ANALYSIS: By Roman Bryl, Ukraine
ISI - Intellinews, Kyiv, Ukraine, Wed, June 29, 2005
via AUR

Ukraine significantly reduces import duties

Last week Ukrainian parliament (Verkhovna Rada) passed a law that significantly lowers import duties on a wide range of imported goods. The law was presented as a list of changes to the current customs tariff code. But in fact, it is a new code providing new goals and priorities. It is the most liberal code Ukraine ever had. The law comprises more than 1,000 printed pages.

Ukraine may lose up to USD 500mn in 2005 due to new customs tariff code

The changes presented in the law concern slashing import duties on 56% of goods items or 54 goods groups listed in the customs tariff code. In particular, the law decreases preferential duties, changes previous preferential duties to full-payment duties, and replaces most special and combined duties to ad valorem ones.

The new duties concern imported goods, total value of which in 2004 made up USD 25.3bn. Imports charged with these duties amounted to USD 20.8bn or 82.5% of total imports in the year. The law effectively lowers the average weighted import duty to 4.45% from 7.79%. State officials hint that fallout revenues from the state budget will make up USD 100mn in 2005. Government plans to offset these losses by widening the VAT taxable base. However, our estimates show the gap will be at least USD 500mn for imports of the same amount as in 2004.

The changes do not cover all excise goods (e.g. petroleum) and certain kinds of items (e.g. lingerie, footwear) because of earlier made amendments to the customs tariff code. All import duties are set according to Ukraine's proposals related to WTO entrance, made in 2004.

Lobbying by food producers keeps related duties unchanged

According to some Rada MPs, parliament lowered the duties on goods that are not produced in Ukraine and raised duties on those produced locally. 328 MPs out of 415 supported the new customs tariff code. In particular, the most significant duty cuts concern hi-tech products and computers, i.e. goods Ukraine itself does not manufacture, Rada deputy chairman Vitaly Khomutynnik (Regions of Ukraine fraction) informed. According to Khomutynnik, duties on furniture and cable industries' products stayed unchanged.

Also, he informed that metallurgical and food industries were not even mentioned in the new law. These industries are very important for the Ukrainian economy. Food processing is mostly domestically oriented and is the main supporter of stagnating agriculture. We should note that food producers have a powerful lobby both in parliament and government. For a long period of time they successfully opposed any import duty reductions. As a result, the share of imported food products rarely exceeded 10-15% on the Ukrainian market during the last 7 years.

Some import duties on steel products were included in new duties list

Metallurgy is the most export-oriented industry, providing a great part of state budget revenues. Thus, government supports protectionist measures. It is necessary to note that in contradiction of Khomutynnik's statement, made to a Ukrainian news agency, the new customs tariff code does lower import duties on specific steel products.

These are several types of ferroalloys (20-53% duty cut) and rolled metal (up to 100% reduction).

Changes in Import Duties
Good + % by which import duties were lowered
Kaolin clay  50%;     Granite  50;     Limestone gumboil  50;  White cement  60;     Coal rosin  100; Hydrochloric acid  63; Chloride ammonia  63; Sodium carbonate and bicarbonate    78;  Alcium carbide  45;   Cotton-wool  100; Perfumes, toilet water, shaving creams  35; Soap  74; Umbrellas  33-56;  Ferroalloys  20-53;  Rolled-metal  100;  Leathers  40-100; Timber  100; Paper   70-100; Pipes and wires  40-100; Bulldozer and power graders  60;  Combine harvesters  80; Printers  100; Electric engines  40-100; Tram carriages  40; Tractors  40-92;  Auto cranes and auto concrete mixers 40; Space devices  100; Furniture  30-65; Toys  100; Sport equipment  40-60; 
Source: Interfax-Ukraine news agency, IntelliNews

New document would hopefully help tackle illegal imports

Supporters of the new customs tariff code say with one accord that the law does protect local producers and allows combating smuggling more efficiently. Tackling smuggling is proclaimed as the main goal of new regulations. The previous code, for instance, included special duties that were too high and imports of several types of goods was economically unjustified.

At the same time, the duties were highly differentiated, which provoked importers to abuse goods classification, lower customs value and avoid paying duties. Government hopes that lowering overly high duties would turn illegal imports into legal goods flow.

According to state customs authorities (SCA) information, such kind of legalization will provide 50% extra payments to the state budget compares with present payments made by SCA. Also, SCA informs that half of imported goods were previously supplied to Ukraine through illegal or "black schemes".

By way of history, until 2001 Ukraine did not have a single customs tariff code. The duties were regulated through 16 laws and more that 70 governmental orders.

Ukraine supposed to sign final agreements with all WTO workgroup states by end-summer

The SECOND strategic aim of the new document is speeding up WTO accession. The government in its action plan set a target to enter WTO in 2005. Ukraine allegedly can obtain WTO membership this autumn during the WTO annual meeting in Hong Kong.

Of course, Ukraine should satisfy all demands of 43 member-states of the working group examining conditions of Ukraine's entrance. By now 32 countries have signed bilateral agreements with Ukraine on mutual goods and services market access.

However, such agreements are not signed with major countries like China, the US, Australia and Japan. Those nations have a huge say in the final decision. We can suppose that countries mentioned will not block Ukraine's accession to WTO because of their earlier declared support.

Especially after president Viktor Yuschenko's victory against the allegedly anti-democratic regime of previous president Leonid Kuchma. At the next meeting of the workgroup that will take place at the end of summer, Ukraine might receive the final approval from remaining states. According to SCA, the new customs tariff code corresponds to all demands of member-countries by 90%.

Obviously, Ukraine is trying to swiftly accelerate the reform process to meet WTO accession demands this year. Government abolished all tax privileges for several industrial companies and companies working in free economic zones. There an equal excise rate for foreign and local companies was introduced. Also abolished was the obligatory transfer by exporters of 50% of their FX revenues to the National Bank of Ukraine.

Parliament strongly supports WTO accession idea

Furthermore, here in Ukraine we can witness unprecedented unity among parliament fractions concerning acceleration of WTO entrance. It worth mentioning that during the last 3 months government twice initiated changes to the customs tariff code, but failed to receive support of the Rada majority. Today only communist party members oppose WTO accession.

But their position to a great extent is populist rather than constructive. The rest of parliament supports and, importantly, is adopting almost all laws needed for WTO accession. The bills had been submitted by government on May 26, 2005.

On a negative note, Rada rejected a bill necessary for Ukraine WTO accession on Jun 23. The bill foresaw legislative implementation of multilateral agreements on intellectual property trade rights. The law was to introduce criminal responsibility for illegal CD sales. This thorny issue might hinder Ukraine's WTO accession, as authorities are not doing enough to counter mass violations in this area.

No clear evidence that rapid trade liberalization will benefit Ukraine

We suppose that both the new customs tariff code and special laws aiming to meet WTO requirements will provide more transparent and simplified rules for foreign and local importers to Ukraine. Before, domestic enterprises importing goods into the country enjoyed privileges compared to foreign importers. The new government has no option but to free local markets for imported goods. Otherwise it can be blamed of betraying the declared strategic course of integration with liberal European, Atlantic and global organizations.

On the other hand, government still did not present any economic calculations regarding benefits and losses even of WTO accession. Watching the parliamentary session when the new customs tariff code was passed, the IntelliNews analyst noticed that many MPs made special remarks thanking government for changing duties in a way that certain enterprises in the regions they represent had demanded.

In most cases, such gratitude was expressed on behalf of large industrial companies. And no one even mentioned whether small and medium-sized enterprises are ready to survive after the rapid liberalization of external trade. Lobbyists got their way. Will the entire economy get its?

Our conclusion is that the hastiness in WTO accession is mostly politically-motivated, while the efforts lack detailed economic calculations.

We would advise authorities to institute a more gradual (although not protracted) reform. But now it might be too late already. The law has been passed. We keep our fingers crossed.