Ukraine raises export duties on scrap metal

Posted by Dr. Marina Foltea
On August 18, 2016
business, duties, EU, exports, goods, Ukraine, WTO

Not only does Trade Pacts offer expert advice from its in-house team, but we also provide a platform for junior international trade professionals to publish their qualified research and blogs. This time, I am pleased to introduce Olesia Kryvetska and her blog on trade developments from Ukraine – detailing how the east European country’s government has heavily increased export duties on ferrous metal scrap.

With tariffs now significantly higher than expected and provided under the World Trade Organisation (WTO), this development is sure to draw the attention of industry players who import this raw material from Ukraine.

Olesia Kryvetska is an associate lawyer with Sergii Koziakov & Partners, based in Kiev. She holds a Masters Degree in International Law (Hons) from the Taras Shevchenko National University of Kyiv, Ukraine, and an LL.M in International Economic Law and Policy from the University of Barcelona, Spain.

This blog is an edited version of one originally published by Yevropeyska Pravda (Європейська правда), Ukraine.

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On 12 July 2016, the Parliament of Ukraine passed Draft Law concerning the reduction of a ferrous metal scrap deficit on the domestic market. This revised act provides for a temporal increase of the export duty on ferrous metal scrap – from €10/ton to €30/ton for a period of one year – reaching a pre-World Trade Organisation (WTO) accession level.

According to the first version of the Draft Law (as of 21 April 2016), the measure was supposed to apply for three years. However, criticism from Ukraine’s trading partners – the EU in particular – prompted the nation’s President, Petro Poroshenko, to propose a shortening of the application period to one year. According to legislative procedure, the act must still be signed by the president.

Though revised, the act remains in breach of Ukraine’s commitments under WTO law and the EU-Ukraine FTA (DCFTA). Pursuant to its WTO Accession Protocol, Ukraine was required to gradually reduce export duties on certain products, including ferrous scrap metal paragraph 240 of the Working Party’s Report). The product coverage and respective time frame of the export reduction are specified in Table 20 (b), under which Ukraine explicitly reserved the right to impose new export duties on other products not covered therein.

While WTO law does not normally prohibit Member States from imposing export duties, these measures must nonetheless be applied on the MFN basis (in the context of the GATT 1994 Article I). Export duties are also subject to requirements in respect to publication and reasonable administration (the GATT 1994 Article X requirements).

On the other hand, and in accordance with GATT 1994 Article XXVIII :1 bis, customs duties “often constitute a serious obstacle to trade”. The Article recognises “a great importance” of the negotiations concerning a substantial reduction of the general level of export duties as per other tariff barriers to trade.

Ukraine’s WTO trading partners

In way of this Draft Law, the key question is: What reaction should Ukraine expect from its trading partners within the WTO?

Some WTO disputes have been initiated by the EU against China over export restrictions on certain raw materials on the basis of China’s WTO Accession Protocol (China – Raw Materials and China – Rare Earths). The European Commission recently filed the third case against China over related measures. On 13 July 2016, the USA, too, submitted its request for consultations over China’s export duties on certain raw materials.

Because of the provisional nature of Draft Law, it is unlikely to be challenged before the WTO Panel. Ukraine may though risk ruining its reputation among the WTO Members within the framework of the Council for Trade in Goods. While Ukraine has used WTO mechanisms successfully for defending its position against numerous trade-restrictive measures imposed by the Russia Federation, the increased export duty on scrap metal could negatively affect Ukraine’s image at the WTO, which would inevitably count against the state.

It also violates bilateral commitments of Ukraine under the EU-Ukraine FTA. Pursuant to Article 31.1, Parties to the DCFTA shall refrain from introducing any export duties or other measures having an equivalent effect on, or in connection with, exportation.

Ukraine’s government has said that the measure is in the best interest of its steel industry – suffering from a prolonged domestic scrap metal deficit. Export duties are often regarded a sensitive topic since they may be considered as intent to subsidize domestic producers. It’s hardly surprising then that some concerns have been raised, claims that the Draft Law was passed for protectionist purposes.

In fairness, €10/ton for scrap metal is a relatively low export duty rate for a country that ranks among the world’s largest metal producers. But the only way to change this rate, without Ukraine’s WTO commitment being violated, is to make appropriate amendments to the WTO Accession Protocol. This is highly unlikely, however. Alternatively, if Ukraine had specified its commitments on export duties in its Goods Schedule, the level of rates would be subject to tariff renegotiation under Article XXVIII of the GATT 1994.

Ukraine must ultimately provide a legitimate justification for raising its export duties on scrap metal.

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