

He emphasized that statistics does not take into consideration “invisible” external economic relations, for example, IT-sphere. Roman Vashchuk pointed out that at recent meeting one of Ukrainian companies said that it sold 10% of official external turnover of our country in Canada.

In the Ambassador’s opinion, such huge potential shall be integrated in the general framework of Ukrainian-Canadian economic relations. According to his information, the number of our companies working in the sphere of high technologies considers the possibility of direct investments in Canada to expand their presence in the North American continent. Canadian companies and enterprises of “Ukroboronprom” bring in contact stage by stage.

Canadian oil and gas complex is one of the leading complexes in the world. Roman Vashchuk is sure that North American companies are ready to explore or recover Ukrainian deposits. “I welcome these companies, but at the same time I feel sorry for them,” the diplomat said, “the situation with acreage rent and regulatory policy of the Cabinet of Ministers was not favorable last year. But VerkhovnaRada promises to settle this issue. I think it is necessary to carry over this problem from political battles to the sphere of practical decisions for players of the fuel-and-energy sector could get a clear map of their actions in the market.”

It is to be recalled that recently the parliament has approved in principle the draft of the law which intends to decrease the rent on gas production from 70% to a little bit more than 20% for so called joint ventures.

However, for some reason the Prime Minister ArseniyYatsenyuk considers that this draft of the law lobbies interests of gas oligarchs and is to have a direct impact on financially disadvantaged citizens who receive subsidies from receipts which are taken from the gas corporations and state enterprise “UkrGasVydobuvannya”.

It is not a subject of this article to study the logic of ArseniyYatsenyuk’s reasoning. It is just to be noted that the need for subsidies have arisen due to the unaffordable price of energy products for population. And one of the reasons for high price of gas produced in Ukraine is rental payments which considered being extortionate and destructive for national gas production.

VitaliyVitryk, the head of Poltava well logging company “Burovatechnika”, asked ambassador about the attitude of Canadian oil and gas investors: whether they waited for governmental decision on decrease of taxation burden and were not going to work in Ukraine for the time being.

“For the last two years the attitude of these companies may be characterized with just one word - a nightmare,” Roman Vashchuk answered, “last year I was busy making a kind of psychological counseling to Canadian companies. I repeated “Cheer up, decision will be taken”. When the company entered Ukrainian market there was another level of rental payments and on their basis long-term calculations of business activities were made.”

The diplomat explained that when acreage rent doubles or triples, carrying out business activities becomes more complex and it seems that investor was lured to the foreign country and ripped off. And it is the saddest thing about it! That is why it is important to get hard commitment that fiscal charges are established not for some months but for many years. Indeed, this is a mere detail if the companies have to pay 1-2% more or less, but they expect this amount to be stable.

Roman Vashchuk points up another advantage of Canadian market: “It has been 5 years since we work under conditions of North American free-trade zone (Canada, the USA and Mexico take part in it). Many European countries understood that it is more reasonable to establish their business in our territory and only then to make investment, commercial or production activities in the United States and Mexico. Thus, fixing in Canada you get access to 500 mln of potential consumers.”

“Your country gets ready for extended free-trade zone with European Union,” the ambassador continues, “Canada has already signed the treaty (is under the process of ratification) on economic cooperation and free trade with European Union. The way these three documents will interact is a subject of creative study by the attorneys and economists of our corporations. Besides, Pacific free-trade zone where we participate is to enter into force soon. That is Ukrainian companies will get the opportunity to supply their products not only to the Canadian market, but to a much wider network of countries and continents as well.”

“If your company is ready to make business with the European Union, it will be much easier to work with Canada,” Clint Martin, the head of commercial department of the Embassy of Canada to Ukraine, adds.

American cocktails

Roman Vashchuk was in a great mood and joked a lot. For example, when he noticed that there were no free seats in the conference-room, he said that he was frightened with such and interest to the event.

And answering the question of SvitlanaNovytska, representative of the company “Olymp” (alcohol producer), on possibilities to supply drinks to the North American continent, he said: “If you want to know the best places to booze in Canada, you came to the right place.”

To be serious, historically a unique system of alcohol turnover control exists there, and it is different in different parts of the countries. In some provinces, the chains selling alcohol are privatized.

And in other regions (Ontario, Quebec) there is still a state monopoly for selling (but not production) of alcoholic beverages. In these provinces it is important to find a good local agent who has a possibility to display your products on the shelves of the shops. That is why it is important for Ukrainian exporter to go thoroughly into diversity of Canadian provinces first of all.

Clint Martin advised to remember that apart from Ukrainian vodka juices also fall into the category of goods with zero import duties. “Generally Canadians drink alcoholic cocktails,” the head of commercial department of the Embassy of Canada to Ukraine emphasized.

Speaking about the perspective of selling ready-to-eat food, Roman Vashchuk joked again: “I can add to my speech on alcohol that Canadians do not only drink, they also eat.”

He advised Ukrainian producers two ways of goods promotion in Canada. The first one is to carve out an ethnic niche, for example, to supply buckwheat to the shops focused on the Eastern European consumers.

The second one is to include the product into the chains of big Canadian supermarkets. In the country of the maple leaf it is much easier to produce the goods for own brands of the local shops (PrivatLable – a brand owned by a retail network), than to bring an absolutely new product to the market under specific name.

“Unlike the USA with its huge variety of trading networks, there are 4-5 main players controlling the whole national market in Canada. I think, Ukrainian producers of jams or preserves having unused capacities due to contraction of Russian market can consider themselves as suppliers in this niche,” he noted.

Ivan Landar, Vice President of International association of thermoenergetic companies, offered mutually rewarding implementation of technologies for household waste processing and energy saving in Ukraine, as Canada steadily leads the world in these technologies.

Indeed, 20 mln of household waste is formed in our country every year. Besides there are billions tons of waste accumulated during the previous periods. There are 30 fly dumpings, 6 thous. grounds there and none of them is in normal condition.

When Emma Turos, Executive Director of CUCC, blamed the ambassador in joke mentioning that Americans are more active in our market in comparison with Canadians as in summer they launched a biogas unit at the household waste ground (the territory of Visnyanska country council, Mykolayivska region), Roman Vashchuk answered with the Soviet slogan: “Catch up and outdo”.

It is obvious that Providence Group (member of Aerospace Industries Association of Canada, AIAC), consulting company with headquarters in Toronto, officially registered lobbyist, does not want to find itself catching up.

TarasPavlovskiy, Global Business Director of this company, told that in 2013 they took part in Ukrainian-Canadian aerospace forum in Kharkiv. Since then Providence Group officially represents Kharkiv Machine Engineering Plant “FED” producing aeronautic aggregates.

Justified risks

“We have to make sure that the treaty will not turn into "a one-way street" case”. These words of OleksandrDanyleyko, the ambassador-at-large of the Ministry of Foreign Affairs of Ukraine, were based on the catastrophic figures of the national export to Canada in 2015. “Their import increased by 34%, and our export decreased by 64%. It is only third part of the last year indices. And raw materials compose almost a half of these supplies!” OleksandrDanyleyko gets chewed up.

The ambassador-at-large thinks that we have perspectives in the North American continent, but it is necessary to take into consideration the particularities of local business and logistics, as Canadians are much more cautious than, for example, Americans.

“They say let us sign agreement today, but what if tomorrow we will face the situation when Ukrainians will not be able to execute contractual commitments, hence, we will not be able to effectuate the purpose of an agreement?” Danyleyko continues, “That is why first of all we must persuade our foreign partners in our being responsible.”

The second problem is logistics. It is a serious problem for small and medium-sized businesses. The distance between Kyiv and Ottawa is 7224 km (about 13 hours of flight). That is why arrangements with different associations, chambers of commerce etc shall be used for effective promotion of the goods.

“It is possible to establish the Ukrainian house in Canada where ongoing platform for national products presentation will be created. Thus small companies will be able to count on support of large associations and get the effect of synergy,” OleksandrDanyleyko concluded.

PJSC Rosava, producer of the automobile tires, (BilaTserkva, Kyivska region) is one of the national enterprises which have already started their operations in Canada.

“Today only 35% of sales account for internal market,” VolodymyrLevandovskiy, representative of the export department of the company, tells, “as supplies to Russia decreased by 70%, we have diversified our export. We sell our tires in Europe, South and North America. We started to operate carefully in Canada as well. We do not face any problems except our being careful and the cautious attitude of Canadians towards us.”

Rosava has chosen partnership as a basis for promotion. It decided to abandon direct sales for a while. Rosava considers the matters of sales under different brands, creation of affiliated enterprise, franchise, investments.

Rosava succeeded in finding a local agent. “We have chosen the company Tire (Chateauguay, Quebec),” Levandovskiy says, “we sell small volumes. Dozens of thousands is a miserable quantity for our business. But such quantities of goods are explained by the fact that we conduct “reconnaissance in strength”. We supply our products through reliable logistic companies to Montreal and insure all our freights.”

The expert explains that the Canadian market is almost immense. There are 620 cars per one thousand people. It means 21-25 mln of automobile tires per year. And 1 mln tires of Rosava can dissolve there in a moment.

However, our producers have some concerns based on the negative experience got in Latin America. “In Brazil we sold 1 mln tires per year, and they imposed restrictive duties against us. We do not leave this market, but significantly reduced the volumes of supplies,” VolodymyrLevandovskiy complained.

Angela Mahinova, a lawyer of “SayenkoKharenko” legal firm, confirmed such concerns: “The export of Ukrainian pipes to Canada has stalled due to the high anti-dumping duties. This barrier cannot be cleared by our suppliers.”

Treaties on the free-trade zones do not cancel the remedies aiming protection of the national producers implementation. Although such documents provide additional rules of anti-dumping application, they let the interested parties protect their rights more actively.

According to the WTO statistics, even notwithstanding a great number of free-trade zones existing in the world, remedies aiming protection of the national markets are still used actively enough. Thus, 4757 anti-dumping investigations, 380 subsidy investigations, 202 compensatory investigations and 295 special ones were held all over the world in 1995-2014.

As of the start of September 2015, five anti-dumping investigations and retrials, one subsidy investigation and one special investigation are being held in Ukraine. 18 anti-dumping and three special measures remain in force. At that there was not any investigation against Canada.

And in Canada two anti-dumping retrials concerning Ukrainian metal are being held at the moment. Currently restricting duties for our steel pipes (37.4%), hot-rolled (77%) and trimmed mill products (15% for Metinvest Group owned by RinatAkhmetov, 21.5% - for other producers).

What shall our entrepreneurs do after start of the treaty on free-trade zone? The lawyer recommends reading the text of the treaty carefully, especially the sections concerning remedies. If free-trade zone provides positive changes regarding procedural actions during investigations (for example, provision of information, advising, additional warranties) duties revision shall be immediately initiated. We shall at least try to reduce the duties.

Remember that dramatic growth of import from the territory of Ukraine, even with an eye on free-trade zone, does not eliminate the possibility of special restrictions implementation. To minimize the risks the price policy in Canadian internal market and own pricing shall be analyzed as well as the trade schemes to be used and costs of product including those of the local producers. Potential margin of dumping (the sum by which the fair value exceeds the export price) shall be calculated.

In case of dramatic growth of import from Canada we will be able to initiate anti-dumping measures, too. Relevant investigation may be initiated by the national producers of the similar goods or their associations.

If import is dumping, dramatically increasing and inflict damage on the local producer, the WTO agreement provides the mechanism of loss assessment – volumes of import, price and at least 15 other factors of economic activities of the national producers.

http://cucc.ca/index.php/news-information/business-news/trade-free-but-remember-about-restrictions

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