Grain Subsidies in Ukraine : The Role of WTO Law and the EU-Ukraine Association Agreement [1 ed.] 9789004353695, 9789004353688

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Grain Subsidies in Ukraine

Nijhoff International Trade Law Series Editorial Board Robert Howse (New York University) Miguel Maduro (European University Institute) Joost Pauwelyn (Graduate Institute of International Studies, Geneva) Jan Wouters (University of Leuven) Kern Alexander (University of Zurich)

VOLUME 16

The titles published in this series are listed at brill.com/nint

Grain Subsidies in Ukraine The Role of wto Law and the eu-Ukraine Association Agreement

By

Kateryna Zelenska

leiden | boston

Library of Congress Cataloging-in-Publication Data Names: Zelenska, Kateryna, author. Title: Grain subsidies in Ukraine : the role of WTO law and the EU-Ukraine Association Agreement / by Kateryna Zelenska. Description: Leiden ; Boston : Brill Nijhoff, 2018. | Series: Nijhoff international trade law series ; volume 16 | Based on author's thesis (doctoral - Universitat Bremen, 2016) issued under title: Grain Policies and the Challenge of External Trade Liberalization: on the Example of the European Union and Ukraine | Includes bibliographical references and index. Identifiers: lccn 2017057916 (print) | LCCN 2017059302 (ebook) | ISBN 9789004353695 (E-book) | ISBN 9789004353688 (hardback : alk. paper) Subjects: LCSH: Grain trade--Law and legislation--Ukraine. | Agricultural subsidies--Law and legislation--Ukraine. | European Union--Ukraine. | Association Agreement between the European Union and its Member States, of the one part, and Ukraine, of the other part (2014 March 21) | World Trade Organization. Classification: LCC KKY3329.5.F63 (ebook) | LCC KKY3329.5.F63 Z45 2018 (print) | DDC 382/.413109477--dc23 lc record available at http://lccn.loc.gov/2017057916

Typeface for the Latin, Greek, and Cyrillic scripts: “Brill”. See and download: brill.com/brill-typeface. issn 1877-7392 isbn 978-90-04-35368-8 (hardback) isbn 978-90-04-35369-5 (e-book) Copyright 2018 by Koninklijke Brill nv, Leiden, The Netherlands. Koninklijke Brill nv incorporates the imprints Brill, Brill Hes & De Graaf, Brill Nijhoff, Brill Rodopi, Brill Sense and Hotei Publishing. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill nv provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, ma 01923, usa. Fees are subject to change. This book is printed on acid-free paper and produced in a sustainable manner.

Contents Acknowledgements xi List of Abbreviations xii Introduction 1 Identification of the Research Subject 1 Subject of the Study 4 The Course of Examination 4 1 Economic Aspects of State Support Measures (Subsidies) with Specific Consideration of Agriculture 7 1.1 Nature and Impact of Subsidies 7 1.2 Specificity of Agricultural Sector 11 1.2.1 Features of Agricultural Markets 11 1.2.2 Components of Agricultural Policies 13 1.2.3 Development Aspects of Agricultural Policies 14 1.2.4 Effects of Agricultural Support 15 1.2.5 Justification of Agricultural Subsidies in Light of the Concept of Multifunctionality 16 Conclusion of Chapter 1 18 2 Introduction to Agricultural Policies in Ukraine 20 2.1 Process of Agricultural Transition in Ukraine 20 2.1.1 The Nature of Agricultural Transition 20 2.1.2 Agricultural Transition in Eastern Europe: Common Trends and Specific Features in Ukraine 25 2.2 Legal Framework of Agricultural Policies in Ukraine 40 2.2.1 Lex generalis and Lex specialis of Grain Trade Regulation 40 2.2.2 Organisation Forms of Agricultural Production in Ukraine 44 2.3 Objective Handicaps for Agricultural Growth 50 2.3.1 Grain Production Costs 50 2.3.2 Farm-gate Prices 52 2.3.3 Sustainability Concerns 52 Conclusion on Chapter 2 53 3 External Factors with Influence on Ukrainian Grain Policies 54 Scope of the Chapter 54 3.1 Implementation of Agricultural Disciplines within World Trade Law 55

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3.1.1 3.1.2

Emerging Power of the wto 55 Particularities of Multilateral Regulation on Agricultural Trade 61 3.1.3 A Short Overview of the AoA Disciplines 63 3.1.4 Agricultural Policies in the Framework of the Doha Reform Process 83 3.2 Agricultural Commitments within Regional Trade Agreements 92 3.2.1 Issues Emerging with Proliferation of rtas 92 3.2.2 Incorporation of Agriculture into Trade Deals 106 Conclusion of Chapter 3 151 4 Subsidy Definition: International Approaches in Regulation 152 Scope of the Chapter 152 4.1 Definition of Subsidy under wto/gatt Law 152 4.1.1 Overview of Criteria 152 4.1.2 The Element of “financial contribution” (Art. 1.1. (a)(1) of the scma) 153 4.1.3 The Element of “government or any public body” 155 4.1.4 Alternatives to the Requirement of “financial contribution by government”: Granting of Income or Price Support (Art. 1.1. (a) (1) of the scma) 157 4.1.5 The Element of “benefit” (Art. 1.1. (b) of the scma in Conjunction with Art. 14 of the scma) 158 4.1.6 The Element of “specificity” (Art. 1.2. of the scma) 159 4.1.7 Incorporation of Agricultural Subsidies into General Disciplines 160 4.1.8 “Peace Clause” Expiry and the Interplay between the scma and the AoA 161 4.2 The eu Approach to Subsidies 166 4.2.1 Introduction 166 4.2.2 The Element of Benefit (“aid in any form”) 169 4.2.3 The Element of “public costs” 170 4.2.4 The Element of “selectivity” 172 4.2.5 State Aid v. Subsidy: ecj Interpretation 173 4.2.6 Agricultural Subsidies in the eu State Aid System 173 4.3 Interplay of the wto and eu Subsidy Concepts 190 4.4 Regulation of Subsidies in Ukraine 192 4.5 Incorporation of State Aid Regulation into the Framework of eu-Ukraine Co-operation 194 4.6 The eeu Approach to Domestic Support Regulation 200 Conclusion of Chapter 4 204

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5 The eu Practice on Agricultural Support 206 Scope of the Chapter 206 5.1 The Development of European Common Agricultural Policy (cap) 206 5.2 Pillar i Measures Applicable to Cereals 210 5.2.1 Grain Interventions 210 5.2.2 Direct Payment Schemes 217 5.3 Examples of Domestic Support “Greening” within Pillar ii 233 5.3.1 Investment Aid 233 5.3.2 Risk Management Instruments of the cap 235 Conclusion on Chapter 5 243 6 Interplay between State Support for Grain in Ukraine and International Trade Commitments 244 Scope of the Chapter 244 6.1 Reference Point: Ukraine’s wto Domestic Support Commitments 244 6.2 Overview of State Support for Grain in Ukraine 245 6.3 Price Support 246 6.3.1 Direct Support 246 6.3.2 State Grain Pledges 247 6.3.3 Commodity and Financial Interventions for Cereals 250 6.3.4 Provisional Price Administration 255 6.3.5 State Forward Purchases 256 Intermediary Summary 261 6.3.6 Direct Price Controls 262 6.3.7 Market Alternatives to State Price Interventions 264 6.4 Quasi Income Support 265 6.4.1 Subsidised Credits and Loans 265 6.4.2 Leasing Subsidies 270 6.4.3 Other Input Subsidies 272 Intermediary Summary 277 6.4.4 Alternatives for Input Subsidies 277 6.4.5 Insurance Subsidies for Agricultural Producers 281 6.5 Shortcomings of Agricultural Direct Support in Ukraine 286 6.5.1 Foreseeability Concern 286 6.5.2 Selectivity v. Equity 288 6.5.3 Efficiency 289 Intermediary Summary 290 6.6 Indirect Support: Tax Subsidies 291 6.6.1 Introduction to Ukraine’s System of Agricultural Taxation 291

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6.6.2 Fixed Agricultural Tax (fat) Regime 292 6.6.3 vat Regime for Agricultural Production 297 6.6.4 Taxation of Private Households 309 Intermediary Summary 309 6.6.5 Taxation in the Framework of eu-Ukraine Co-Operation 310 6.6.6 General Summary on Agricultural Taxation in Ukraine 319 6.7 Legal Changes of Domestic Support after Ukraine’s wto Accession 321 6.7.1 The Factor of Economic Crisis 321 6.7.2 Changes in the Structure of Agricultural Support 322 6.7.3 Economic Impact of the wto Accession on the Ukrainian Agricultural Sector 324 6.8 The Case of “External Domestic Support”: Co-operation with China 325 6.8.1 China’s Agricultural Credits 325 6.8.2 Assessment of Chinese Credits in the Light of wto Law 330 Intermediary Summary 339 6.9 Proposals for Agricultural Policy Reform in Ukraine 340 6.9.1 Promotion of Private Investment 340 6.9.2 Direct Tackling of Farm Income Problem 344 Conclusions on Chapter 6 346 7 Export Measures for Foodstuffs: Rationale, Forms, and Impact 348 Scope of the Chapter 348 7.1 Export Restrictions 349 7.1.1 Rationale of Export Restrictions in Agricultural Trade 349 7.1.2 Factors Contributing to the Emerging Significance of Export Restrictions 350 Intermediary Summary 353 7.1.3 Regulation of Export Restrictions within the wto/gatt System 353 Intermediary Summary 363 7.1.4 The Case of Export Duty 363 7.1.5 Export Restrictions and Investment Measures 366 7.1.6 Interplay of Export Restrictions and Subsidies 368 Intermediary Summary 370 7.1.7 Export Restrictions in the Doha Process 371 Intermediary Summary 372 7.2 Agricultural Export Policies in Ukraine 372 7.2.1 General Legal Framework 372

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7.2.2 Ukraine’s Sunflower Export Policies 373 7.2.3 Export Measures in the Cereals Sector 376 7.2.4 New Mechanisms of Quasi-Voluntary Export Restrictions by Exporters 380 7.3 Credibility of Ukraine’s Justifications for Export Restraints 382 7.3.1 Arguments at the National Level 382 7.3.2 Arguments at the Multilateral Level 383 7.4 Alternative Measures 390 7.4.1 National Level 390 7.4.2 Regional Level 392 7.4.3 Global Approach: Alternative Measures at the Multilateral Level 395 Intermediary Summary 400 7.5  w to Disciplines on Export-Incentive Measures in the Context of Ukraine’s Agricultural Policies 400 Rationale for the Examination 400 7.5.1 Distribution of Non-Commercial Stocks 401 7.5.2 Payments Financed by Virtue of Governmental Action 404 7.5.3 Reduction of Export Marketing Costs 407 7.5.4 Export Credit and Insurance Schemes 408 7.5.5 Regulation of Export-Incentive Measures within the eu-Ukraine aa 412 Intermediary Summary 414 7.6 Export Impact of State Trading 414 7.6.1 gatt Disciplines 414 7.6.2 stes in Agriculture 418 7.6.3 State Trading in Ukraine 420 7.6.4 State Trading Issues within the eu-Ukraine Cooperation 425 Intermediary Summary 427 Conclusion on Chapter 7 428 Final Conclusions 429 Bibliography 435 Index 452

Acknowledgements The Friedrich-Naumann-Foundation and the German Ministry of Foreign ­Affairs respectively supported my PhD studies and the publication of this book. I would like to thank my supervisor, Prof. Dr. Josef Falke, for his assistance. I would also like to express my gratitude to the World Trade Organisation for allowing me to take part in the wto PhD Support Programme, with special thanks to the Agriculture and Commodities Division and especially Mr. Cedric Pene. I dedicate this book to my parents who stood by me during the work and encouraged me in difficult times.

List of Abbreviations ams Aggregate Measurement of Support AoA wto Agreement on Agriculture cap European Union Common Agricultural Policy ceecs Central and Eastern European Countries cis Commonwealth of Independent States ComC Commercial Code of Ukraine cse Consumer Support Estimate ec European Community ecu Eurasian Customs Union eec European Economic Community eeu Eurasian Economic Union efta European Free Trade Association enp European Neighbourhood Policy enpard  e u Neighbourhood Programme for Agriculture & Rural Development enpi European Neighbourhood Policy Instrument dcfta Deep and Comprehensive Free Trade Agreement dda Doha Development Agenda dsb Dispute Settlement Body fta Free Trade Agreement gatt General Agreement on Tariffs and Trade gcu Grain Corporation of Ukraine gsse General Services Support Estimate igc International Grain Council ipa Instrument for Pre-Accession Assistance mercosur Southern Common Market otds Overall Trade-Distorting Domestic Support pca Partnership and Co-operation Agreement pse Producer Support Estimate rta Regional trade agreement sapard Special Accession Programme for Agriculture & Rural Development scma wto Subsidies and Countervailing Measures Agreement sps Sanitary and Phytosanitary Measures ste State trading enterprise tbt Technical Barriers to Trade trims Trade-related Investment Measures trq Tariff-rate quota tse Total Support Estimate

List of Abbreviations vat vclt wto

Value-added tax Vienna Convention on the Law of Treaties World Trade Organisation

xiii

Introduction

Identification of the Research Subject

It may seem that the role of the agricultural sector is diminishing in our modern, highly technological and globalised society.1 However, in reality, agricultural issues remain present on the agendas of both developed and developing countries. It may even be argued that the sector’s importance is increasing. This phenomenon could be explained by the economic peculiarities of food production, by the new trend of coercion between agriculture and the financial sector (agricultural commodities are largely used as objects of financial speculation), and by the implications of a growing world population and the surge of income in developing countries. These issues contribute to the emerging demand on crops and to a steep rise in dairy and meat consumption, which requires substantial amounts of grain and oilseeds to produce. Add in the ­factor of quickly expanding biofuel production and it appears that meeting the global food balance in the near future could be guaranteed merely by ensuring sufficient supply in cereals and oilseeds. The current surging demand should encourage key market players to boost their production as it stimulates prices on agricultural commodities upward. The Black Sea grain region incorporating Kazakhstan, Russia and Ukraine is expected to become one of the major ­supply growth regions. Although increased exports from particular regions are anticipated, meeting the multiplying global food demand is rather unlikely if the sector relies exclusively on traditional production methods. Today, competition in modern agriculture tends to show a lesser degree of connection to climate and geographical factors, while the importance of infrastructure, human capital, and the regulatory environment intensifies. These factors may be effectively addressed with an expansion in international trade. International trade is also supposed to foster an overall growth in agricultural income due to increasing specialisation and heightened competition. In turn, fiercer competition in agriculture may force governments to either restrict or ease regulation. Most national policy-makers tend to prefer agricultural production subsides, which take many forms. This strategy could result in inefficient trade policies that

1 The so-called Engel’s Law states that the share of expenditures on food reduces with the increase of the population’s revenues.

© koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004353695_002

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Introduction

limit competitiveness and hamper growth. This brings the issue of external influence on national agricultural policies into the spotlight. Despite some progress, international regulation of the agricultural trade ­remains rather loose. The only functioning multilateral rules in this sector come from the legal regime of the World Trade Organisation (wto). With the provisional and outdated global compromise on agricultural policies within the wto, the stalemate of the ongoing multilateral trade negotiations and vanishing hope for prompt, successful outcomes, wto members may choose an alternative option by negotiating for agricultural chapters within regional trade agreements (rtas). However, due to the identified sector’s sensibility, this pattern is not widespread. One of the rare examples of regional agricultural regulation is the Common Agricultural Policy (cap) of the European Union (eu). The importance of this unique structure for the world agriculture trade is hard to overestimate, since the eu is one of the global leaders in agricultural (the eu is the world’s largest agricultural exporter).2 At the same time, the eu is the largest importer of agricultural products from developing countries.3 The expansion of food imports may be ascribed to the mechanisms of the common customs policy and the proliferation of the eu rtas. One of the latest rtas was signed in June 2014 with another key agricultural exporting state, Ukraine. In this context, it is worth mentioning that the country’s grain export potential is extremely high (Ukraine is often called a “breadbasket of Europe”). Ukraine, like the eu, is a wto member and also pursues the rtas proliferation strategy. Furthermore, Ukraine has a substantial interest in expanding agricultural exports (i.e. cereals) in a duty-free and restriction-free mode. Given the increasing importance of global food security,4 the world community remains hopeful that grain producers could help solve the food price issue by increasing their supply. In respect to this, it is believed that Ukraine has great potential for agricultural growth without harmful environmental

2 European Commission. Annual Agri-food trade report 2015: eu first exporter worldwide, 14 July 2016, available under: http://europa.eu/rapid/press-release_IP-16-2525_en.pdf (last ­accessed on 3 August 2017). Cereal and wheat are among the top five eu agricultural exports. European Commission. International Aspects of Agricultural Policy: Background document for the Advisory Group on International Aspects of Agriculture, 2012, pp. 8–9. 3 Ibid, pp. 15, 26. 4 According to the fao, world food production must increase by 70 per cent before 2050 to ensure sufficient food supply for the growing population. fao; imf; World Bank and others. Price Volatility in Food and Agricultural Markets: Policy Responses, 2011, p. 10.

Introduction

3

­effects.5 Some achievements have already been documented: although Ukraine ­exported no grain during its final years in the ussr, the nation became a m ­ ajor player in international grain and oilseed markets by the end of the 2000s. Nevertheless, the country is not meeting its full agricultural potential. After years of steeply decreasing harvests, Ukraine has only recently attained its 1990 level of grain production.6 The past few years have seen a sharp increase in grain production7 that should be sufficient to ensure profitability.8 Apparently, rising exports9 may be the only incentive to increase grain production, as Ukraine’s population is shrinking. In the same way, growth in grain exports and the potential for trade expansion may be seen as an engine for the development of Ukraine’s transition economy, but also as contributing factors to a tightening agricultural policy space. It may be argued that the issue of the country’s national interventions into agricultural markets is gaining international importance, as the influence of Ukraine’s domestic policies is expected to increase alongside its growing share in world grain trade flows. What follows is a legal analysis of international regulation in the grain trade that takes into account the political and social importance of this s­ ector. It is assumed that in a complex situation where grain policies are subject to national, regional and multilateral regulations, conflicts may arise between differing sets of rules. This case study will cover the compliance of Ukranian grain support policies with multilateral rules and rtas signed by Ukraine. The grain-related regulation of the eu will be taken as a second reference point for 5 80 per cent of agricultural land in Ukraine is arable. The acreage of arable land in use declined during the 1990s and 2000s (accordingly, from 33.4 million ha in 1990 to 30.8 million ha in 2005). Belozertsev O.; Gavryliuk V. Grain Sector of Ukraine: Trends and Perspectives. Basic Analytical Research, Ukraine–Canada Grain Project, 2007 (in Ukrainian) (further Ukraine– Canada Grain Project 2007), p. 13. 6 In 1986-1990 47.4 million t cereals were harvested, in 1999-2000 – 24.5 million t and in 2010 – 39.2 million t fao, ebrd 2010, p. 6. 7 In the marketing year 2015/2016, the grain production in Ukraine reached 60 million t. ­International Grain Council. Grain Market Report gmr 476, 27 April 2017, available under: http://www.igc.int/downloads/gmrsummary/gmrsumme.pdf (last accessed on 22 May 2017). 8 At stable yields, profitability requires at least 58 million t of annual production. Klimenko V. Analytical Report on Proposals for Grain Market Regulation Improvement in Ukraine, usaid Ukraine, 2007 (in Ukrainian) (further Klimenko), p. 39. 9 According to the fao, the total cereals exports from Ukraine amounted to 40 million t in 2016 compared to the average of 34 million t in 2012–2016. giews – Global Information and Early Warning System, available under: http://www.fao.org/giews/countrybrief/country .jsp?code=UKR (last accessed on 22 May 2017).

4

Introduction

Ukrainian policy makers in regard to the comprehensive bilateral approximation agenda between Ukraine and the eu.

Subject of the Study

Agricultural policies, including grain10 policies, are an interdisciplinary issue. Lawyers typically evaluate this subject by relying primarily on policy compliance with governing laws, but their legal argument would benefit from also making points on economic efficiency and social impact. The task of this research is to identify the relevant legal norms applicable to the grain trade and examine how different laws interact. Reference to other disciplines (economics, political and social science) will only be used to support the arguments, not as a basis for them. Since the subjects of both case studies, the eu and Ukraine, are wto members, it makes sense to choose the wto order as a reference point. The ­General Agreement on Tariffs and Trade (gatt) and the Agreement on Agriculture (AoA) will constitute the focal points due to their closeness to the field of research. Other covered agreements, in particular, the Agreement on Subsidies and Countervailing Measures (scma), the Agreement on Technical Barriers to Trade (tbt), the Agreement on Sanitary and Phytosanitary Measures (sps), and the Agreement on Trade-Related Investment Measures (trims) may obviously overlap with agricultural regulation. The relevant provisions of these agreements will thereby be referred to where required. The relevant legal rules and their interpretation by the Dispute Settlement Body (dsb) and by the wto Appellate Body will be examined. The next level of regulation to be covered are the rta regimes. In this ­regard, the eu–Ukraine Association Agreement, especially the free trade agreement, and the rtas signed by Ukraine with the efta States and the cis will constitute a major interest. Because the rta partners of Ukraine are normally wto members, the rtas will be analysed in light of the wto rules. The specificity of the rta with wto non-members will be clarified.

The Course of Examination

Below is a breakdown of how the thesis is structured in this book. 10

When referring to grain in this work, the author means cereals (wheat, rice, coarse grains, i.a. oats, barley, buckwheat, maize (corn), millet, sorghum, rye, triticale), as well as oilseeds in the context of Ukraine.

Introduction

5

Chapter 1 will be rather theoretical in nature and will provide the basis for an economic understanding of agricultural policies, in particular, support ­measures (subsidies). The goal of this chapter is to provide context for further arguments through the rest of the thesis, and to reflect on the economic viability of domestic and international regulation for agricultural production and trade. Chapter 2 will provide some basic information on the economic and legal environment in the Ukrainian agricultural sector. First, the impact of the transition process on the agricultural sector will be analysed. Ukraine will be compared to other Eastern European states. The predominant focus will be the land reform issue and its effects on Ukraine’s agricultural policies. After that is a brief summary of the general legal principles in agricultural regulation (Sub-chapter 2.2.1.), and an overview of the organisational and legal structure of the agricultural sector in Ukraine (Sub-chapter 2.2.2.) followed by the identification of sector-specific advantages and disadvantages (Sub-chapters 6.2.3.). That should provide the basis for determining the tailor-made objectives in support of the Ukrainian grain sector. The overall goal of Chapter 2 is to outline the challenges faced by Ukrainian policy-makers. In Chapter 3, basic legal aspects of international trade regulation and the interaction between international and regional legal regimes will be examined briefly. First, Sub-chapter 3.1. will pertain to the implementation of agricultural trade disciplines on the multilateral level. The focus will be set on the wto Agreement on Agriculture. Besides the co-existence with the multilateral legal framework, Ukraine tends to increase its external impact on trade by means of rtas. Their current and potential future domestic grain trade policies will be clarified in Sub-chapter 3.2. Agricultural components of two major blocks of Ukraine’s rtas will be studied: the economic integration with the eu and within the cis. Chapter 4 will provide an external framework for the definition of an “agricultural subsidy” in Ukraine. Since the Ukrainian policy practice will be analysed not only in its compliance with the wto norms, but also with the eu approach, an interrelation between the eu grain support and the wto commitments must be established. That will also form the basis for comparing the policies in Chapter 5. Chapter 6 will address the incorporation of agricultural subsidy disciplines into the Ukrainian legal order. It will give an extended analysis of different aspects of agricultural support in Ukraine. After identifying the impacts of state agricultural support mechanisms in the grain sector in Chapter 6, Chapter 7 will present the country’s approaches to using the policy space in export protection and export competition. It may be argued that the relevant measures have been introduced with the goal of rectifying the negative impact of state interventions into the grain market. By the same token, it may be argued that the Ukrainian model is not unique but

6

Introduction

reflects common trends inherent to most developing countries. For that reason, the instruments developed by Ukraine will be analysed in a global context. The result of this research is a comprehensive legal analysis of the external involvement in national grain policies using Ukraine as an example. The ­selected cases have been chosen to explore the issue from the points of view of both importers and exporters, and to examine the discrepancies between the corresponding policies in developed and developing countries.

chapter 1

Economic Aspects of State Support Measures (Subsidies) with Specific Consideration of Agriculture 1.1

Nature and Impact of Subsidies

From the economic point of view, market equilibrium is, in principle, attainable without state presence.1 If governments intervene, they tend to distort this balance and either reduce the income of market participants (taxation) or increase it (subsidisation).2 Establishing which kind of interventions constitute subsidies is rather difficult as various economic definitions of subsidies differ from each other substantially.3 Generally, the concept of a subsidy signifies a distortion from a normal market condition. Thus, if observed economically, it may be concluded that fundamentally every government action that diminishes economic welfare with a goal to attain certain objectives may constitute a subsidy.4 Also, subsidies are broadly perceived as benefits. However, if all benefits provided for private individuals by the state were subsidies, the notion of a subsidy would be highly non-selective and would basically cover all governmental actions, even those imposing costs on their recipients.5 That is why a more precise definition is required.6 1 Nevertheless, semi-presence of a state on markets (directly or indirectly through legal regulation, supply of public goods etc.) does not allow proving this market balance concept empirically. 2 Sykes A. Subsidies and Countervailing Measures. In: Bacchetta M.; Ruta M. (eds.) The wto, Subsidies and Countervailing Measures, Cheltenham, 2011, pp. 633–657 (further Sykes), p. 635. 3 wto. World Trade Report 2006: Exploring the Links between Subsidies, Trade and the wto, Geneva, 2006 (further World Trade Report 2006), p. xxiii. 4 Jackson J. The Perplexities of Subsidies in International Trade. In: Bacchetta M.; Ruta M. (eds.) The wto, Subsidies and Countervailing Measures, Cheltenham, 2011, pp. 603–632 (further Jackson), p. 623. See also Calamai P.; De Moor A. Subsidizing Unsustainable Development: Undermining the Earth with Public Funds, commissioned by the Earth Council, 1997, p. 1. 5 World Trade Report 2006, p. 47. 6 The wto pointed to three categories of government programmes which may fall within the economic meaning of subsidies: transfer of funds to private actors; provision of goods or ­services at no cost or below market price; regulatory policies under condition that they © koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004353695_003

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chapter 1

In reality, identification of subsidies is anything but simple and may require comprehensive calculations, as such government actions can lead to unintended benefits or burdens for some actors. Due to the described economic complexity, a legal definition of subsidies should be more precise, since lawyers tend to perceive subsidies in a normative way. Broadly speaking, subsidies cause price reductions and develop allocative consequences favouring specific products.7 They may trigger expansion of production in two ways depending on how the subsidy influences inputs or outputs.8 Generally, such production subsidies could lead to an increase in producers’ welfare9 by incurring costs on taxpayers. There are two leading ideas on market distortion caused by subsidies. The “simple” view of Benitah relies on a subsidy’s interference with the natural market mechanism governing allocation of resources in the economy.10 The “sophisticated” doctrine represented by Schwartz and Harper underlines the impact of a subsidy on the competitive process triggered by the beneficiary’s conduct and an adverse effect on the position of his competitors.11 Therefore, if a perfect market without any distortions existed, subsidies would be undesirable. Despite these clear disadvantages, economists commonly accept subsidies as an instrument to rectify market failures.12 Such failures occur when there is a difference between the actual price and the socially optimal price of a good.13 Two types of market failures are distinguished by the wto: economies of scale

7

8 9 10

11 12

13

­create transfers from one group to another, e.g. border protection or forms of untaxed exploitation of public resources by private parties. World Trade Report 2006, pp. 48–49. Wurzbacher Ch. Welthandelsrecht als Wettbewerbsordnung des Systemwettbewerbs: ­Exemplifiziert am Zulässigkeitsregime Interner Agrarbeihilfen, Frankfurt/M, 2008 (further Wurzbacher). However, one-time output subsidies of unexpected character may not, as a rule, have influence on volumes of production, Sykes, pp. 638–640. World Trade Report 2006, p. 62. Benitah M. The Law on Subsidies under the gatt/wto System, The Hague, 2001, pp. 251–280. See also Rubini L. The Definition of Subsidy and State Aid: wto and ec Law in Comparative Perspective, Oxford, 2009 (further Rubini), pp. 51–52. Schwarz W.; Harper E. The Regulation of Subsidies Affecting International Trade. In: Michigan Law Review, 70(5), 1972, pp. 831–858. See also Rubini, pp. 51–52. Hufbauer and Shelton-Erb distinguished two approaches on justification of subsidisation. The “injury-only school” which opines that subsidies are called to correct market failures and to achieve important goals and, thus, their positive impact usually exceeds the negative effects. The “anti-distortion school” while criticizing subsidies as such argues that they might be used to cure market failures. Hufbauer G.; Shelton Erb J. Subsidies in International Trade, Cambridge, 1984, pp. 19–21. See also Rubini, p. 43. World Trade Report 2006, pp. 58–59.

Economic Aspects of State Support Measures (Subsidies)

9

and production externalities, i.e. unintended impact of a measure.14 The first type is associated with the phenomenon of decreasing production costs by expanding production size. As for the second type, the government is expected to intervene only in cases of negative externality with a view to reduce overproduction.15 Inequitable distribution of income in a society, while one of the most common justifications for subsidies, is not regarded as a market failure in the viewpoint of economics.16 With respect to the use of subsidies for national security reasons, e.g. food security, the economic theory identifies a market failure in this context as a discrepancy between private (economic consideration) and public (political consideration) perceptions of risk.17 According to the theory of optimal intervention,18 a market failure must be answered by a measure that directly targets the cause of this market failure. Again, finding an optimal response to a market failure could be quite complicated and is essentially the choice between subsidies and other instruments to combat the distortion. The need for sophisticated calculations of an aid amount adequate to correct a market failure makes subsidies, in principle, a second-best option.19 Moreover, the state support would not encourage private actors to struggle against the market failure on their own.20 On top of that, public aid in one sector suffering from a market failure may have unpredictable impacts in others.21 The effect of a subsidy measure is also dependent on the general regulatory environment: a subsidy will not curb a domestic market failure if the taxes that must be levied in order to finance this subsidy cause their own distortions.22 14

Stiglitz, in his turn, extended the list to six basic market failures: imperfect competition, public goods, externalities, incomplete markets, imperfect information, unemployment and other macroeconomic disturbances. See Stiglitz J. Economics of the Public Sector, 3rd ed., Washington, 2000, Chapter 4. 15 If an externality is positive, the actual quantity of goods produced would be less than the optimal amount. World Trade Report 2006, pp. 58–59. 16 Ibid., p. xxvii. 17 Ibid., p. xxix. 18 See e.g. Johnson H. Optimal Trade Intervention in the Presence of Domestic Distortions. In: Bacchetta M.; Ruta M. (eds.) The wto, Subsidies and Countervailing Measures, Cheltenham, 2011, pp. 12–46, p. 12; Tietje C. (ed.) Internationales Wirtschaftsrecht, Berlin, 2009 (further Tietje), p. 44. 19 Rubini, pp. 53–54. 20 Luja R. Assessment and Recovery of Tax Incentives in the ec and the wto: a View on State Aids, Trade Subsidies and Direct Taxation, Antwerp, 2003 (further Luja), p. 8. 21 Luja, p. 8. 22 Bacchetta M.; Ruta M. The wto, Subsidies and Countervailing Measures, Cheltenham, 2011, p. xvi.

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Yet, subsidies are considered to be a better option than market access protection since tariffs tend to distort consumption and increase consumers’ costs.23 Subsidies, in contrast, should prevent growth of consumers’ prices and decrease distortion, but the public costs of subsidies (taxation) are associated with further distortions for consumers.24 Generally speaking, the outcome of a subsidy assessment would depend on which perspective – domestic or international – it is pursued.25 It is clear that unless governmental actions do not affect cross-border trade, they could not be subject to international disciplines.26 On the other hand, the issue of international subsidy impact may be rather tricky: even if subsidised products are marketed well domestically, they may still affect producers in states exporting the like or substituting products to this country. Consequently, international disciplines on subsidies seem to be justified by economics under the condition that its scope is correctly defined.27 It is widely accepted that not all subsidies are harmful for international trade, only those that substantially affect production and marketing. On the contrary, domestic subsidies that have social objectives or aim to correct market failures are perceived as the least distortive,28 although they can be inefficient from an economic standpoint and may reduce global economic welfare.29 In opposition to this type of measure, export subsidies are considered highly distortive and could not be justified by economic analysis.30 Nonetheless, they may have some positive implications given the fact that subsidised imports benefit ­consumers in importing countries, while producers affected by low prices of imported goods may theoretically transfer their activities into other more profitable sectors.31

23 24 25 26 27

28

29 30 31

Ibid, p. xvi, World Trade Report 2006, p. 62. Sykes, p. 640. One can observe a low tolerance for subsidies at the international level. World Trade Report 2006, p. 63. Jackson, p. 623. In general, international economic system recognises the state power, but solely through the scope of economic law and other involved branches of international law, provided that it is used in a non-discriminative manner and under consideration of the principle of proportionality. See Tietje, pp. 13–14, 17. On economic effects of subsidies on international trade see Luengo Hernandez de Madrid G.E. Regulation of Subsidies and State Aids in wto and ec Law: Conflicts in International Trade Law, The Hague, 2007 (further Luengo), pp. 20–27. Sykes, p. 635. Ibid., p. 641. Ibid., p. 642.

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Subsidies focused on protecting domestic producers from import competition or that have an equivalent effect are not considered to be less ­trade-distortive either. These kinds of subsidies are supposed to have an impact similar to that of trade restrictions by creating a gap between world and domestic prices.32 This type cannot be justified economically as it is not designed to rectify any market failure. Therefore, economic theory may only find justifications for the least distortive categories of subsidies, whereas the others, even with certain positive features, would not be proportionate to the welfare loss caused. Besides the issue of the scope of international regulation on subsidies, a key question is the extent of subsidy disciplines. Where a lax regulation would undermine market access commitments,33 Bagwell and Staiger argue that stronger disciplines would, in their turn, push countries to use tariff barriers34 and thereby “compensate” the distortions. Supposedly, the balance should be found through economic calculations. In summarizing the possible discrepancies in the perception of market failure between governments and economic scholars, it may be concluded that the difference in the approaches is, in fact, a reference level taken. The state considers that the market is not able to remediate its distortion when a factual allocation of resources does not respond to the sought social objectives (thus, policy goals serve as a reference). From the economic point of view, the cost of the intervention must be balanced with the value of its objective (economic margin is taken as the reference mark).35 Correspondingly, political and economic attitudes towards subsidies may hardly be reconcilable. In practice, however, decisions on subsidy authorisation are typically political and rather than economic. 1.2

Specificity of Agricultural Sector

1.2.1 Features of Agricultural Markets It may be argued that the perception of the modern role of agriculture in the public opinion has recently shifted from a domain of low productivity to a 32 33

34 35

World Trade Report 2006, p. 56. Sykes, p. 634; Bagwell K.; Staiger R. Will International Rules on Subsidies Disrupt the World Trading System? In: Bacchetta M.; Ruta M. (eds.) The wto, Subsidies and Countervailing Measures, Cheltenham, 2011, pp. 727–745, pp. 740–741. Bagwell K.; Staiger R. Subsidy Agreements, Working Paper N 10292, National Bureau of Economic Research, 2004. See also World Trade Report 2006, p. 196. World Trade Report 2006, p. xxv.

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s­ ector of growth. Several reasons may explain this change, namely, the surge in demand for agricultural commodities and the resulting price, an expanding share of the sector in countries’ gdps, as well as a contribution of high-value agricultural production to development. To sum up, it may be concluded that the understanding of industrialisation is getting broader and could now include modern agriculture and the linked services.36 Still, the agricultural sector may not be equalised with industry from an economic point of view, as agricultural markets are characteristically different due to their structure and processes. First, the market demand-supply mechanisms for agricultural goods are rather imbalanced, and their inability to make quick production adjustments further aggravates the problem.37 As a result, consumers cannot be protected from high prices by the market,38 while agricultural producers, in turn, are not protected from low prices due to a concentrated demand from the processing industry.39 In the end, it seems to be a vicious circle: if consumers are satisfied, producers suffer (low price periods) and vice versa (the so-called basic agricultural dilemma40). The described factors make agricultural markets vulnerable to price volatility (price shocks as a means for establishment of market balance) which tends to cause uncertainty and to intensify immanent risks. While short-term (­seasonal) volatility may not be avoided in any market,41 unpredictable and unsystematic volatility is a feature specific to agricultural markets. This fact may be explained by the very nature of agricultural production cycles that allow for little price elasticity in agricultural supply and demand, and result in cyclical adjustments at the supply side.42 Besides the internal factors, trade liberalisation makes national markets more sensitive to world price fluctuations. All the issues above make state markets prone to impulsive intervention and protectionism aimed at promoting food self-sufficiency. High dependence on natural conditions – a food security function of the agricultural 36 37 38

39 40 41 42

Cheong D.; Jansen M.; Peters R. (eds.) Shared Harvests: Agriculture, Trade, and Employment, ilo-unctad, Geneva, 2012 (further Cheong, Jansen, Peters), p. 16. Ibid., p. 6. Since demand for food is relatively inelastic, people will always spend money on food no matter how high the prices are. And conversely, no matter how low the prices fall, the population will not significantly increase their food consumption. Götz V.; Kroeschell K.; Winkler W. (eds.). Handwörterbuch des Agrarrechts, Volume i, ­Berlin, 1981 (further Götz, Kroeschell, Winkler), p. 34. See for example be Berlin Economics, pp. 10–13. Seasonal price fluctuations do not create uncertainty, as they are foreseeable. See for details Tangermann S. Policy Solutions to Agricultural Market Volatility: A synthesis, ictsd Issue Paper 33, 2011 (further Tangermann 2011), pp. 3–4.

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13

­sector – ­together with its social and environmental roles, strengthens the rationale for state measures.43 However, governmental regulation aimed at market stabilisation may worsen price fluctuations and culminate in “exportation of instability” to world markets, where the elasticity is even smaller.44 1.2.2 Components of Agricultural Policies To address the described challenges of agricultural markets, states tend to design an extended palette of policy tools. Agricultural policy may be defined as all of the measures taken (not only economic,45 but also social and environmental) by a state or by institutions charged with governmental competence to achieve the state’s goals in the agricultural area.46 This policy is also influenced by other economic policies, such as competition, legal or regional policies.47 In addition, some states operate agricultural market orders, specific systems of state measures targeting prices and product quantities supplied to agricultural markets48 (in fact, they constitute an integrated economic segment of agricultural policies). Market order may be identified with competition order.49 By taking another approach, market order may be observed as market regulation. Therefore, the first step towards establishment of a market order would be the adoption of comprehensive agricultural legislation.50 Under this construction, the goal of a market order would be a correction of undesired market externalities (or market failures).51 Market order may be also defined as the opposite to stopgap policies, i.e. a response to short-term fluctuations in domestic commodity supply and demand, and to increased pressure from producers for income protection.52 Within the market orders, stopgap policies are replaced by a process politics (Ablaufpolitik) being a component of an overall 43 44 45

For more details see Cheong, Jansen, Peters, pp. 6–7, 12. See for details Tangermann 2011, pp. 3–6. The economic domain of agricultural policies encompasses various trade instruments, such as border protection, subsidisation and taxation. 46 Götz, Kroeschell, Winkler, p. 39. 47 Ibid. 48 Götz, Kroeschell, Winkler, p. 413. 49 In this case, it would follow that the tasks of a market order cover establishing, keeping and improving market functionality, seeking market transparency and consumer protection. Götz, Kroeschell, Winkler, p. 415. 50 Similar by Hartell J.; Swinnen J. Trends in Agricultural Price and Trade Policy Instruments since 1990 in Central European Countries. In: The World Economy, 21(2), 1998, pp. 261–279 (further Hartell, Swinnen), p. 6. 51 Götz, Kroeschell, Winkler, pp. 414–415. 52 Hartell, Swinnen, p. 5.

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order politics (Ordnungspolitik, earlier Agrarverfassung).53 While the former is responsible for design of single measures (form, intensity, specific impact on agricultural relationship) within the order politics, the later establishes legal, organisational and institutional framework conditions. 1.2.3 Development Aspects of Agricultural Policies The goals of agricultural policies vary. While developing countries struggle for food security for their growing populations and rural employment, developed countries usually work towards income security for agricultural producers, supply stability, and to address environmental issues.54 In this context, the paradox of agricultural policies emerges: developing countries tend to neglect their typically large agricultural sectors in favour of industrial sectors, while almost all developed countries support and defend their relatively small number of agricultural producers.55 Consequently, these two groups of states normally choose antipodal policies by targeting the producers’ income issue. Developing countries, facing significant income inequality in agriculture due to polarisation of land ­ownership56 and poor rural infrastructure, tend to impose measures focused on income “redistribution” inside the sector. This means that import-competing agricultural production and inputs are usually subsidised, while e­ xport-oriented branches (presumably, with a higher level of income) are mostly taxed.57 In contrast, ­developed states with a rather homogenous market structure opt for income redistribution within the entire economy and switch the burden of agricultural support to taxpayers (consumers), since their population is spending a 53 54 55

56 57

The conclusion made on the basis of the definitions developed by Götz, Kroeschell, Winkler. See Götz, Kroeschell, Winkler, pp. 44–46. Götz, Kroeschell, Winkler, p. 44. This phenomenon may also be explained through a “number paradox” (Olson M. Logic of Collective Action, Harvard, 1965), when a small group of specific interest is more efficient in lobbying their interests than a large heterogenic group. See Bilal S. The Political Economy of Agricultural Policies and Negotiations. In: Bilal S.; Pezaros P. (eds.) Negotiating the Future of Agricultural Policies: Agricultural Trade and the “Millennium” wto Round, The Hague, 2000, pp. 81–93 (further Bilal), pp. 81, 84–85; Anderson K. Lobbying Incentives and the Pattern of Protection in Rich and Poor Countries. In: Anderson K.; Josling T. (eds.) The wto and Agriculture, Volume i, Cheltenham and Northampton, 2005, pp. 241–264, p. 241; oecd. Agriculture: Why Is It Still so Difficult to Reform? url: http://www.oecdobserver .org/news/archivestory.php/aid/1177/Agriculture:_Why_is_it_still_so_difficult_to_reform .html (last accessed on 2 December 2017). See Cheong, Jansen, Peters, p. 11. So-called “compensation effect.” Bilal, pp. 84–85.

Economic Aspects of State Support Measures (Subsidies)

15

modest income share on food compared to the developing world58 (Engel’s law) and does not resist against paying more for nutrition.59 This approach in developing countries would be met with hostility. 1.2.4 Effects of Agricultural Support Agricultural support as an agricultural policy instrument60 is widely justified by the need for a correction of an extended list of market failures, such as replacement of “missing markets,” rectification of negative externalities, impact increase for positive externalities, and restriction of imperfect competition.61 Beyond the market failure correction, agricultural support may be driven by a rent-seeking behaviour of producers and a non-market food security objective.62 Depending upon the type of market failure in question, the government’s role might be concentrated on reduction of transaction costs for agricultural producers, elimination of information asymmetries, property rights allocation, or on other activities aimed at curing the default market. Since it is often not possible to correct a market failure at the source, the second best solution typically involves the creation of an artificial market (e.g. insurance and credit subsidies).63 There are two essential tasks of agricultural support that may also be cumulative, namely, the increase of farm income and/or production. Regulators use four main instruments to address these aims: market price support, output or 58

59 60

61

62

63

Consumers in developed countries spend in average of about 15 per cent of their income on nutrition in comparison to at least half of the income spent on food in developing countries. See oecd. Agriculture: Why is it still so Difficult to Reform?; Daugbjerg C.; Swinbank A. Explaining the “Health Check” of the Common Agricultural Policy: Budgetary Politics, Globalisation and Paradigm Change Revisited. In: Policy Studies, 32(2), 2011 (further Daugbjerg, Swinbank), pp. 127–141, p. 157. On political patterns of agricultural policies see Bilal, pp. 5–6. Butault J.-P.; Bureau J.-C. and others. Comparative Analysis of Agricultural Support within the Major Agricultural Trading Nations: Study commissioned by the Committee for Agriculture of the European Parliament, Brussels, 2012 (further Butault, Bureau and others), pp. 26–29. Meilke K.; Cranfield J. Production subsidies. In: Kerr W.; Gaisford J. (eds.) Handbook on International Trade Policy, Cheltenham, 2007, pp. 292–300 (further Meilke, Cranfield), p. 293. While developed countries tend to deal with all objectives making a conceptual accent on public goods provision, developing countries typically concentrate on this non-market objective. Rude J. Under the Green Box: the wto and Farm Subsidies. In: Journal of World Trade, 35(5), 2001, pp. 1015–1033 (further Rude), p. 1017.

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inputs payments, and decoupled income aid.64 When assessing these tools by their economic impact (distortion of trade), input subsidies are regarded as the most distortive followed by market price support and output payments.65 Decoupled income support is moderately trade distortive or non-trade distortive, albeit non-efficient as a support instrument.66 All in all, any type of agricultural support may result in artificial protection of farmers from market signals, as well as the establishment of conditions for production without market demand consideration.67 A level of distortion may be reduced by support in the form of retroactive compensation for some activities or by a partial switch of financial responsibility towards farmers.68 Despite possible irregularities, the economic concept of trade distortion was incorporated into the multilateral disciplines on subsidies in the mid-1990s. That prompted development of alternative approaches capable of justifying state intervention into agricultural markets. Justification of Agricultural Subsidies in Light of the Concept of Multifunctionality It is widely recognised that the agricultural sector, besides production, executes other functions, in particular, provision of services, employment, and environmental functions.69 These additional undertakings may constitute non-trade concerns and may have potential to justify agricultural subsidies along with other governmental measures aimed at increasing commodity production. This approach was reflected in the concept of multifunctionality.70 The notion of “multifunctional agriculture” has been developed since the mid-1990s, i.e. in conjunction with the sustainability debates.71 The introduction of the concept

1.2.5

64

65

66 67 68 69 70 71

Zahrnt V. For a New Classification System of Domestic Support in the wto Agreement on Agriculture. In: Journal of World Trade, 43(2), 2009, pp. 1325–1343 (further Zahrnt), pp. 1326–1327, 1329. See for the alternative classification, including market price support, deficiency payments (countercyclical support), tax policies and input payments Meilke, Cranfield, p. 292 and Butault, Bureau and others, pp. 26–29. The consequences of trade-distorting domestic support extend from import demand reduction to depression or destabilisation of world prices. Zahrnt, pp. 1328–1329; Butault, Bureau and others, p. 37. Butault, Bureau and others, p. 37; Zahrnt, p. 1335. See similarly Podbury T.; Roberts I. and others. Agricultural Export Measures in wto Negotiations, Canberra, 2001, pp. 24–26. Sykes, p. 649. Rude, pp. 1018–1019. oecd. Multifunctionality: Towards an Analytical Framework, Paris, 2001, p. 14. Ibid., pp. 14–15. World Environmental Forum 1992 (Chapter 14 of Agenda 21); World Food Forum 1996 (Declaration of Rome).

Economic Aspects of State Support Measures (Subsidies)

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of multifunctionality by the agricultural ministers of the oecd countries in 199872 opened a new perspective for this topic and provided a differentiation between multifunctionality and sustainability functions of agriculture.73 The main idea of the multifunctionality approach declares that agricultural activity is a “joint production” process, where not only commodities are produced, but also “non-commodities” which exhibit the characteristics of positive externalities and public goods,74 i.a. land conservation, sustainable management of renewable natural resources, preservation of biodiversity, and socio-economic viability of rural areas.75 In the oecd opinion, producer remuneration for provision of the abovementioned public goods, if left to the market, could be insufficient to ensure a socially optimal supply level. In this regard, it is questionable whether the production of these “non-commodities” can be guaranteed by agricultural production or whether other instruments may be required.76 If so, their use should be limited, since the oecd members are bound by their international commitments, and they have confirmed their adherence to market mechanisms.77 Hence, the oecd standard policy recommendation in situations where there is a combination of private and public goods suggests a free determination of production levels, consumption and trade of the private goods by market forces. At the same time, any underprovision of public goods and any positive or negative externalities should be addressed by targeted and decoupled policy measures.78 Yet, providing support to commodity production with the goal of achieving certain non-commodity objectives is likely to cause undesirable effects on other non-commodity outputs. That is why it is proposed to tackle non-commodity outcomes directly (through incorporation of the market failure approach for combating negative externalities).79 For instance, observing a food security case as an externality,

72

73

74 75 76 77 78 79

oecd. Agriculture in a Changing World: Which Policies for Tomorrow? Meeting of the Committee for Agriculture at the Ministerial Level, Press Communiqué, Paris, 5–6 March 1998. The first refers to specific properties of a production process and its outputs (an activityoriented concept), where the second implies the manner of resources use (a resourceoriented concept). oecd. Multifunctionality: Towards an Analytical Framework, Paris, 2001, p. 11. Ibid, p. 13. Ibid, p. 9. World Trade Report 2006, p. xxix. oecd. Multifunctionality: Towards an Analytical Framework, Paris, 2001, p. 9. Ibid, p. 15. Ibid, pp. 17, 66.

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the oecd provides a spectrum of non-distortive private and public responses, such as diversification of supply sources, research and public stockholding.80 In fact, the concept of “multifunctionality” could be applied in a nondistortive manner. An example could be the policy shift referred to by the oecd as the New Rural Paradigm, which emphasises regions rather than sectors and investment rather than subsidies.81 However, a downturn of distortive subsidies does not predetermine a reduction of expenditures. Thereby, the multifunctionality approach hardly has the potential to be implemented in the developing world. Nevertheless, developed countries advocate the concept not only at domestic level,82 but also within the multilateral framework.83 The wto and scholars, however, warn against a misuse of this concept through production-linked subsidies and high levels of border protection.84 Therefore, despite all the advantages of the multifunctionality approach, it should be applied in moderation. By the same token, it must be clearly established how far agriculture may be considered “exceptional,” with a view to ensure the dominance of market mechanisms in the sector.

Conclusion of Chapter 1

Agricultural markets have imperfections and pitfalls, inasmuch as they are not able, at least in a short-term, to rectify their imbalances. Primarily due to the food security function of agricultural supplies, governments tend to intervene into markets and may further aggravate the basic imbalances by their actions. 80 Further oecd. Multifunctionality: The Policy Implications: Conclusions and Policy implications, Paris, 2003, p. 68. oecd. Multifunctionality: Towards an Analytical Framework, Paris 2001, p. 47. 81 Buchenrieder G.; Hanf J.; Pieniadz A. 20 Years of Transition in the Agri-food Sector. In: Agrarwirtschaft, 58, 2009, pp. 285–293, p. 287. 82 The ec focused on this concept in course of the Agenda 2000 discussions. The multifunctional nature of agriculture is mentioned in the Swiss Constitution. Butault, Bureau and others, p. 119. 83 The grouping “Friends of Multifunctionality” was founded during the wto Doha Round, see i.a. G/AG/NG/W/90. The wto system allows incorporation of at least some aspects of the multifunctionality concept, since non-trade concerns are included into the scope of regulation, e.g. the preamble to the Agreement of Agriculture, as well as Art. 20 thereof. 84 oecd. Multifunctionality: Towards an Analytical Framework, Paris, 2001, p. 381; O’Connor B. Agriculture in wto Law, London, 2007 (further O´Connor), p. 382; Grossman M. ­Multifunctionality and Non-trade Concerns. In: Cardwell M.; Grossman M.; Rogers C. (eds.) Agriculture and International Trade: Law, Policy and the wto, Cambridge ma, 2003, pp. 85–129.

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The spectrum of governmental agricultural instruments is wide and is not exceptionally directed to commercial components of agriculture. From an economic point of view, all government measures that confer benefits for private actors may potentially constitute subsidies. Therefore, in order to restrict this broad concept, subsidies should be assessed on the ground of economic calculations, rather than being based on any formal criteria. Since supply imbalances may be effectively targeted by trade mechanisms and most agricultural support instruments are economically distortive, international co-operation on agricultural policies is highly desirable, but may be very complicated, considering that agricultural sectors are subject to several systems of internal protection (tariff and non-tariff measures, subsidisation). Finding consensus on agricultural subsidies in the north-south relation may also be very challenging. Thus, the initial rationale for agricultural subsidies that still persists in developing countries is increased production. The experience of developed countries in the second half of the 20th century that pushed them to limit agricultural production reveals the danger of this approach. On the other hand, at a time when extremely high food demands exceed the supply and result in high commodity prices, there is a common interest in increasing agricultural outputs. Nonetheless, the production growth may have other disadvantageous consequences, i.e. environmental constraints, water supply problems, and climate change. These concerns are met by the concept of multifunctionality of agriculture which may help to support sustainability, but does not address production expansion sought by developing countries.

chapter 2

Introduction to Agricultural Policies in Ukraine 2.1

Process of Agricultural Transition in Ukraine

2.1.1 The Nature of Agricultural Transition 2.1.1.1 Theoretical Basics of a State’s Transition Process To understand the process of transition, the effects of centrally-planned and market economies should be distinguished at the outset.1 The main negative externality of a centrally planned economy is a lack of signals indicating ­depleting supplies,2 since the pricing mechanism is used for reduction of transaction costs rather than for provision of incentives to produce.3 At the same time, enterprises do not have hard budget constraints, as a government distributes means of production.4 A secured supply of inputs along with an ­immanent lack of competition and guaranteed protection against financial losses diminish efficiency of input use. These factors in conjunction with insulation from the international trade system lead to failing signals to producers to promote the quality of their goods. In a market economy, the state’s role is theoretically limited to the enforcement of economic policy aimed at coordinating and protecting competition.5 State expenditures and interventions are not prohibited per se, but should be 1 Most real-world economies are neither pure market nor pure planned ones. Debroy B. ­Handbook of Transformation to Market Economy, Berlin, 2008 (further Debroy), p. 9. ­Market-economies for the purpose of this research would be those which have prevalently the features of the theoretical model of a market economy. 2 I.e. due to the absence of market mechanisms producers do not have indicators of demand dynamics. 3 Ciaian P.; Pokrivcak J. Agriculture Reforms and Development in East-Central Europe. In: Sergi B.; Bagatelas W.; Kubicova J. (eds.) Industries and Markets in the Central and Eastern Europe, Aldershot, 2007, pp. 117–131 (further Ciaian, Pokrivcak), p. 117. 4 The expected outputs tended to be set centrally at very high levels in the ussr. As a consequence, Soviet producers (i.a. peasants) were permanent debtors of the state. Demjanenko S.; Zoria S. Ukrainian Agricultural Tax system after 2004, Science Notes of Institute for Economic Research and Political Consultations, 18, 2002 (further Demjanenko, Zoria), p. 10; Bleuel H.H. Wirtschaftspolitik der Systemtransformation, Wiesbaden, 1996 (further Bleuel), p. 8. 5 Free competition is, among other things, important for transferring external price signals from international to domestic markets. Bleuel, p. 18; Tangermann S. Integration der Landwirtschaft Osteuropas in den Europäischen Markt und in den Weltmarkt. In: Alvensleben R.; Adamowicz M. (eds.) Strukturanpassungen der Land- und Ernährungswirtschaft in

© koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004353695_004

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limited to non-distortive and justifiable levels under the market conditions (system-conform measures).6 As a result of market-friendly policies, a competitive equilibrium is expected to be established and that should ensure ­efficient resource allocation and signalling price functions.7 Hence, it may be concluded that the transition from a centrally-planned economy to a market economy is, in a nutshell, a transformation8 of the state’s role in the economy (society), namely, a shift of decision-making and economic responsibility to private actors both in the internal (domestic) and the ­external (international) dimension.9 The tasks of the system transformation (reforms) can be divided into institutional and legal components. The first category targets suspension of p ­ olitical and economic systems and the abolishment of intervention policies. The legal reform aims for changes in regulation of individual economic activities with a view to reduce legal insecurity.10 The agricultural sector is to undergo four specific transformations: reform of property relations, restructuring of enterprises, de-nationalisation and de-­ monopolisation, and the liberalisation of agricultural markets.11 It may be argued that all identified levels of agricultural reforms have both institutional and legal dimensions.12 Where the privatisation process may cover the first three elements, trade liberalisation seems to constitute an overarching area. 6

7 8 9 10 11

12

Mittel- und Osteuropa, Münster-Hiltrup, 1993, pp. 19–32 (further Tangermann 1993), pp. 19–20. Non-system-conform measures cause the need for further state measures and therefore the market is restricted again (e.g. measures which cause imbalance of demand and supply provoke introduction of state transfer payments to producers or consumers). Bleuel, pp. 20–21. Proved by Arrow and Debreu. See Debroy, p. 11. The notions “transformation” and “transition” will be used in this research interchangeably. See also Tangermann 1993, p. 20. Bleuel, pp. 23–24. Dräger D. Landreformpolitik für den Übergang in die Marktwirtschaft in Osteuropäischen Länder. In: Alvensleben R.; Adamowicz M. (eds.) Strukturanpassungen der Land- und Ernährungswirtschaft in Mittel- und Osteuropa, Münster-Hiltrup, 1993, pp. 485–490, p. 485. These cumulative tasks basically replicate the core pillars of economic development which are trade liberalisation, competitive markets and the protection of property rights. Singham S. A General Theory of Trade and Competition: Trade Liberalisation and Competitive Markets, London, 2007 (further Singham), p. 26. For instance, privatisation process has a strong link with human rights (a right to property is protected e.g. by Art. 1 of the Protocol 1 of the echr), and plays a key role in contract law by ensuring the liability principle. Bleuel, p. 19.

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The latter and its interconnection with the legal transformation must be briefly analysed. 2.1.1.2 Liberalisation of (Foreign) Trade From the economic point of view, the purpose of trade liberalisation,13 pursuant to the classical approach of A. Smith and D. Ricardo, is to ensure that ­global consumers can benefit from comparative advantages resulting in a proper ­allocation of economic resources.14 The idea of trade liberalisation is based on the open market principle which claims that the wealth benefits of the i­nternational labour division could be obtained only if market access barriers in international economic flows are eliminated.15 The essence of this principle lies in the freedom of decision-making by economic actors.16 It may be conceded that trade liberalisation is the core of a market economy, where other elements, such as private property rights or legal rules, serve to support and guarantee the former. Turning back to the integral parts of the transition process, it would be ­appropriate to assert that internal and external trade liberalisation along with price liberalisation, are the easiest (primary) transition reforms, since no ­investment is needed to pursue them. Despite that, their effects are usually more rapid and visible than those of other policies: given the fact that prices in centrally-planned economies are highly distorted, an increase in prices after the liberalisation is unavoidable17 and usually leads to a so-called transition crisis (an adaptation crisis).18 In this regard, timing and sequencing of the liberalisation reforms are important. There are basically two strategies to follow: shock therapy (“big bang”), i.e. simultaneous reforms in all sectors of the economy which should bring quick and positive results after a short period of a sharp recession, and the

13

Liberalisation may be defined as a removal or loosening of restrictions on something, i.e. some restrictions may be maintained, but their extent should be limited and be less restrictive than at the starting point. Bleuel, p. 25. 14 Singham, p. 13. 15 See e.g. Tietje, pp. 35, 37. 16 Due to unavoidability of state regulation, the goal of government measures should focus on provision of the maximum possible decision-making freedom for individuals. Tietje, p. 37. 17 Bleuel, pp. 72–75. 18 It means that framework conditions of a new order may not be created at the same pace with the dissolution of the old structures. Ibid., pp. 51, 62.

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second strategy, gradualism.19 Where the second way may soften the impact of the transition crisis, it may be less efficient overall.20 Hence, assumedly the reforms should target all transition goals in parallel.21 In the external dimension, the adaptation crisis appears in the form of an imports surge and a fall in competing domestic production. That forces governments to intervene by taking protectionist measures to promote inland ­producers.22 If observed economically, border protection may be rather ­inefficient as it does not resolve the main producers’ problems in transition states, namely, high input prices.23 Furthermore, being an artificial instrument, external border protection is inclined to hinder natural adaptation processes. Therefore, market infrastructure development may be more desirable as an alternative.24 By the same token, the extent of the protective measures could be effectively reduced over the mid- and long-term perspective by integration into the multilateral trade system, or over the short-term (usually temporary) by means of regional economic integration.25 2.1.1.3 Legal Transformation All transition components may not be enforceable without legal changes that establish binding rules for economic actors. The scope of the legal reform 19 20

21

22 23

24 25

Ibid., pp. 113–115. The fall of a preceding system causes dissolution of the existing coordination ­mechanisms in the society. Insecurity of individuals about incumbent and future frame economic conditions may lead to drawbacks. See also Ibid., p. 28. In fact, other transition elements are supplementary to economic liberalisation, since any positive outcome could hardly be achieved without a general loosening of strict ­regulation, immanent to planned economies. On the other hand, trade liberalisation and privatisation, if not accompanied by institutionalisation of private property rights and development of effective contract enforcement, would be inefficient as the experience of most cis has shown. If protective measures have a tariff form, they also may be used for fiscal purposes. Tietje, pp. 44, 166. Bleuel, p. 90. That is why it is claimed that by pursuing external trade liberalisation the focus should be on microeconomic adaptation to trade conditions. The latter is deemed to be an indicator of the reforms’ positive effect. Levkovych I.; Hockmann H. Transition and Foreign Trade: the Case of Ukrainian Agri-Food Sector. In: Csáki C.; Forgács C. (eds.) Agricultural Economics and Transition: What Was Expected, What We Observed, the Lessons Learned, Volume i, Budapest, 2007, pp. 93–103 (further Levkovych, Hockmann), p. 93. Sidenko V. System Transformation of External Economic Activities in Transition from Central-Planned to Market Economy, Kiev, 1999 (in Ukrainian). Bleuel, p. 91.

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o­ verlaps with the institutional dimension, as law is used to ensure an efficient legal environment for market structures.26 The initial transition phase (liberalisation and privatisation) does not necessarily require deep legal reforms and comprehensive property rights regulation. Contract and company law, and law on competition should suffice. In a long-term perspective, the whole legal system (including legal enforcement and interpretation) will be modified27 based on international standards and shaped for local circumstances.28 Another aspect of transitional legal reform should be a paradigm change for state economic regulation. The legal systems of transition states often possess features inherited from state-centred economic models. For that reason, the executive branch tends to dominate over the legislative in transition states and may be vested with power for discretionary decisions.29 In the same vein, due to a lack of advanced law-making experience, legal acts usually have a fragmented character.30 This may lead to substantial legal gaps. Nevertheless, it should be remembered that the legal system is more static than the economic reality and merely reflects historical realities.31 Therefore, reforming the complete legal system is a rather long-term project, and could not be finished before the last stages of transition. 26

The declarative character of legal norms which cannot be practically enforced is supposed to be non-efficient for the system transition. In its turn, the institutional dimension should contribute to effective implementation of new legal norms. Herrnfeld H.H. Recht Europäisch. Rechtsreform und Rechtsangleichung in den Visegrad-Staaten, Gütersloh, 1995 (further Herrnfeld), pp. 13 seq. 27 Perry A. International Economic Organisations and the Modern Law and Development Movement. In: Seidman A.; Seidman R.; Waelde T. (eds.) Making Development Work: Legislative Reform for Institutional Transformation and Good Governance, The Hague, 1999, pp. 19–32, p. 25. 28 Seidman A.; Seidman R.; Waelde T. (eds.) Making Development Work: Legislative Reform for Institutional Transformation and Good Governance, The Hague, 1999, pp. 3–5. In this context, adoption of laws similar to the ones in neighbouring developing states seems to be more efficient than a reception of laws from developed countries (so-called legal transplants). Webb D. Legal System Reform and Private Sector Development in Developing Countries. In: Seidman A.; Seidman R.; Waelde T. (eds.) Making Development Work: Legislative Reform for Institutional Transformation and Good Governance, The Hague, 1999, pp. 33–52, pp. 41, 43. 29 Ibid., p. 37. 30 “Laws are often brief and ambiguous statements of policy and poorly harmonised with other laws and with any overall legal reform strategy.” Ibid., p. 38. 31 Ibid., p. 36.

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Agricultural Transition in Eastern Europe: Common Trends and Specific Features in Ukraine 2.1.2.1 Trade Dimension First of all, it must be underlined that the comparison between the trade ­liberalisation process in the post-Soviet states and the ceecs may not be ­credible since the starting points were significantly heterogeneous. Where the ceecs had established external economic relationships with the third countries before the end of the 1980s,32 the state monopoly over foreign trade (i.a. for agriculture) in the ussr was only abolished in 1991.33 Moreover, further development in the specified regions was gradually different too: the ceecs took a radical liberalisation course,34 while most cis were postponing deep structural reforms35 and searching for easier options primarily by constructing a web of bilateral trade agreements to control “inter-Soviet” trade.36 Regardless of substantial discrepancies in the approaches to trade policy reforms among the Eastern European states, the effect of trade liberalisation was quite similar throughout the region and produced an increase of import 2.1.2

32

33

34 35

36

Already in the 1970–80s Hungary and Poland (a contracting party of the gatt 1947) linked their domestic prices to international prices and partially liberalised their trade sectors. Kaminski B.; Winters L.A.; Wang Z.K. Foreign Trade in Transition: the International Environment and Domestic Policy, Washington, 1996 (further Kaminski and others), p. 6; Bleuel, p. 55. As for agricultural trade of the ussr, import operations were dominating, in particular after the 1970s. Jähne G. Sowjetische Landwirtschaft und Embargo, Berlin, 1980, p. 20; Serova E. Agricultural Transition and Integration to the World Economy: nis Case. In: Csáki C.; Forgács C. (eds.) Agricultural Economics and Transition: What Was Expected, What We Observed, the Lessons Learned, Volume i, Budapest, 2007, pp. 117–132 (further Serova), pp. 118, 121; Havlik P. Structural Change and Trade Integration on eu-nis Borders. In: Grinberg R.; Havlik P.; Harvrylyshyn O. (eds.) Economic Restructuring and Integration in Eastern Europe: Experiences and Policy Implications, Baden-Baden, 2008, pp. 119–148, p. 121. For details of the organisation of the Soviet foreign trade see Clement H. Die Organisationsstruktur der Sowjetischen Außenwirtschaft, Hamburg, 1973. The level of liberalisation of external trade was substantial, although single protective measures in the agricultural sector were retained. Hartell, Swinnen, pp. 261–264. In general, the trade liberalisation process in the cis could be characterised as unstable. The extent and methods of trade liberalisation are rather heterogeneous across the cis. Kaminski and others, p. 40. Kaminski and others, p. 7. The ceecs also had experience of regional integration in the 1990s which was however of provisional nature.

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diversification along with an unchanged structure of exports.37 Thus, the link between price liberalisation and protective trade measures could be easily established. The countries that retained price controls, or have not liberalised prices to the full extent, faced the problem of disparity between domestic and world prices. This created export incentives and pushed the governments to implement export control measures.38 By the same token, there is a clear connection between radical domestic reforms and effective foreign trade reorientation in some ceecs. However, this comparative success of the ceecs may also be explained by the effect of gradual economic integration with the ec and resulting structural reforms.39 2.1.2.2 Rural Dimension Similarly to the trade system, the initial situation in rural policies of the Soviet states and the ceecs was completely different. There were no market structures in the ussr and distribution of agricultural goods took place through state selling companies. In the ceecs, some market elements had been present before the end of the 1980s. On the other hand, all socialist states used to concentrate on large-scale agricultural production40 and doled out a high level of agricultural support.41 These common features created comparable 37

38

39

40

41

Bleuel, p. 86; Havrylyshyn O. Structural Change in Transition 1990–2005: a Comparison of nms and Selected nis Countries. In: Grinberg R.; Havlik P.; Harvrylyshyn O. (eds.) ­Economic Restructuring and Integration in Eastern Europe: Experiences and Policy Implications, Baden-Baden, 2008, pp. 17–46 (further Havrylyshyn), p. 33; Hartell, Swinnen, pp. 263–265. The forms of export controls may be very sophisticated, e.g. the three-fold difference ­between official and market exchange rates in Ukraine in the second part of 1993. See Kaminski and others, p. 42. Kaminski and others, p. 42; Pindyuk O. Trade Restructuring in the nis: Lessons of the nms and Policy Recommendations. In: Grinberg R.; Havlik P.; Harvrylyshyn O. (eds.) Economic Restructuring and Integration in Eastern Europe: Experiences and Policy Implications, Baden-Baden, 2008, pp. 463–470, p. 463; Hartell, Swinnen, p. 13. The average area of a production unit varied from state to state (republic), e.g. in the 1980s the average farm area in Ukraine amounted to almost 4 000 ha, in Russia – almost 8 500 ha, in Poland – over 1 100 ha, in comparison to the us average of 197 ha and 18 ha in the EU-15. Ciaian, Pokrivcak, p. 118; Lerman Z. Russia’s Agricultural Transformation in the Context of World Experience. In: Schulze E.; Knappe E.; Serova E.; Wehrheim P. (eds.) ­Success and Failures of Transition: the Russian Agriculture between Fall and Resurrection, Halle (Saale), 2003, pp. 261–288 (further Lerman), p. 262. The only exception was Poland. In the 1980s the agricultural support in the ussr and the ceecs exceeded the eu level, and in Russia and Estonia was even higher. The total costs spent on the agricultural support in the final years in the ussr are estimated

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transition effects: all countries of concern faced a significant price increase for agricultural inputs, while prices for agricultural goods stagnated or grew only slightly (so-called price disparity).42 This situation caused a decrease of farm outputs during the first transition years and forced the governments to introduce import protection measures. At the very end, the problems of agricultural trade in the cis and in the ceecs were mostly the same43 despite a larger degree of integration into the world trade system of the latter. Nonetheless, the eu stimulated structural ­rural reforms in the ceecs,44 where the lack of external pressure and a strong domestic conservative lobby45 did not motivate cis governments to pursue reforms. As a result, agricultural sectors in the most post-Soviet states were functioning under the central-economy rules in the market environment up to the 2000s and are still not fully liberalised. 2.1.2.3 Property Rights The heterogeneity across the region was also obvious in the domain of ­property rights. While land was exclusively public property in the ussr,46 private property on land was formally recognised in the ceecs.47 The patterns of post-­socialist land reforms in particular states varied and were mostly dependant on dominating means of production in the agricultural sectors.

42

43

44 45 46

47

at around 10 percent of gdp. Ciaian, Pokrivcak, p. 119; Cramon-Taubadel S.; Nivyevski O. and ­others. Ukraine. In: Anderson K.; Swinnen J. (eds.) Distortions to Agricultural Incentives in ­Europe’s Transition Economies, Washington, 2008, pp. 175–218 (further Cramon-­ Taubadel, Nivyevski), p. 183. For example, the input prices for agricultural producers in Ukraine in 1990–1999 were six times as high as the output prices. Materials of Parliamentary Hearings on State of Rural Reforms of 15.1.2003, p. 10. See also Cacace P. Ukraine: Countertrade and Commodity Exchanges. In: Most-Most, 2, 1993, pp. 135–143, p. 135; Hartell, Swinnen, pp. 3–5. Davidova S.; Giurca D.; Hubbard L.; Rusali M. wto Commitments and cap Adoption in Central and East European Countries: the Case of Romania. In: moct-most, 9, 1999, pp. 273–290, p. 274. Ibid., p. 273. Havrylyshyn, p. 37. Where both collective and state land property co-existed, the share of the former was decreasing. Collective farms were being united into larger entities in preparation for their transfer into state property. Furthermore, Soviet collective property was, in fact, a fiction, since only a negligible part of collective farms’ assets were contributed by their members. Further see Götz, Kroeschell, Winkler. Only a relatively small portion (below 20 per cent) of the land plots was expropriated by the state. See Lerman, p. 262.

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L­ abour-­intensive agricultural economies tended to distribute land plots to r­ ural households. As a consequence, small-scale family farms are prevailing there nowadays (e.g. Azerbaijan, Kazakhstan). Capital-intensive agricultural economies ­restituted land to former owners that resulted in domination by largescale corporate farms (e.g. Czech Republic, Hungary, Romania, and Bulgaria). Finally, ­land-intensive agricultural economies distributed land as shares, and likewise large-scale ­corporate farms currently hold leading ­positions (e.g. ­Russia, Ukraine).48 Although almost all considered countries started land reforms, only the ceecs and four small post-Soviet republics (the countries of the Southern Caucasus and Moldova)49 launched the land markets and did not impose legal barriers on land transactions.50 The other cis states impose various barriers on land purchases.51 These restrictions are typically justified as beneficial for small producers.52 However, the empirical evidence maintains that small and middle-scale producers in the ceecs with liberalised land markets have much less difficulty accessing land than those in some cis countries.53 The fear of land grabbing by the Western European investors after the accession of the ceecs into the eu has also shown to be groundless.54 Even though certain possible negative implications of land markets for transition economies are duly recognised, as well as the substitute role of lease 48

49 50

51

52

53 54

Swinnen J.; Ciaian P.; Vranken L. Land Market Developments, Imperfections, and Effects in Transition Countries. In: Curtiss J.; Balmann A.; Dautzenberg K.; Happe K. (eds.) Agriculture in the Face of Changing Markets, Institutions and Policies: Challenges and Strategies, Halle (Saale), 2006, pp. 55–77 (further Swinnen, Ciaian), p. 66. Among others, it may be explained by the traditional small-scale farm structure in the region and geographical impossibility of expansion of monocrop production. The World Bank survey on land markets in transition states pointed to the underdeveloped character of these markets in comparison to the land lease segment. Swinnen, ­Ciaian, pp. 57–58. For instance, Kazakhstan does not recognise private land ownership at all; Ukraine has been maintaining moratorium on land sales; Russia officially launched sale of agricultural land with restrictions for foreigners and prerogatives for the local administrations, but the market remains hindered by some practical obstacles. As a rule, the focus of land reforms is on the social conditions of rural inhabitants. ­Promotion of productivity as a goal of land reforms would shift the central point to largescale production. Tuma E.H. Twenty-six Centuries of Agrarian Reforms: a Comparative Analysis, Berkeley, 1965 (further Tuma), p. 241. Lerman, p. 270; Swinnen, Ciaian, p. 55. The sales of agricultural land were not substantial, allegedly due to limited information about sale prices and/or the expected increase in land prices. Swinnen, Ciaian, p. 56.

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markets,55 examples of efficient agricultural sectors without private property on agricultural land are scant.56 It may be also assumed, with a high degree of certainty, that negative externalities of land markets in the transition environment could be rectified by efficient legal reforms57 and systems of property rights protection. However, incomplete land reform may hinder positive developments in other transition components, e.g. until the question on land property is clarified, the farm restructuring process may not be carried out effectively.58 2.1.2.4 The Case of Land Reform in Ukraine 2.1.2.4(a) Historical Development of Land Relationships Three interconnected reforms (the consequences of each led to a successive reform) were crucial for the agrarian relationships in the territory of modern Ukraine during the pre-independence period:59 – Emancipation of the serfs in 1861 which freed peasants from their landlords and united them into communes; – Stolypin’s reforms of 1906–1911 aimed at dissolving rural communes and providing land plots for individual peasants, predominantly in the Eastern parts of the Russian Empire; – Early Soviet reforms: nationalisation of land in 1918 and the so-called collectivisation of 1927–1930 which resulted in major changes in land holding and led to the expansion of large-scale agricultural production.60

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57 58 59

60

Lease market for agricultural land contributes to equity and may still provide efficiency for land markets with the ability to transfer land from less productive to more productive users. Swinnen, Ciaian, p. 56. Agriculture of most developed countries is based on private land property. Some exceptions, e.g. Israel and the Netherlands, are justified by harsh natural conditions. Strubenhoff H.; Movchan V.; Buriakovski I. (eds.). Agriculture, Bioenergy and Food Policies in Ukraine – Analysis, Conclusions and Recommendations, Warsaw, 2007 (further Strubenhoff, Movchan, Buriakovski), p. 109. Ibid, p. 286. Buchenrieder G.; Hanf J.; Pieniadz A. 20 Years of Transition in the Agri-food Sector. In: Agrarwirtschaft, 58(7), 2009, pp. 285–293, p. 289. The largest part of modern Ukraine constituted part of the Russian Empire from the end of the xvii century until 1917. Later on, it was incorporated into the Soviet Union as a republic. Hence, the land reforms were conducted not solely in Ukraine, but in the entire state entities. On the history of Russian land reforms see Tuma, pp. 68–107.

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In spite of the major importance of the land distribution problem in the ­Russian Empire61 and later in the Soviet Union, none of the reforms were able to bring an effective resolution. The agricultural sector was often used as a means for achieving the state’s economic and social goals. The most prominent example is probably the forced collectivisation in the ussr. Formally, it was an instrument to increase food production with a view to ensure food security in the urban areas, growing as a result of the industrialisation process. In order to provide financing for the latter, the government exported grain in extensive amounts. The resulting high demand and the harsh methods of public grain supply caused catastrophic famines in the early 1930s in Ukraine, South Russia and Kazakhstan.62 As a result of the early Soviet reforms, by the beginning of the 1930s, individual peasantry had been destroyed. In the Soviet era, land was perceived only as a means of production and was state property exclusively. For that reason, land was largely perceived as a publicly owned natural resource in the post-Soviet space.63 This conception and lack of experience in land market regulation delayed the rural reforms in Ukraine. 2.1.2.4(b) Approach to Modern Land Reform in Ukraine There are plenty of concepts for land reforms, but two things are common for all approaches: land reform is defined as a more or less direct, publicly controlled change in the existing methods of land ownership (or other elements of the agrarian structure), and this change should involve a redistribution of wealth, income or productive capacity.64 If a land reform targets property ­issues, its purpose is not to guarantee ownership, but rather to create opportunities for land acquisition. The modern land reform that commenced in Ukraine in 1990 initially manifested as part of the general economic reform.65 Subsequently, the ­adoption 61 62

63 64

65

The issue of land distribution was among those leading to the fall of the Russian Empire. This national trauma of the 1930s can be felt even today and may explain the support throughout the cis population for national export protection policies. See also CramonTaubadel, Nivyevski, p. 175. un Economic Commission for Europe. Land Administration Review Russian Federation. HBP/WP.7/2003/7, 18 July 2003 (further unece). The ordinary perception of land reform used to be limited solely to redistribution of land for the benefit of small farmers or landless agricultural workers. The new reform ­conception emerged in the us in the middle of the XXth century and included not only an “opportunity for ownership,” but also other assistance measures for farmers, i.a. agricultural advisory services and education. Tuma, pp. 8, 10, 12–14. Parliament’s Resolution on Land Reform of 18.12.1990.

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of the Land Code in 199266 marked a switch from the liberal tendencies to more restrictive reform models. Although three forms of land property – ­private, state and collective – were recognised in 1990,67 the Land Code 1992 secured the factual priority for state property and rejected the free of charge ­privatisation model for agricultural land, and on top of that set up a six-year moratorium for land transfer.68 These developments may be evaluated as a de facto suspension of the land reform in Ukraine.69 Much later, the President Order of 3.12.1999 broke the ice by launching the process to allocate land plots to members of collective farms and their transfer into private property.70 The incumbent Land Code, adopted in 2001,71 provided the legal basis for privatisation of agricultural lands and accelerated this process. In opposition to the privatisation procedure in the industrial sector, where all citizens of Ukraine obtained a right to acquire the shares, only members of collective farms were entitled to receive agricultural land ownership. ­Moreover, due to certain regional particularities of agricultural production, the distribution of privatisation rights between the regions was unequal.72 The size of land plots also varied from region to region corresponding to the negligible average of 4 ha.73 Consequently, land distribution played a large part in the process of fragmentation of agricultural areas. Although some scholars indicate that the pace of privatisation in Ukrainian rural areas was relatively slow due to the conservatism of the rural population,74 66 67 68

69 70

71 72

73 74

Law No. 561-XII of 18.12.1990, repealed on 1.1.2002. Law on Economic Independence of Ukrainian ssr No. 142-XII of 3.8.1990. Thereby, Land Code 1992 is claimed to create a legal conflict with already existing legal provisions. Nosik V. Land Property of Ukrainian Folk, Kiev, 2001 (in Ukrainian) (further Nosik), p. 88. Further presidential bylaws of 1994–1995 declared the reform of collective farms, but were not duly implemented. See for details Ukraine–Canada Grain Project 2007, pp. 16–20. President Order No. 1529/99 of 3.12.1999 was the first legislative document that perceived the agricultural reform as a complex of measures and declared private land ownership as a cornerstone of the reform. Law No. 2768-III of 25.10.2001 (with further amendments). Only 15.6 per cent of the rural inhabitants in the Zakarpatia region obtained private ­property on land plots comparing to 78.8 per cent in the Chernikhiv region. Kyrylenko I. Topical Problems of Agrarian Reform in Ukraine in the Conditions of the World Economic Crisis, Kiev, 2009 (in Ukrainian) (further Kyrylenko), p. 24. Kyrylenko. p. 29. Pleines H. Der politische Einfluss der Agrarlobbies in Polen, Russland und der Ukraine. Eine vergleichende Politikfeldanalyse. In: Arbeitspapiere und Materialien – ­Forschungsstelle Osteuropa, 79, 2006, pp. 1–57, p. 38.

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the figures nevertheless point to a shrinking share of state ownership for agricultural land.75 The privatisation of agricultural land also triggered the process of restructuring which led to an increase in the number of agricultural enterprises.76 In spite of these developments, the process of agricultural privatisation in Ukraine has yet to be accomplished.77 2.1.2.4(c) Legal and Institutional Aspects of the Land Reform in Ukraine The Constitution of Ukraine78 created a unique land ownership construct ­according to which Ukrainian people are the original and default owners of land in Ukraine. Thus, land property rights could be only derived from the ownership of Ukrainian people.79 At the same time, this two-level constitutional model of land property80 is not fully implemented into land law.81 In this regard, it is highly questionable whether Ukrainian legal culture is ready to accept and exercise these constitutional provisions,82 not to mention whether and how the internal contradictions between Art. 13 and 14 of the Constitution

75

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78 79 80 81

82

The share of state ownership for agricultural land diminished from 100 per cent in 1991 to around 25 per cent in 2003. Taking into consideration the legal development, it may be presumed that the largest piece of this decrease must have happened between 2000 and 2003. Other statistics for 2004 referred to 49.4 per cent of the state land ownership (presumable for all kinds of lands). See Melnychuk V.; Parkhomenko S.; Lissitsa A. Creation of Agricultural Land Market in Ukraine: Current State of Development, Discussion Paper of Institute of Agricultural Development in Central and Eastern Europe, 86, 2005, p. 22; Ukraine–Canada Grain Project 2007, p. 16. On 1.11.2008 around 16 000 agricultural enterprises and 44 000 individual farmers were registered on the territory of Ukraine comparing to around 11 300 collective farms in the 1990s. Kyrylenko. p. 34. At the beginning of 2010, over 2.5 million citizens submitted their applications to receive state land property certificates (about 38 per cent of all entitled persons). By the end of 2010 about 685 000 acts had been issued (27 per cent of the submitted applications). Audit Chamber of Ukraine. Report for 2010, p. 67. Constitution of Ukraine of 27.06.1996. Art. 13 of the Constitution of Ukraine. See for details Nosik, p. 116. Ibid., p. 118. Art. 324 of the Civil Code (Law No. 435-IV of 16.1.2003 in the state 1.6.2014) and Art. 5.2. of the Commercial Code (Law No. 436-IV of 16.1.2003 in the state of 1.6.2014) (further ComC) follow the approach of Art. 13 of Constitution, but the Land Code 2001 anchors only the provisions of Art. 14 the main law by proclaiming land to be a specific treasure which underlies state protection. Nosik, p. 22.

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(property of the people v. protection of land by the state) may be resolved.83 But since the norms of the Constitution have direct effect and the highest ­hierarchical rank within the Ukrainian legal system, the provisions of Art. 13 of the Constitution may have the potential to restrict the classical approach to private property rights. Regardless of the non-conventional model of land ownership origin, the Ukrainian state has a constitutional duty to guarantee all forms of land property rights.84 One of the core components of the guarantee must be its protection. In the case of property rights, the system of protection is supposed to be executed through the institutional dimension consisting of a cadastre (a means of identification and description of rights), a registry of rights (a means of formalisation), markets (instruments for circulation of rights), financial institutions and instruments (supporting the market); and through the legal dimension – the judicial system (a stricto sensu means of rights protection).85 This book will examine whether the Ukrainian government has established a respective system of protection for land property rights. The land cadastre, the core of the governmental land administration,86 was officially launched in the early 2000s,87 but received a complete regulatory base only in 2012. Frequent changes in institutional subordination and the manner of land administration88 created a concern over whether the cadastre may be operated efficiently after long-awaiting the liberalisation of the land market. However, owing to the assistance project of the World Bank in 2003–201289 and the adoption of the Law on State Land Cadastre following the five-year legislative procedure,90 this component of the property rights system 83 84 85 86 87 88

89

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Nosik, pp. 110, 114, 116. Art. 41 of the Constitution of Ukraine. Further German–Ukrainian Agricultural Policy Dialogue. Legal and Institutional Aspects of Agricultural Land Markets in Ukraine, Policy Paper 13, 2007, pp. 3–5. unece. Strubenhoff, Movchan, Buriakovski, pp. 120–122. Primarily, the division of competences between the State Committee on State Resources and Ministry of Justice. German–Ukrainian Agricultural Policy Dialogue. Legal and Institutional Aspects of Agricultural Land Markets in Ukraine. Policy Paper 13, 2007, p. 15 seq.; unece. World Bank. Project Appraisal Document on a Proposed Loan in the Amount of us 193.5 Million to Ukraine for a Rural Land Titling and Cadastre Development Project of 30.5.2003. Law of Ukraine on State Land Cadastre was passed by the Parliament of Ukraine on 20.03.2007, but was vetoed by the President on 13 April 2007 and was finally adopted only in 2012. Law on State Land Cadastre No. 3613-VI of 7.7.2011.

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has been established. The question of its efficiency is closely related to improvement of the general regulatory environment in Ukraine. The property rights registration system is also a key precondition for transparent land transactions.91 Ukraine’s previous choice in favour of a unified ­system for land cadastre and state registry of rights to immovable property (the European model)92 was changed and separated into the two systems.93 The ­efficiency of this model is reported to be low due to some operational ­issues and corrupt practices.94 To sum up, well-functioning property rights registration and an effective judicial system are quasi prerequisites for efficient land markets. Underdevelopment of both components will endanger the achievement of a sufficient security level by land transactions. These arguments must be made to the conservative lobby eager to ban land purchases. Under the given circumstances, the market-related parts of the land right protection system will not be able to progress. 2.1.2.4(d) Land Purchase Moratorium The moratorium on agricultural transactions was established in the early 1990s and is still in force today. The transitional provisions of the Land Code 2001 lay down conditions for the termination of the ban.95 The only prerequisite left is a coming into force of the Law on Circulation of Agricultural Land Plots96 (hereafter Law on Land Market) but no earlier than the 1st of January 2018.97 91 92 93 94 95

96 97

unece. Law No. 1952-IV of 1.7.2004. Art. 15.2. and Art. 30 of Law on State Land Cadastre. This conclusion was made on the basis of the interviews with the representatives of Ukrainian agricultural and ngo sectors. The moratorium includes registration of land property rights as a contribution to company statute capital; sale and purchase of agricultural land plots in state or municipal property, except in form of a buyout for public needs; sale and purchase or other alignment of land plots in property of agricultural producers (physical persons and legal entities producing agricultural goods for commercial purposes) and private households, as well as a change of an intended purpose (tsiliove pryznachennia) of these land plots, except for succession, exchange of land shares, buyouts for public needs and a change of intended use to transfer land plots to the investors under production sharing contracts. The second sub-condition, a coming into force of Law on State Land Cadastre, was fulfilled on 1.1.2013 (Law No. 309-VI of 3.6.2008). Paras. 14–15 of Transitional Provisions of Land Code 2001. Previously the text of this paragraph referred to the law on land market, nowadays the legislator avoids using the notion “land market” which is extremely unpopular among the Ukrainians and merely operates with the term “circulation of lands” (obikh zemel’).

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Hence, the official purpose of the moratorium is to take time to develop the legislative framework necessary for the functioning of the land market.98 Considering the date of the ban termination has been amended seven times since 2004, the legislative aspect alone is not justification enough for the delay. ­Another explanation for the persistent moratorium is that the concept of a free land market remains unpopular within the Ukrainian agricultural lobby. Furthermore, it is perceived as socially dangerous by a large part of the society. Among several draft laws on the land market, only one succeeded in going through the entire legislative procedure, but was still vetoed by the President in 2012,99 allegedly due to the above political stakes. Analysing the main e­ lements of this law may create a sample for further legislative development in this area. The main feature of the draft Law on Land Market was its highly restrictive treatment of potential agricultural landowners. Only citizens of Ukraine ­(individuals), the state (through a special creation, State Land Bank, and governmental bodies) and municipal communities would have been entitled to acquire land ownership.100 In parallel, direct purchase prohibition for ­foreigners and for all legal entities would have been imposed.101 Regarding the former ­category, there is nearly zero possibility of including non-nationals into the rank of persons eligible for agricultural land acquisition, since Ukraine ­reserves this restriction in the related international legal instruments.102 At the same time, all natural persons or legal entities would have been entitled to take part in competition for land leases.103 The second line of defence for property acquisition under the draft law was the requirement that eligible buyers declare their income sources.104 Besides 98 99 100 101

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103 104

See Working Party on the Accession of Ukraine to the World Trade Organisation of 25.1.2008 WT/ACC/UKR/152, para. 371. Draft Law on Land(s) Market No. 10043 was registered on 7.2.2011, voted on 21.6.2012 and annulled on 6.9.2012. Art. 10.1. of Draft Law on Land(s) Market. Art. 10.2. of Draft Law on Land(s) Market. Land plots were not allowed to constitute a contribution to company statute capital (Art. 10.6. of Draft Law on Land(s) Market). Therefore, the provisional measure under para. 14 of Transitional Provisions of Land Code 2001 would have become permanent. This reservation is included into the trims commitments of Ukraine (Schedule to the wto Accession Protocol of Ukraine), Art. 4.10. of efta-Ukraine fta and Annex XVI-D to the eu–Ukraine Association Agreement between the eu, of the one part, and Ukraine, of the other part (oj L 161 29.5.2014 p. 3) (further eu–Ukraine aa). The rule of Art. 47 of Draft Law on Land(s) Market extends to all physical persons, legal entities and special categories, e.g. farmers, agricultural enterprises. Art. 10.7. of Draft Law on Land(s) Market.

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the above restrictive elements, the draft law attempted to confer benefits for some actors, e.g. purchase priority for lessees and owners of neighbouring ­agricultural plots;105 state benefits by a tender procedure for sale and lease of state-owned lands.106 From a legal point of view, the land ownership restrictions could not be questioned, since the Ukrainian Constitution, as already identified, declares the property rights of the Ukrainian people as a whole, comparing to the right of every citizen to use land.107 But taking the economic position, the exclusion of the most competitive actors, companies and foreign investors, from the pool of possible buyers would stymie competitive land prices108 and general competition in the sector. Beyond the ratione personae, the draft law restricted plot sales by size, capping land ownership at 100 ha per person.109 Furthermore, the draft law established land lease limitations for parcels exceeding 6 000 ha that were situated in one district (rayon, part of a region) and constituted more than 5 per cent of regional (oblast) agricultural land.110 Interestingly, the process of consolidation of agricultural land was intended to111 increase efficiency of commercial land use.112 The latest Draft Law113 continues the tendency of restrictions in respect to land plot size, land concentration and buyer’s income declaration, but intends to allow land purchase by domestic legal entities beginning in 2020 and foreign nationals in 2030. 2.1.2.4(e) Concluding Remarks on the Current Land Reform in Ukraine It may be argued that among the tenants of land rights protection considered indispensable for an efficient land market, the property rights registration and 105 Art. 18.1. of Draft Law on Land(s) Market. 106 Tender security payments to be charged in the amount of 50 per cent of a starting bid would have been not repayable. Art. 33 seq. of Draft Law on Land(s) Market. 107 Art. 13 of the Constitution of Ukraine. 108 be Berlin Economics GmbH. Turning Ukrainian Agriculture into an Engine of Growth: A Strategy for the Development of the Grains and Oilseeds Sector, Berlin, 2012 (further be Berlin Economics), p. 28. 109 Art. 14.1. of Draft Law on Land(s) Market. 110 Art. 14.4. of Draft Law on Land(s) Market. 111 Consolidation was defined as a complex of coordinated measures to integrate land plots on an economically grounded and voluntary basis and/or to change their borders in order to form land plots so that location, size, structure, and configuration would guarantee sustainable land use. Art. 1.1. and Art. 24 seq. of Draft Law on Land(s) Market. 112 For the purpose of consolidation of lands see Nosik, p. 107. 113 Draft Law on Land(s) Market No. 5535 registered on 13.12.2016.

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judiciary protection components are operated in Ukraine in a non-efficient and non-transparent way. The market component is not developed either, since the land market does not exist de jure. In the end it is a vicious circle: the land market liberalisation is suspended because of the drawbacks of other system components that cannot be developed without implementing the land market. In fact, major obstacles to the introduction of the land market seem to be the conservative lobby, political fears,114 and general regulatory and administrative pitfalls. At the end of the day, the land reform in Ukraine remains incomplete. Of course, one contributing factor may be the country’s exceptionally large agricultural land area,115 but more likely it is the lack of a well-grounded conceptual basis.116 The government has been searching to protect small landholders by delaying structural reforms, but has failed to do so. As a result, there is a clear case of land ownership polarisation, a classic example of co-existing largescale plantations and small farmers, typical of other developing countries.117 This bimodal land distribution provides incentives for further suspension of market liberalisation. Despite the obstacles, the introduction of the land market in Ukraine seems to be inevitable for the future development of the agricultural sector.118 ­Besides, liberalisation of land purchases is subject to external pressure since Ukraine underlined its goal of land market development by the accession to the wto.119 Legal and regulatory approximation to the eu law120 is perceived as a component of Ukraine’s transition process.121 In this regard, only one

114 Among these factors one could mention concern about rural unemployment, massive migrations to the urban areas, as well as land concentration, although these issues have existed for decades despite the circumstances of de jure banned land transactions. 115 71.3 per cent of Ukrainian territory (41.7 million ha) falls under agricultural land. Ukraine– Canada Grain Project 2007, p. 13. 116 During the recent fifteen years of the land reform, the Ukrainian government tried four different reform models, but did not complete any of them. To date, there is no common understanding about the land reform priorities. See Nosik, p. 6. 117 Cheong, Jansen, Peters, p. 11. 118 Strubenhoff, Movchan, Buriakovski, p. 118. 119 WT/ACC/UKR/152, para. 378. 120 Art. 474 of eu–Ukraine aa makes a distinction between gradual approximation of legislation and regulatory approximation (refers exclusively to the trade chapter). The regulatory approximation is foreseen for the specific trade sectors (mainly, services). 121 Art. 1(2)(d) and Art. 343 of eu–Ukraine aa.

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­solution may be proposed: rapid adoption of efficient legislation122 and launch of the land market. Nevertheless, quick positive results should not be anticipated. Initial land prices are expected to be low in Ukraine because of the modest rate of productive and profitable land use and an initially limited collateral value of land due to fragmented ownership. By the same token, since the demand side on the land market will be restrained to a relatively small number of actors, the lack of competition for land should not contribute to price growth. That is why it could be proposed to expand the circle of eligible land buyers. Finally, it should be mentioned that land purchase restrictions for foreigners may be justified over concerns of massive land grabbing, a current trend due to a high demand on land during crisis and inflation periods. However, the extent of the restrictions proposed by Ukrainian legislator have the appearance of being too severe to target this problem and may be effectively replaced by investor reporting or/and monitoring. In general, using concerns over land ownership as a reason for public policy is highly problematic for the economic environment because of the discretional nature of this approach. 2.1.2.5

Implications of an Incomplete Transition on the Ukrainian Agricultural Sector The process of transition in Ukraine was mostly concentrated on macroeconomics and was not largely supported by sectoral reforms.123 As for agriculture, in spite of some progress, the transition has not yet been completed because of the refusal to enact important but highly unpopular changes. As a result of the pick-and-choose tactics, the liberalisation process in Ukrainian agriculture is not as deep as in other sectors of the country’s economy.124 The regulation of foreign agricultural trade was already partially reformed in the 1990s,125 but the extent of external liberalisation shrank in the following years; the insulated agricultural sector answered with a large decline in production.126 Price liberalisation in the agricultural sector has been running at a much slower pace. The state had a major role in price building during the

122 In order to avoid further fragmentation of land law, it may be recommended to include the provisions on land market regulation into the Land Code 2001. 123 As a consequence of this approach, macroeconomic reforms of Ukraine “formed a thin crust over a rotten core.” Cramon-Taubadel, Nivyevski, p. 201. 124 See Levkovych, Hockmann, p. 100. 125 Decree of Ukraine’s Cabinet of Ministers (further cmu) No. 54/93 of 20.5.1993 introduced harsh export duties on agricultural goods. Export controls for several essential goods were maintained. 126 Cramon-Taubadel, Nivyevski, p. 200.

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1990s and the extensive support did not cease, but the government was unable to stop the increase of farm debts.127 While privatisation of agricultural enterprises has been formally accom­ plished,128 the grain sector remains partially state-owned129 (it concerns mostly service providers and processors). The course of agricultural privatisation and restructuring in Ukraine proves that partial decisions may provide small producers with land resources, but cannot guarantee the effective use of land as an asset. Thus, the simple transfer of collective farm property without ­investment makes them highly inefficient. Formally, the process of restructuring collective agricultural enterprises had been finalised in Ukraine by 2005. Then the lead passed to private actors which resulted in acquisitions of the enterprises by vertical production structures.130 In the situation where most transactions on agricultural land transfers are de jure banned, the market has rectified this imperfection by developing a substitute market segment, a land lease market.131 Most land lease contracts in Ukraine are short-term132 and set up with extremely low land lease payments (about 37 usd in 2015 which is 20 times lower than in the eu).133 If duly enforced, formal state price regulation aimed at advancing land lease ­payments134 127 While in 1990–1995 the state continued purchase programmes for basic agricultural products at indicative prices, these were replaced by barter operations and credits in exchange for public procurement contracts in the mid-1990s. oecd, World Bank. Achieving Ukraine’s Agricultural Potential, Washington, 2004, p. 17. 128 The list of specific state-owned property not subject to privatisation is fixed at the legislative level (Law No. 847-XIV of 7.7.1999). In 2007 this list contained 1 548 enterprises, including 457 agricultural entities (mostly service providers). WT/ACC/UKR/152, paras. 34, 38. 129 Cramon-Taubadel, Nivyevski, p. 200. 130 German–Ukrainian Agricultural Dialogue. Agroholdings in Ukraine: Good or Bad?, Kiev, 2008 (further German–Ukrainian Agricultural Dialogue 2008), p. 6. 131 17.3 million ha of Ukrainian agricultural land (64 per cent of the total distributed land) are leased. Kyrylenko, p. 34; Bezlepkina I.; van Berkum S.; Rau M. Prospects for Ukraine’s agrifood sector: Implications for Dutch trade relations, The Hague, 2013 (further Bezlepkina, van Berkum, Rau), p. 39. 132 Land lease contracts for the term of over 10 years constitute only 13 per cent of the total amount of land tenancy contracts. The maximum eligible period is 50 years. Bezlepkina, van Berkum, Rau, p. 39. 133 Bilan A. Establishment of the land market in Ukraine: current state and prospects, 2017, available under: http://infagro.com.ua/eng/establishment-of-the-land-market-in-ukraine -current-state-and-prospects/ (last accessed on 2 December 2017). 134 The minimum land lease payments are set by Art. 288.5.1. of Tax Code of Ukraine at the extremely low level (Law No. 2755-VI of 2.12.2010 in the edition of 30.5.2014).

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may become an additional obstacle to efficient development of the market since the main reason for the lower prices seems to be underdevelopment of infrastructure, as well as the instability of state land policies.135 Current low prices and prospective high yields push the competition for agricultural land lease in Ukraine. Under the described circumstances ­competitors may use unlawful means for solutions to their land interests. A phenomenon of “land wars” triggered by massive early termination of land lease contracts has appeared.136 By the same token, various “shadow” schemes for transfer of land property in Ukraine have been reported,137 although contracts on land sales or other land alignments concluded during the land purchase moratorium and obligations on future sales are de jure void.138 The extension of the land purchase moratorium correspondingly strengthens this trend.139 Beyond the above implications, the unresolved land issues hinder the ­development of agricultural financial markets since land constitutes the main source of collateral for small and middle-scale producers. This obstacle, in ­conjunction with the persisting price disparity, creates incentives for state ­interventions. Further contributing to market insecurity, government interventions may establish new barriers for market development.140 All in all, to date the task of agricultural transition is not fulfilled in its entirety in Ukraine. Both legal and institutional components of the land reform are not complete, government influence remains rather high, and agricultural markets are not fully liberalised. 2.2

Legal Framework of Agricultural Policies in Ukraine

2.2.1 Lex generalis and Lex specialis of Grain Trade Regulation Ukrainian legislation for state agricultural support may be divided into general norms valid for all branches of the economy and special norms developed for the agricultural sector.

135 Strubenhoff, Movchan, Buriakovski, 2008, p. 115. 136 That is why, in the absence of land market, the role of transparent land lease rules may be even more important than land purchase transactions. Ibid, pp. 113 seq. 137 Ibid., p. 117. 138 Paras. 14–15 of Transitional Provisions of Land Code 2001. 139 Allegedly, massive land sales by small and medium holders have been taking place after the extension of the land purchase moratorium in 2012. 140 be Berlin Economics, pp. 23–25.

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The general legal framework (competition law as part of economic law) is set by Art. 42.3. of the Constitution141 and by the ComC, which declares the principles of optimal integration of market self-regulation and governmental macroeconomic regulation (Art. 5.1. of ComC), protection of domestic producers, as well as prohibition of illegal intrusion into the state and of municipal authorities into commercial relations (Art. 6 of ComC). Art. 16 of ComC ­explicitly empowers subsidies (dotatsiia) and other state support measures, i.a. support for food production and for imports of specific goods; support to economic entities in critical social-economic or ecological situations (Art. 16.1. of ComC). In the same vein, Art. 16.2. of ComC clearly permits compensation or additional payments to agricultural producers for goods sold to the state. All in all, it may be concluded that Ukraine’s economic legislation provides a wide field of opportunities for granting distortive subsidies. Eligible state ­support measures are not precisely spelled out in the ComC, and the loose formulation “support for production” allows for the assumption that coupled support also remains possible. Evidently, the option for compensation and ­additional payments to agricultural producers, where the sale of production to the state is a pre-condition for obtaining a subsidy, explicitly enables output subsidies. The very first attempt to implement agricultural support priorities was made in 1990142 by mandating a public investment into rural areas and agriculture of no less than one per cent of the gdp (later this rate was changed to five per cent of all budget expenditures143), while at least 50 per cent of this amount must be spent on social infrastructure.144 Nevertheless, the full five per cent investment requirement has never been attained.145 Active development of agricultural support regulation started in the early 2000s following the announcement of increased subsidisation and support for 141 Art. 42.3. of the Constitution of Ukraine: “The state guarantees protection of competition in commercial activities.” The notion “protection of competition” in light of this provision should be understood in a common sense as anti-trust regulation of the state. 142 Law on Priority of Social Rural Development and of Agroindustrial Complex No. 400-12 of 17.10.1990 (the last version of 1.1.2011). Ukrainian legislator uses the notion “agroindustrial complex,” which besides agricultural producers includes processing enterprises as well as agricultural service providers. 143 Art. 10 of Law on Stimulation of Agricultural Development for the Period 2001–2004 No. 2238 of 18.1.2001. 144 This provision is still in force. Art. 5 of Law No. 400-12. 145 In 2004 agricultural budget expenditures reached 3.81 per cent of the total outlays; in 2008 – 3.1 per cent and in 2009 – 3.4 per cent. Report of the Audit Chamber of Ukraine for 2003–2004; be Berlin Economics, p. 24.

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producers in order to ensure the state’s food security.146 Although the elaborated legal acts on agricultural policies tended to be very declarative,147 they simply reiterated the most important role of agriculture in Ukraine, and boldly proclaimed the course for European integration and integration into the global economic space.148 The foundation of a stable regulatory framework was laid by the adoption of Law on State Support for Agriculture (further Law on State Support) in 2004.149 Being more precise in comparison to the foregoing legal acts, the Law was intended to provide basics of state budget, credit, price, insurance, regulations and other policies for stimulating agricultural production, developing agricultural markets, and ensuring food security for the population. To achieve these goals, the Law on State Support introduced particular state support instruments and gave an impulse to further legislative development on financial support for agricultural producers.150 It may be assumed that the adoption of this legislation was the first step towards establishment of agricultural market organisation in Ukraine. Lex specialis for regulation of grain production in Ukraine – Law on Grain and Grain Market151 (further Law on Grain) – was adopted in 2002, prior to the general regulatory track. Aimed at consolidating free competition and state regulation to guarantee a balance of business and state interests, while at the same time ensuring food security of the state, the law basically paraphrased (or in this case rather foretold) the support instruments provided in the basic regulation. Besides the binding legislative acts concerning agricultural support, there are also a bunch of special soft law instruments such as – national programmes 146 Law No. 2238, also the successive Law on Basics of State Agricultural Policy in the Period until 2015 No. 2982 of 18.10.2005. 147 For instance, Law No. 2982 consisted solely of five articles. 148 Preamble and Art. 1 of Law No. 2982. 149 Law on State Support for Agriculture No. 1877-IV of 24.6.2004. 150 Audit Chamber of Ukraine documented in 2007–2008 an increase in the number of regulatory acts directed toward providing financial support to producers, however, it was concluded that these acts failed to create effective farm support mechanisms. Audit Chamber of Ukraine. Report for 2008. 151 Law on Grain and Grain Market No. 37-15 of 4.7.2002 with amendments. The application scope of the Law extends to fruits of grain, legume and oilseed agricultural cultures used for food, seed, feed and technical purposes. Art. 1.11. of Law on Grain. At the same time, under the provisions of the igc Grain Convention oilseed is not considered to be “grain.” Art. 2(e) of Grains Trade Convention 1995. The processed products are not expressly included into the scope of the Law on Grain unlike the Law on State Support.

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for agricultural development and laws declaring Ukraine’s agricultural priorities. Several development programmes for the agricultural sector (or for specific products) were elaborated over the past two decades. Their legal status is, however, unclear.152 The proposed measures usually were not implemented and the level of compliance of state agricultural policy with the programmes is generally very low.153 The grain sector was one of the most favourite objects of the state programme instrument. The first programme “Grain of Ukraine 2001–2004,” ­adopted in 2000, called for ensuring both market conditions of agricultural development and state control over production and the grain market.154 The subsequent programmes155 intended to multiply domestic support for grain production and to increase investment into infrastructure in order to reduce producers’ costs. The latest development strategy for the agricultural sector is effective until 2020,156 again declarative and very brief, proposes a shift to the least trade-distortive subsidy instruments.157 Essentially, the grain programmes simply summarise facts and do not provide any detailed solutions. This short analysis of the legal framework conditions in Ukraine allows for the conclusion that the general legislative environment confers a broad policy space for use of agricultural support in the most distortive forms. The ­conceptual policy level (in particular, development programmes) that usually involves participation by producer associations also sustains the idea of subsidies expansion. 152 Law on State Target Programmes No. 1621-IV of 18.3.2004 provides that national economic programmes shall be adopted through laws. All agricultural programmes were introduced through bylaws. 153 For instance, the tasks and deadlines set out in State Target Rural Development Programme for the Period until 2015 (cmu Regulation No. 1158 of 19.9.2007) were not met (e.g. land market chapter (para. 2.16. seq.)), adaptation of National Sustainable Land Use Code (para. 2.25.), state regulation of organic agriculture (para. 2.28), establishment of rural banking system (para. 3.42.). 154 President Order No. 832/2000 of 29.06.2000 and the implementation of cmu Regulation No. 1739 of 27.11.2000. The programme implementation failed, since the budget law did not provide sufficient means for its enforcement. Audit Chamber of Ukraine. Report for 2009. 155 Both Grain Programme for 2004–2007 and the Grain of Ukraine 2005–2010 programme were adopted by Orders of Ministry for Agriculture. 156 cmu Regulation No. 806 of 17.10.2013. 157 The strategy mentions a shift to compensation support and direct support under the condition of environmental compliance, as well as gradual elimination of price support instruments.

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2.2.2 Organisation Forms of Agricultural Production in Ukraine 2.2.2.1 Individuals There are two organisational models of individual agricultural activities in Ukraine. Any person may carry on agricultural production without registration as a private household or may register as a physical individual entrepreneur. In the second case, the activities are subject to the general legislation supporting physical individual entrepreneurs.158 Regarding the right of this producer category to apply for agricultural state support, the eligibility criteria for every measure must be examined to establish whether natural individual entrepreneurs may obtain support. Private households do not possess legal personality and are characterised by individual or family production.159 Commercial purposes should theoretically play a secondary role for these units (they primarily aim “to meet personal needs” and to sell surpluses). Land plots owned or leased by a private household are limited to 2 ha.160 This acreage generally isn’t large enough to run commercial production of agricultural goods. Legally, individuals who lease or own more than 2 ha of agricultural land must register another form of production. The state legally guarantees aid to private households, but the law does not indicate the quantity and form of that aid.161 Moreover, private households acquire the same basic rights as other producers, i.a. the right to freely dispose over their production, to participate in competition for budget support and to conduct foreign economic activities.162 Notwithstanding this formal equality, the rights of private households are the least protected. Paradoxically, while they are hardly supported by the state, private households supply 158 It may be concluded that the general law on individual entrepreneurs is extended to those acting as agricultural producers. See Law on Development and State Support for smes in Ukraine No. 4618-17 of 22.03.2012, i.a. Art. 16.2. 159 A private household (subsidiary farm) in Ukraine is not defined as an entity, but as an activity. Art. 1 of Law on Subsidiary Farm No. 742 of 15.5.2003 provides the definition as “economic activity conducted by a physical person individually or by individuals-family members or relatives who live together, without creating a legal entity with the purpose to meet personal needs by production, processing and consumption of agricultural products, selling surpluses and rendering services by using the subsidiary farm’s property, including those in the sphere of countryside green tourism.” 160 However, the land parcel size may be increased if a land share is allocated in kind and inherited by members of the subsidiary farm in accordance with the law. Art. 5 of Law No. 742. 161 Art. 10 of Law No. 742 reads as: “Annually … the Cabinet of Ministers of Ukraine … shall envisage certain financing to support subsidiary farms.” 162 Art. 7 of Law No. 742.

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a ­considerable share of the country’s agricultural supplies.163 The number of private households in Ukraine is difficult to assess, but they may cultivate a sizeable portion of total agricultural land.164 2.2.2.2 Agricultural Enterprises Although enterprises may have various organisational structures, the U ­ krainian legislature establishes particular rules exclusively for farmers165 and collective enterprises.166 Under Ukrainian law, farmers are legal entities oriented to commercial agricultural production (individual or family production), which may be carried out exclusively by Ukrainian nationals.167 Farmers have a right to land allocation free of charge,168 while land in use is not capped. A substantial amount of land cultivated by these types of producers is leased. Collective enterprise is legally defined as a “voluntary union” of people (citizens).169 A remarkable feature of this organisation type is the collective property assets of the members.170 The participants who are willing to leave and establish their own new farm are entitled to receive their land share in kind.171 Collective agricultural enterprises are rare nowadays because these entities were being restructured in the 1990s and early 2000s. They were transferred to private agricultural enterprises or usually became branches or divisions of large corporate enterprises (agriholdings). Another rather rare legal form of agricultural producer is a cooperative, either an agricultural production cooperative or an agricultural cooperative for provision of services.172 163 For example, in 2009 private households produced 22 per cent of the total cereals supply and 12 per cent of the sunflower seed production. See www.ukrexport.gov.ua. 164 For example, the land ownership structure in the Dnipropetrovsk region (one of the agricultural regions) in 2013 was 31.1 per cent represented by agricultural enterprises and 39.4 per cent by individual producers. However, a large share of the individually owned land is supposed to be leased. 165 Law on Farming No. 973 of 19.6.2003. 166 Law on Collective Agricultural Enterprises No. 2114-XII of 14.2.1992 with further amendments. 167 “Legal entity aiming at producing agricultural goods, their processing and distribution to receive profits.” Art. 1 of Law No. 973. 168 Art. 7.5.–7.6. of Law No. 973. 169 Art. 1 of Law No. 2114-XII. 170 Joint property (“spilna chastkova vlastnist’”). Art. 7 of Law No. 2114-XII. 171 Art. 10.4. of Law No. 2114-XII. 172 Law on Agricultural Co-operation No. 469 of 17.07.1997 with amendments.

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In comparison to private household farmers and collective enterprises that have more guaranteed state support,173 cooperatives are less protected in this right.174 Agricultural enterprises represent the largest segment of agricultural producers in Ukraine, while farmers make up the majority of these enterprises.175 However, land distribution within different categories of producers varies, as corporations possess almost one half of all agricultural land in use by agricultural enterprises.176 The average acreage of arable land per each mid to large size enterprise is 2 080 ha, whereas the average area used by a farm is 106 ha.177 According to 2010 statistics, most cereals and sunflowers were produced by agricultural enterprises (respectively 75 and 82 per cent of the total harvest).178 Productivity of enterprises is reported to be higher than that of individuals. The share of agricultural enterprises in grain production may have, nevertheless, a downward trend.179 Intermediary Summary Ukrainian agriculture is signified by the individualisation process (a switch from collective to individual organisational forms) that brings it in line with world trends. Regardless of the significant share of small and mid-size agricultural enterprises in the total structure, the individualisation process in Ukraine is characterised by the concentration of land ownership in the hands of a few 173 Art. 9-11 of Law No. 973. 174 The state declares state support to agricultural cooperatives, but does not guarantee it. Art. 1 of Law No. 469. 175 In 2009 over 46 000 farmers and 15 000 other agricultural enterprises, including 41 000 farmers, were reported to operate in Ukraine. dg Agriculture. Ukraine’s Agriculture: Harvesting the Potential?, MAP No. 03-09, 2009 (further dg Agri 2009), p. 3. 176 Farmers use 11 per cent of agricultural land and mid- and large-scale agricultural ­enterprises cultivate 46 per cent of the total agricultural land. dg Agri 2009, p. 3. For instance, the land structure of agricultural enterprises in the Dnipropertovsk region is as follows: 579 private limited liability companies use 678 800 ha, 490 private land lease enterprises (collective farms’ successors) – 162 400 ha; 19 stock share companies – 24 400 ha; 15 ­cooperatives – 8 900 ha; 1 600 farmers – 355 200 ha; 833 other entities – 127 200 ha. Official information for October 2013 from State Department for Land Resources in Dnipropertovsk Region State Administration. 177 dg Agri 2009, p. 3; Bezlepkina, van Berkum, Rau, p. 40. 178 Kobuta I and others. Wheat Export Economy in Ukraine: fao Policy Studies on Rural Transitions 2012–4, 2012 (further Kobuta and others), p. 5. 179 In 2000 agricultural enterprises harvested 80 per cent of total grain production; in 2005 this share decreased to about 60 per cent. Ukraine–Canada Grain Project 2007, p. 37.

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(mostly large corporations).180 In this regard, the trend to integration of agricultural production should be scrutinised. 2.2.2.3 The Phenomenon of Vertical Coordination The phenomenon of complex vertical coordination in agricultural chains has been emerging in the Eastern European region over the last two decades.181 The original goal of the vertical processes was to secure agricultural output supply of good quality. For that purpose, contractors provided producers with inputs and assistance, i.e. in some sense, broken chains of production from the pre-transition times sought to be restored.182 Vertical coordination may generally be developed in private183 or public184 dimensions. Where developed countries tend to construct public or producerdriven schemes, the Eastern European practice, for various reasons, turned to vertical integration with the establishment of big private holding companies.185 As for Ukraine, a steep development of agricultural holding structures was the result of a favourable tax regulation, together with general economic benefits provided for large-scale agriculture.186 The agrarian reform, and in

180 Most agricultural enterprises have less than 50 ha agricultural land in possession, and the absolute majority operate with plots smaller than 500 ha. The minority acquires over 3 000 ha of agricultural land. State Statistics Committee of Ukraine. Agriculture of Ukraine, Statistical Yearbook 2009 through oecd. Implementing Credit Guarantee Schemes in Ukraine: The Case of Agribusiness (Project Sector Competitiveness Strategy for Ukraine Phase ii), 2012 (further oecd 2012), p. 32. 181 Although this phenomenon is not uncommon in other parts of the world, vertical integration in East Europe develops in the sectors not using this method in other countries. Further Swinnen A. Dynamics of Vertical Coordination in eca Agrifood Chains: Implications for Policy and Bank Operations, Washington, 2005 (further Swinnen 2005). 182 Swinnen 2005, p. 11; Swinnen J.; Vanderolas A. From Public to Private Governance of Agrifood Supply Chains in Transition Countries: Some Theoretical and Empirical Lessons. In: Csáki C.; Forgács C. (eds.) Agricultural Economics and Transition: What Was Expected, What We Observed, the Lessons Learned, Volume ii, Budapest, 2007, pp. 309–321, p. 313. 183 Through building of value chains for exportation and domestic markets. See oecd, wto. Aid for Trade and Value Chains in Agrifood, 2013, p. 14. 184 Through development of warehouse receipt systems and state interventions. Swinnen 2005, p. 37. 185 Swinnen 2005, p. 15. See also for details German–Ukrainian Agricultural Dialogue 2008, pp. 7–9. 186 Swinnen 2005, p. 21; fao, ebrd. Ukraine: Review of the Sunflower Sector, Report 02/074 ebrd-ukr of 14.11.2002 (further fao, ebrd 2002), pp. 21–23.

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particular the privatisation process and transfer of state agricultural enterprises into share companies, triggered the development of agriholdings.187 Ukrainian law defines a holding company as a stock company that acquired majority interests of at least two other companies.188 There are also informal agriholdings, i.e. economic and financial dependence on legal entities without any legal relationship (connections).189 Before the adoption of the Law on Holdings in 2006, all holdings used to be, in fact, informal, as the registration of holding structures had not been foreseen.190 Agriholdings currently appear in different forms191 and may concentrate both agricultural and non-agricultural activities, e.g. processing, inputs, banking, and services.192 This diversification of activities contributes to cash flow optimisation between production units, consequently resolving the investment problem since a stable financial situation throughout the year makes it easier for holdings to obtain credits in comparison to other agricultural producers. By the same token, agriholdings are also supposed to show a higher level of resistance against state restrictive policies.193 Due to these clear advantages, middle-scale agricultural companies have strong incentives to become holdings by means of land allocation and international investment.194 By 2010, Ukrainian agriholdings were using 21 per cent of all land held by agricultural enterprises,195 while the average per entity may exceed the m ­ edian for agricultural enterprises.196 Agriholdings can offer higher rents to land owners than farmers on the land lease market. However, there is no visible 187 See Sub-chapter 1.3. See also German–Ukrainian Agricultural Dialogue 2008, p. 6. 188 Art. 1 of the Law on Holdings No. 3528-IV of 15.03.2006 and Art. 126 of ComC. 189 Nesterchuk Y.; Golota V. Trends in Holding Development in Ukraine. In: Papers of Uman’ State Agrarian University, 71(2), 2009, pp. 30–37 (in Ukrainian) (further Nesterchuk, Golota). 190 President Order No. 224 of 19.5.1994 covered a narrow regulation segment for formation and holdings’ activities in the initial stage. 191 Nesterchuk, Golota, p. 30. 192 German–Ukrainian Agricultural Dialogue 2008, pp. 9–10. 193 Swinnen 2005, p. 6. 194 At the current stage of development, agriholdings tend to concentrate large land masses, enter into M&A transactions, and initiate ipos at international stock exchanges (mostly in Warsaw) as an instrument to attract foreign capital (majority of Ukrainian ipos were made for agricultural companies). Moreover, agriholdings may be funded through ­“foreign investment” of the related companies based in low tax jurisdictions. See ­German–­Ukrainian Agricultural Dialogue 2008, pp. 10, 15. 195 Kobuta I and others, p. 18. 196 The average area in use equals to 80 000 ha, and may reach 500 000 ha. German–­Ukrainian Agricultural Dialogue 2008, p. 3; Bezlepkina, van Berkum, Rau, p. 40.

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i­mbalance in favour of agriholdings as the number of private farmers leasing land grows.197 The impact of agriholdings on the land lease market is supposed to be positive overall.198 In the crop sector, agriholdings are more active in the grain segment than in horticulture.199 They demonstrate substantially higher yields than the sector on average, but simultaneously carry higher production costs.200 This is why cereal and sunflower production in agriholdings shows a lower average profitability than in other agricultural enterprises (e.g. profitability for sunflowers makes up, respectively, 17 and 47.5 per cent, for grain – 2.1 and 9.1 per cent), although the maximum results for a single agriholding may exceed 100–200 per cent of profitability.201 In general, agricultural integration is considered favourable for the entire Ukrainian rural sector, i.a. because of the positive impact on competition and product quality.202 On the other hand, the list of drawbacks associated with agriholding activities may also be quite long. First of all, they likely contribute to the income distribution problem: despite soaring revenues, holdings are reluctant to support rural areas where they lease their land.203 Another negative consequence is non-transparent price building practices arising out of numerous contract relationships within the integrated structures.204 Given the magnitude and implications of vertical integration processes in Ukraine’s agricultural sector, this phenomenon should not be ignored when designing the country’s agricultural policies. Intermediary Summary Formal equity of all agricultural production subjects in Ukraine is established by law.205 The government’s challenge is finding a sound balance for 197 German–Ukrainian Agricultural Dialogue 2008, p. 12. 198 The tendency’s positive implications may be cultivation of previously abandoned lands, increase in competition and lease payments growth. German–Ukrainian Agricultural Dialogue 2008, p. 12. 199 The agriholdings’ share of total cereal production was around 20 per cent in 2010, i.a. above 18 per cent for wheat, 30 per cent for maize, and 13 per cent for sunflower production. Their part in the total crop production is slightly above 10 per cent. Kobuta and ­others, pp. 19–20. 200 Ibid., p. 22. 201 Ibid., p. 24. 202 Swinnen 2005, p. 21; German–Ukrainian Agricultural Dialogue 2008, p. 14. Further Nesterchuk, Golota. 203 German–Ukrainian Agricultural Dialogue 2008, p. 7. 204 Wurzbacher, p. 117. 205 Preamble of Law No. 2114-XII.

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d­ evelopment of all farming forms and to responding to the duality within Ukraine’s agricultural sector between corporations (vertical structures, oriented to the external markets) and individual farms and producers (low-profit units producing labour-consuming crops). 2.3

Objective Handicaps for Agricultural Growth

2.3.1 Grain Production Costs In spite of being rather competitive in the world market, Ukraine’s grain sector is not characterised by low production costs. Its competitiveness is rather the result of rising yields.206 Even so, the yields per ha are still substantively lower than in most developed countries with less climate advantages (e.g. France and Germany).207 Furthermore, regardless of international competitiveness,208 profitability of grain production is unstable.209 The periods of decline may be explained by the fact that price building is not advantageous for agricultural producers; input prices are growing more quickly than output prices210 (thus, the common transitional agricultural problem persists211). Relatively low and uneven profitability of grain production, especially in the wheat sector, does not create 206 Einex C.; Lissitsa A.; Parkhomenko S. Getreideproduktion in der Ukraine – eine komparative Analyse von Produktionskosten. Discussion Paper of Institute of Agricultural Development in Central and Eastern Europe, 79, 2005. The grain yields in Ukraine are, however, lower than they used to be in 1990 (35.1 c/ha comparing to 24.1 c/ha in 2006 and 29.7 c/ha in 2009, for wheat correspondingly 40.2 c/ha in 1990, 25.3 c/ha in 2006, and 36.7 c/ha in 2008). Klimenko, p. 39; Kobuta and others, p. 13. 207 Ukraine–Canada Grain Project 2007, p. 14. 208 44 per cent of Ukrainian farms have competitive wheat production, 41 per cent are profitable in sunflower production, 25 per cent – in barley production, 10 per cent – in rapeseed growing and 13 per cent in the maize sector, albeit showing a high degree of competitive heterogeneity. Strubenhoff, Movchan, Buriakovski, pp. 33–35. 209 The average profitability of cereal production in Ukraine made up 275 per cent in 1990, 65 per cent in 2000, 20 per cent in 2004, 13.7 per cent in 2010, 26 per cent in 2011, 2 per cent in 2013, 26 per cent in 2014, comparing to an average 64.5 per cent profitability for sunflower and 25.9 per cent for rapeseed production. A large share of the farms are unable to cover their input costs. See Ukraine–Canada Grain Project 2007, p. 4; Strubenhoff, Movchan, Buriakovski, p. 35; usda. Ukraine: Oilseed and Products Annual Report, gain Report, Washington, 2016, p. 3. 210 For example, in 2000–2004 the purchase price index for agricultural goods increased by 25.7 per cent, while the same indicator for industrial goods – by 46 per cent. Audit ­Chamber of Ukraine. Report for 2003–2004. 211 See Sub-chapter 1.2.

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incentives for expanding production and often forces producers to switch to oilseed or coarse grain planting, where income is higher or production costs are lower.212 As a consequence, wheat production in Ukraine is volatile, although there’s been a recent upward trend.213 Current expansion of the forage cereals sector is not as lucrative as the potential of food wheat production.214 The situation is aggravated by additional costs on the production side, i.a. transportation, storage, certification etc. These costs may account for the ­underdevelopment of infrastructure (e.g. insufficient port and elevator ­capacities, especially after the Crimea and the Donbas crisis), but also for the consequences of monopolistic abuse of power (e.g. railways fares are set by the government and a large share of grain stores are in the possession of staterelated institutions). To rectify this obstacle, private grain exporters tend to invest in market infrastructure (predominantly in elevator and port facilities) without involvement from the state. Export duties imposed by the government create additional costs and ­further reduce producers’ prices. As a consequence, Ukrainian agricultural producers obtain on average only 60 per cent of the world market price compared to a­ lmost 90 per cent flowing to French farmers.215 This inequality exists also at the national level since different kinds of producers often receive diverse prices for their goods. Similar discrepancies also exist between regions.216 From this short overview of price building in the grain sector it can be determined that production costs, which are a central decision-making factor in agriculture,217 constitute a major economic handicap for efficient sector development.

212 See e.g. on this phenomenon Kandul S. Financial Crisis and Ukrainian Agriculture: Impact and Response. Policy Paper Series German–Ukrainian Policy Dialogue in Agriculture, 27, 2009 (further Kandul), pp. 15–16. 213 In 2003 Ukraine’s wheat production equalled 3.6 million t (a bad harvest year); in 2004 – 17.5 million t; in 2008 – 24.2 million t; in 2010 – 17.2 million t; in 2014/2015 – 24.7 million t, and in 2015/2016 – 27.2 million t. oecd; fao. Agricultural Outlook: Highlights 2011 url: http://dx.doi.org/10.1787/wheat-table-2011-1-en; usda. Ukraine: Grain and Feed Annual, gain Report, Washington, 2016, p. 14. 214 Most wheat harvested in Ukraine is feed wheat (67 per cent). Its share in the wheat export structure reaches on average 50 per cent with spikes up to 90 per cent documented in single years. At the same time, the share of wheat use in feedstock production decreases and is replaced by maize, barley and oil-plant processing products. Kobuta and others, p. 28. 215 Similar proportions are observed when comparing to other exporting countries with ­efficient infrastructure and marketing systems. be Berlin Economics, pp. 2–4. 216 See e.g. Strubenhoff, Movchan, Buriakovski, p. 59. 217 oecd; wto. Aid for Trade and Value Chains in Agrifood, 2013, p. 10.

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2.3.2 Farm-gate Prices Grain markets, like other agricultural markets, are sensitive to seasonal imbalance in demand and supply. Small and middle-size Ukrainian producers tend to sell cereals during periods of oversupply (just after harvesting) due to ­limited storage. By doing so, they tend to receive the lowest price for their product.218 The Ukrainian grain sector is trying, without much success, to escape this ­pattern where expanded production leads to a price fall. Even in 2008, a year of soaring world prices, domestic grain prices were low and many farmers sold their crops below their profitability.219 The problem of low farm gate prices may be partially resolved by market “self-cure.” Specifically, small producers should sell their grain to large e­ xporters on forward conditions when farm gate prices are calculated as the difference between export prices and transaction costs (transportation, certification). This vertical coordination scheme, if it proceeds without intermediaries, may be rather efficient.220 However, since the share of intermediaries in Ukrainian supply chains is estimated to be 50–80 per cent, the farm gate prices tend to be dumped. Low access to infrastructure by small producers forces them to sell the harvest at disadvantageous prices. 2.3.3 Sustainability Concerns Lower input costs in the oilseed sector (particularly sunflower seeds) made it extremely attractive to farmers because of favourable market dynamics that resulted in expanded land areas under these crops. But any monocrop production, especially the sowing of oilseed in the same place and in violation of crop rotation rules, is very harmful to the soil. Absence of a land market and the spread of short-term land lease schemes indirectly stimulates profitable but environmentally dangerous oilseed production. Thus, the market may be not capable of targeting negative externalities associated with swelling grain and oilseed production. In this regard, the current economic situation is contradictory: consecutively planting similar crops must be avoided to ensure further high yields, but short-term rotation systems are now the most profitable. Another critical sustainability concern is a gradual increase in the use of mineral fertilisers in parallel with a decreased use of organic fertilisers because of a remarkable fall in Ukrainian livestock production. Such fertilizing m ­ ethods may endanger the normal balance of nitrogen, phosphor and p ­ otassium in 218 See also Ukraine–Canada Grain Project 2007, p. 45. 219 Only large-scale producers with own storage capacities were not forced to sell at low prices. 220 Ukraine–Canada Grain Project 2007, p. 46.

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soils. The resulting imbalance may not only lead to a decrease in yields, but also to environmental harm and public health issues.

Conclusion on Chapter 2

The transition states of Eastern Europe and the former ussr have been developing their trade and agricultural policies rather differently but with some similar features. The differences between countries are presumably the result of strategy choices, the influence of external commitments (within the wto, with the eu, ifc, imf), as well each country’s unique historic background. The ceecs that chose rapid market reform and had strong eu support were obviously much more successful than their Eastern partners. In Ukraine, twenty years of agricultural reforms were marked by continuous struggle between adherents and opponents (conservatives) of changes. As a result, structural reforms in Ukrainian agriculture started only at the end of the 1990s. The negative consequences of the incomplete transformation are aggravated by lack of investment into rural areas over the course of the last twenty years. There are three basic interconnected disadvantages for Ukraine’s grain market: – Additional production costs due to poor market infrastructure and excessive regulation; – unfavourable price development for small producers (increase of income discrepancies); – a missing land market that is aggravating the lack of financial resources. Besides these producers’ income-related problems, further negative externalities are associated with the expansion of agricultural production, i.a. soil degradation and deformation of product structure. On the other side, it may be concluded that agriholdings do not suffer from the same disadvantages given the extent of production (economy of scale) and accessibility of financial resources. However, these entities may expand the dimensions of negative externalities by their agricultural practices. With this in mind, it could be assumed from an economic standpoint that solutions to the producer income issue should target small and mid-scale producers only, while efforts to combat negative externalities should be applied to all production units.

chapter 3

External Factors with Influence on Ukrainian Grain Policies

Scope of the Chapter

The purpose of this chapter is to identify the channels of influence in international law that are shaping domestic agricultural regulation. In order to achieve this, it will start by determining the multilateral rules on agricultural trade (Sub-chapter 3.1.). Since agricultural trade is treated differently from trade in industrial goods, this distinction will be highlighted. (Sub-chapter 3.1.2.). In the following, the pillars of the wto agricultural regulation (AoA) will be analysed (Sub-chapter 3.1.3.). The major focus will be on the domestic support calculation required from wto members, as well as the widely spread “exempt” policy measures. This will establish the theoretical ground for further examination of specific policy measures in the eu and Ukraine. Next, the progress within the agricultural track of the ongoing wto ­reform will be briefly presented (Sub-chapter 3.1.4.). The separability of agricultural rules will be considered, followed by an overview of the negotiation process over the last 15 years. After identifying the positions of key players, the cornerstones of the draft agricultural regulation will be scrutinised. The overall goal of Sub-chapter 3.1. is to establish a theoretical base for interpreting European and Ukrainian policies in the successive parts of the research. In the second part of the chapter, the interplay between multilateral and ­regional rules will be analysed (Sub-chapter 3.2.). Ukraine signed several ­regional trade agreements (rtas) and has aspirations to expand the circle of its preferential trade partners. In this context, both the compliance of rta provisions with wto disciplines, and the interplay between them, should be examined. The focal point will be the recently signed eu–Ukraine ­Association Agreement (aa) and its core element, the free trade agreement (Sub-­chapter 3.2.2.3.). The impact of this legal tool on the signatories’ grain trade will be presented by first, identifying entry barriers to the eu market. That will be followed by an analysis of the specific commitments concerning bilateral grain trade between the eu and Ukraine. The conformity of the rta with the ­disciplines of Art. xxiv of the gatt will also be evaluated. Finally, the legal ­approximation track for agricultural in the eu–Ukraine

© koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004353695_005

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aa must be examined, as well as its potential to reconcile possible legal conflicts. After reviewing the eu–Ukraine aa, its disciplines will be compared to ­agriculture-related rules under other treaties concluded by Ukraine (Subchapter 3.2.2.4.). The examination will include two tracks: the fta with the efta States, and the economic integration process between the cis. The subchapter will close by evaluating the reciprocal impact between the eu–Ukraine aa and the cis integration projects. 3.1

Implementation of Agricultural Disciplines within World Trade Law

3.1.1 Emerging Power of the wto It is widely recognised that international trade law (the wto/gatt ­regime) shows one of the highest degrees of legalisation.1 That “hard” legalisation2 ­ implies certain potential to reduce the economic policy space of states. Being a multilateral international organisation by nature, the wto has ­specific features of interplay with international and national legal norms. ­Observing from the position of general international law, the wto/gatt ­system is a rare example of a “self-contained regime,” i.e. lex specialis excluding the application of norms of other international law. The common ­opinion, however, persists that this system remains a subsystem of international public law3 inasmuch as the wto norms do not include an opt-out, i.e. parties can derogate from international law provisions, but they cannot get out of the

1 See Goldstein J.; Martin L. Legalisation, Trade Liberalisation, and Domestic Politics. In: Goldstein J.; Keohane R. and others. (eds.). Legalisation and World Politics, Cambridge ma, 2001, pp. 219–248 (further Goldstein, Martin), pp. 222–224. At the same time, increased legalisation of international trade would not contribute to a higher degree of trade liberalisation, since it may have an impact on trade-related interests of domestic actors and mobilise protectionist interests. Goldstein, Martin, pp. 220, 222, 225. 2 Abbott K.; Keohane R. and others. The Concept of Legalisation. In: Posner E.A. (ed.) Economics of Public International Law, Northampton, 2010, pp. 307–320, pp. 310–312. 3 McRae D. The Contribution of International Trade Law to the Development of International Law. In: The Hague Academy of International Law, Recueil des Cours, Volume 260, 1996, pp. 99–238, pp. 116–117; see also Pauwelyn J. Conflict of Norms in Public International Law: How wto Relates to other Rules of International Law, Cambridge, 2003 (further Pauwelyn), p. 31; Babu R. Remedies under the wto Legal System, Leiden, 2012, p. 99.

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system of international law.4 In any case, once a self-contained regime fails, recourse to general law is supposed to be allowed.5 On the other hand, the wto provisions require compliance for national legal orders. Bhuyain specifies the obligations that regulate the relationship between the wto law and the national laws of its members as systemic ones.6 This category encompasses the obligations on implementation, transparency (publication under Art. x of the gatt and obligations to notify), and administration of national laws (Art. X:3(a) of the gatt). The mechanisms in focus are to be strengthened by the instruments of control over national norms.7 The core wto systemic commitment is Art. XVI:4 of the wto Agreement that requires all wto members to comply with their obligations under the gatt/wto regime, while the members have some flexibility in the implementation of this legal requirement.8 In spite of that, Petersmann determines Art. XVI:4 of the wto Agreement is a constitutional principle establishing the supremacy of wto norms over national laws.9 The application of this norm by the dsb seems to confirm his position. Due to the fact that the dsb sees a violation of another norm of the gatt/wto as triggering Art. XVI:4 of the gatt, it could be suggested that the latter has the nature of a principle.10

4

Art. 3.2. of the dsu provides that interpretation of wto norms shall be executed in accordance with the provisions of international public law, i.e. Art. 31 and 32 of the vclt. See also ilc. Fragmentation of International Law: Difficulties Arising From the ­Diversification and Expansion of International Law, 2006 (further ilc Report), pp. 68 seq., especially 71. 5 None of the treaty-regimes in existence today is supposed to be self-contained in the sense that the application of general international law would be generally excluded. ilc Report, pp. 82, 91, 101. 6 These types of obligations are distinguished from substantive obligations (standard of treatment). See Bhuiyan S. National Law in wto Law: Effectiveness and Good Governance in the World Trading System, Cambridge, 2007 (further Bhuiyan), pp. 43–44. 7 Especially, Art. 21 of the dsu, provisions of special agreements, as well as the wto Trade Policy Review Mechanism (tprm) (Annex 3 to the wto Agreement). 8 “The Member concerned must be allowed the maximum autonomy in ensuring such conformity and, if there is more than one lawful way to achieve this, should have the freedom to choose that way which suits it best.” Panel Report us-Section 301 WT/DS152/R, para. 7.102. 9 Petersman E.U. Constitutionalism and International Organisations. In: ­Northwestern Journal of International Law and Business, 17(1), 1997, pp. 398–469, p. 428; see also ­Bhuiyan, p. 62. 10 Panel Report ec-Bananas iii WT/DS27/R/USA, para. 7.308; Appellate Body Report ec-Hormones ii WT/DS26/AB/R, WT/DS48/AB/R, para. 128. In the absence of the breach of other wto provisions no violation of Art. XVI:4 of the wto Agreement has been found yet (e.g. Appellate Body Report us-Carbon Steel WT/DS213/AB/R, para. 177).

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Alternatively, Bhuiyan opines that a gatt/wto obligation to adapt ­ ational laws to international obligations is a lex specialis. According to his n argument, in the absence of a direct indication of the compliance requirement within the gatt/wto system, the general rules of international law (namely, Art. 26, 27 of the Vienna Convention on the Law of Treaties (vclt)) would apply11 and have basically the same effect as Art. XVI:4 of the wto Agreement. In addition to the overall requirement for compliance with the wto Agreement, some multilateral wto agreements impose separate obligations on members for conforming to their rules12 (quasi lex specialis of the gatt/wto order). Contrary to Art. XVI:4 of the wto Agreement that requires compliance only with the taken obligations, these multilateral agreements demand conformity with all provisions of the specific agreement.13 Nevertheless, the legalisation of compliance clauses in the multilateral agreements is less ­severe (“take necessary steps”) than the strict obligations of Art. XVI:4 of the wto Agreement. Thus, every measure that may be “in principle any act or omission attributable to a wto Member”14 and that is not compliant with any obligation under the gatt/wto law and/or with any provision of the multilateral wto agreements containing a “compliance clause,” as well as the measures that do not violate any wto commitments under conditions set out in Art. XXIII:1(b) of the gatt, may be seen as non-conforming and have potential legal consequences.15 Reversing this statement, and following Pauwelyn, in the context of

11 12 13 14

15

Bhuiyan, p. 58. E.g. Art. 18.4. of the wto Antidumping Agreement (ada), Art. 32.5. of the scma. Similarly by Bhuiyan, p. 56. The definition of a measure may be specified in other wto agreements, e.g. gats, sps Agreement and Antidumping Agreement. See Yanovich A.; Voon T. What Is the Measure? In: Mitchell A. (ed.) Challenges and Prospects for the wto, London, 2005, pp. 115–164 (­further Yanovich, Voon), p. 134. According to Art. 3.3. of the dsu the task of the wto dispute settlement is to deal with the situations where a “Member considers that any benefits accruing to it directly or indirectly under the covered agreements are being impaired by measures taken by another Member” (similar emphasis in Art. 3.7. of dsu – withdrawal of “measures … found to be inconsistent with the covered agreement”). The Appellate Body ruled that “In principle, any act or omission attributable to a wto member can be a measure for the purposes of dispute settlement.” Appellate Body Report us-Corrosion Resistant Steel Sunset Review WT/DS244/AB/R, para. 81. Furthermore, Art. XXIII:1(c) of the gatt and Art. 26.2. of dsu also authorise challenge of “situations” other than taking a measure.

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the wto dispute settlement, any measure that is not prohibited under a wto treaty must be allowed.16 Regarding the question as to what may constitute a measure within the wto, the previous gatt and dsb practice used to deal only with m ­ andatory ­legal rules. However, the us-Section 301 case challenged this approach and paved the way for sanctions against certain discretionary legal provisions.17 One of the  ­arguments in favour of challenging discretionary legal norms is the fact that economic regulation, even if not applied, may have a “chilling effect” on private operators.18 Consequently, where a legal act provides a possibility for action, it does not matter whether this possibility is used.19 Therefore, the scope of a “measure” includes both legislative acts of general and prospective application (per se challengeable, challenge of a measure “as such”) and acts applied in specific situations (challengeable “as applied”).20 The passage from Art. XVI:4 of the wto Agreement requiring conformity with obligations may be interpreted in a way that the coverage of discretionary ­legal provisions would depend on the precise requirements of the wto obligations concerned.21 Hence, it could be concluded that mandatory norms may be challenged “as such,” while discretionary measures are normally only challenged “as applied” (provided that inconsistency with the wto provisions is established).22 The exceptions of this rule seem to be multilateral agreements with compliance clauses that directly provide for compliance with the text of 16 17

Pauwelyn, p. 154. Within the wto system, incompatible legislation may constitute a breach by itself, i.e. “as such” (even if not in application). Panel Report us-Section 301, paras. 7.41., 7.54., 7.80. Different approaches were taken later by Panels in us-Export Restraints (WT/DS194/R, paras. 8.77. seq., 8.8.-8.9.) and Canada – Aircraft (1999) (WT/DS70/R, para. 9.124). In contrast to the wto system, the icj does not regard domestic law to be the source of a breach, but solely an unlawful act of a state (e.g. Arrest Warrant Case). See Bhuiyan, p. 39. 18 Panel Report us-Section 301, para. 7.76. 19 “Where the regulation provides for a right, whether this right is performed is not relevant to consideration of violation.” Panel Report Argentina-Bovine Hides WT/DS155/R, para. 2(d) XI.2. 20 Appellate Body Report us-Corrosion Resistant Steel Sunset Review, para. 82. Yanovich, Voon, p. 126. 21 Panel Report us-Section 301, para. 7.53.; Davies A. Mandatory and Discretionary Legislation  in wto Law: A Distinction Worth Preserving? In: Legal Issues of Economic ­Integration, 31(3), 2004, pp. 185–218, p. 187. 22 The “existence of some form of legislative discretion alone is not sufficient for a law to be prima facie wto-consistent, what is important is whether the government has an effective discretion to interpret and apply its legislation in a wto-consistent manner.” Panel Report us-Countervailing Measures Concerning Certain Products from the European Communities

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the agreement.23 Thereby, allegedly, the subsidy regulation may be potentially challenged “as such.” At the end of the day, the question of whether a measure is mandatory or discretionary in nature remains complicated and will likely require an interpretation of national law.24 Regarding the source of the measure, in most cases it will be a legal act, ­although the judiciary tends to expand the coverage to all kinds of de facto binding rules.25 As a consequence of the major role of national trade regulation, some recently acceded wto members had to make commitments to transparency, namely, prompt publication of all trade-related legislation,26 and to a reasonable allotment of time, usually no less than 30 days, for members to comment on new legislation, except for emergency cases.27 In addition to disciplines on the content of national legal rules, the wto employs disciplines on their implementation. Searching for transparency of members’ regulation, Art. X:3(a) of the gatt requires administration of trade-related laws, regulations, rulings and decisions “in a uniform, impartial and reasonable manner.” Uniform administration requires consistency and predictability and is not just limited to ensuring equal treatment (which is covered by the mfn requirement).28 Reasonableness relates to the “access to certain information which is irrelevant to the stated purpose of the legislation in question”29 and impartiality, in its turn, concerns persons who have access to WT/DS212/R, para. 7.123., see also 8.1. See also Appellate Body Report us-Corrosion Resistant Steel Sunset Review WT/DS244/AB/R, para. 89 and Yanovich, Voon, p. 147. 23 On the impact of Art. 18.4. of the ada see Panel Report us-1916 Act, para. 6.168. The decision on mandatory/discretionary distinction under scma must allegedly have the same outcome due to the identical text of Art. 18.4. of ada and Art. 34.5. of the scma. 24 Bhuiyan, pp. 213–238. 25 Appellate Body in us-Corrosion-Resistant Steel Sunset Review (para. 87) decided specifically on Art. 18.4. of ada that not only “laws, regulations and administrative procedures,” but also “the entire body of generally applicable rules, norms and standards adopted by Members in connection with the conduct of anti-dumping proceedings” must be compatible with the ada. Voon and Yanovich suggest that the identical text of Art. XVI:4 of wto Agreement would be interpreted by the Appellate Body in the same manner. Yanovich, Voon, p. 133. 26 In case of Russia even prior to the adoption of the legislation. WT/ACC/RUS/70, para. 1427; WT/MIN(11)/2. 27 E.g. Ukraine (WT/ACC/UKR/152, para. 498); Russia (WT/ACC/RUS/70, paras. 1426–1428). 28 Panel Report Argentina-Bovine Hides, para. 2(d) XI.6. 29 The dsb found unreasonable the administration not precluding “the possibility of revealing confidential business information.” Argentina-Bovine Hides, para. 3(c) XI.9.

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such ­information.30 Decisions regarding violation of Art. X:3(a) of the gatt can only be made after thorough examination of possible impacts by alleged partiality, unreasonableness or lack of uniformity of the challenged practice on the competitive situation.31 It is generally undisputed that compliance with international obligations may be evaluated only through effective and transparent monitoring mechanisms.32 The wto regime uses a system of notifications33 (quasi self-control), to accomplish this. A range of gatt articles require that members submit ­notifications on particular measures (e.g. Art. xi and xvii of the gatt etc.). Notifications together with the trade policy review mechanism (tprm)34 are the most important sources of information on domestic policies. Intermediary Summary Summarizing the arguments provided above, it could not be deduced that the wto order is hierarchical to national and other international legal orders,35 but one should agree that this interaction is rather of a “heterarchical”36 nature due to the interdependency of the mechanisms. Nevertheless, given the high degree of legalisation, the wto may have significant impact on the economic regulations of its members. The constitutionalisation of the organisation (i.a. enforcement mechanisms, as well as a broad understanding of policy non-compliance with the rules), may make this impact even stronger. However, the possibility to opt out of legal agreements within the wto/gatt system at the time of accession (Art. xii–xiii of 30 31

32 33

34 35 36

Panel Report Argentina-Bovine Hides, para. 3(c)XI.1. Panel Report Argentina-Bovine Hides, para. 2(d) XI.2. At the same time, the dsb practice showed unwillingness of the judiciary body to analyse the consistency of the acts falling within the scope of Art. X:3(a) of the gatt with the national legislation (e.g. us-Stainless Steel, paras. 6.50.–6.51.). See Bhuiyan, p. 78. Herrnfeld, p. 13, Chayes A.; Chayes A.H. The New Sovereignty: Compliance with International Regulatory Agreements, Cambridge ma, 1998, pp. 135–137, 142. General obligation to notify encompasses publication and notification as to para. i of Decision on Notification Procedure. Notification may be opposed to authorisation, as the sovereign state is not to ask for permission for its actions. Ibid., p. 168. The frequency of review depends on the share in the world trade of a specific wto members. Part C of Annex 3. In spite of the unprecedented influence of the wto system on national legal systems, as according to Tietje, p. 69. There is no hierarchy of norms, as all norms and systems are interdependent. See e.g. Schmid C. Multi-level Constitutionalism and Constitutional Conflicts: Interconnecting the National, European and International Economic Constitutions in the Banana Dispute, Florence, 2001, p. 267.

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the wto Agreement), the waiver procedure (Art. IX:3 of the wto Agreement), as well as the right to withdraw itself from the wto Agreement (Art. xv of the wto Agreement) may soften to a certain extent the systemic obligation of compliance. 3.1.2 Particularities of Multilateral Regulation on Agricultural Trade Initially, agriculture was formally included into the gatt subsidy regime,37 but these disciplines had been ignored before the establishment of the wto by a simple refusal of enforcement or waivers (e.g. the us waiver).38 In the 1950s, the first substantive obligations on subsidies, export subsidies disciplines, were included in the gatt text.39 They imposed the ban on export subsidies for non-primary products, and attempted to limit export support provided for primary products.40 This reform was the start of distinctive treatment of agriculture within the gatt system. Nonetheless, the first multilateral instrument of subsidy rules, the Tokyo Round Subsidies Code 1979,41 was applicable to both industrial and agricultural goods (with some differences), but because it was not automatically binding to all gatt signatories, it failed to succeed in strengthening agricultural disciplines.42 In regard to the abovementioned constraints, after the opening of the Uruguay Round of negotiations, the us and the Cairns group43 insisted that a signed agreement liberalising agriculture trade was a condition for the signing of an agreement on further overall trade liberalisation.44 This diplomatic pressure was successful and in 1986 the Punta del Este Declaration launched the 37 The gatt 1947 contained only a few provisions on subsidies. Art. XVI:1 of the gatt 1947 established the general notification requirement and Art. II:4 of the gatt set forth the general obligation against the use of new subsidies to inhibit imports into the subsidizing country. 38 That was one of the grounds why the gatt regime was highly criticised in the international community. 39 In course of the 1955 Review Session of the gatt, Section B of Art. xvi of the gatt was introduced. 40 The vague concept of “more than equitable share” of the world export trade as a limitation criterion under Art. XVI:3 of the gatt did not manage to control agricultural subsidies. See Sykes, p. 647. 41 Agreement on Interpretation and Application of Articles vi, xvi and xxxiii of the gatt of 1979. 42 The Tokyo Round Subsidies Code also made use of the concept of “more than equitable share.” For details on development of agricultural disciplines before the Uruguay Round see Sykes, pp. 644 seq. 43 A group of agricultural net-exporting states. 44 For details see O’Connor, p. 17.

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­agricultural negotiations. However, the final consensus on agricultural regulation was difficult to achieve. While the initial negotiation mandate considered joint regulation of agricultural and industrial trade policies,45 the compromise of the Uruguay Round previewed a progressive (gradual) liberalisation for trade in agriculture. Although the gatt 1994 covers both industrial and agricultural goods, the latter are provisionally not regulated by the general rules on subsidies (scma), but are subject to the sectoral regulation (AoA).46 Thereby, the specificity of agriculture within the global trade system was confirmed. ­Today, it is the only branch of the economy with its own multilateral agreement in the gatt/wto regime. Furthermore, the fact that the AoA is listed first in Annex 1 of the wto Agreement immediately after the gatt 1994 may indicate that it was one of the greatest achievements of the entire Uruguay Round.47 The AoA is regarded as the most complex agreement under wto48 because of the significant preparatory work required to interpret the document,49 the large implementation space left for members,50 and relatively vague control procedures. Furthermore, the AoA legal framework gives a special role to the schedules of concessions and member commitments as to the integrated parts of the gatt.51 This overcomplexity may be explained with the assumption that negotiators were searching to secure flexibility of the disciplines.52 45

Preamble of Ministerial Declaration of 20.9.1986 (Punta del Esta Declaration): “Negotiations shall aim to achieve greater liberalisation of trade in agriculture and bring all m ­ easures affecting import access and export competition under strengthened and more operationally effective gatt rules and disciplines.” 46 Both scma and AoA are multilateral agreements in the Annex 1 to the wto Agreement. 47 O’Connor, p. 83. 48 World Trade Report 2006, p. 193. 49 The Modalities for the Establishment of Specific Binding Commitments under the ­Reform Programme MTN.GNG/MA/W/24 of 20.12.1993 (further Modalities 1993) are “supplementary” for interpretation of the AoA provisions in the sense of Art. 32 of the vclt (Panel Report ec-Export Subsidies on Sugar WT/DS265/R, para. 7.2.). See O’Connor, p. 37. On the other hand, Modalities 1993 stipulated that they were not to be used as a basis for dispute settlement proceedings under the wto agreements. 50 See Switzer S. Biofuels, Food Security and the wto Agreement on Agriculture. In: ­McMahon J.A. (ed.) Research Book on wto Agreement on Agriculture, Cheltenham, 2012, pp. 250–271 (further Switzer), p. 257. The states basically accepted only common policy targets. 51 Art. 3.1. of the AoA, Appellate Body Report ec-Computer Equipment WT/DS62/AB/R, para. 11. 52 This phenomenon is referred to as “constructive ambiguity.” See e.g. Petersmann E.-U. Strategic Use of wto Dispute Settlement proceedings for Advancing wto Negotiations on Agriculture. In: Petersmann E.-U. (ed.) Reforming the World Trading System:

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The structure of the AoA is grounded in three interconnected pillars: m ­ arket access, domestic support, and export competition. They will be illustrated in the next sub-chapter. 3.1.3 A Short Overview of the AoA Disciplines 3.1.3.1 Market Access The major achievement for market access in the Uruguay Round was mandatory tariffication, i.e. the conversion of non-tariff barriers into a tariff equivalent.53 It was required that the entire body of tariff equivalents, i.e. all border measures other than ordinary customs duties, be converted into tariffs.54 The goal of cutting custom duties led to a compromise on tariff reduction commitments for agricultural goods. The average reduction was 36 per cent and the minimum reduction level for each tariff line was 15 per cent.55 All tariff lines were to be bound. That means that wto members are not allowed to ­ apply a higher duty than the bound one on imports from other wto members.56 The downside of what at first appears to be a very fair approach, is the legitimacy of persisting prohibitive high bound tariffs for certain agricultural products.57 Accordingly, the gap between bound tariffs and applied tariffs could be too large and contribute to the uncertainty of market access commitments. For that reason, it is not entirely accurate to claim that the tariff negotiations in the Uruguay Round improved access for all categories of goods.58 Furthermore, because there is no obligation on minimum market a­ ccess under the AoA,59 and the wto mfn principle is not identical to that of L­ egitimacy, Efficiency, and Democratic Governance, Oxford, 2005, pp. 127–144 (further Petersmann 2005), pp. 128–129. 53 The process of tariffication includes three elements: scheduling of tariff concessions and tariff quota commitments (Art. II:1(b) of the gatt and Art. 4.1. of the AoA); prohibition of non-tariff measures (Art. 4.2. of the AoA, footnote 1 of the AoA, Annex 5 of the AoA), and special safeguards provisions (Art. 5 of the AoA). 54 Art. 4.2. of the AoA, Annex 3 of Modalities 1993. On the pitfalls of calculation of tariffication see O’Connor, p. 172. 55 Para. 5 of Modalities 1993. 56 Ibid. 57 O’Connor, p. 20. 58 For instance, the highly protective Entry Price System in the eu was the result of the ­tariffication process, as well as Chile’s variable import tax on agricultural products searching to protect its domestic market from price fluctuations (found inconsistent with Art. 4.2. of the AoA in the mid-2000s). See Appellate Body Report Chile-Price Band WT/ DS207/AB/RW. 59 Modalities 1993 (para. 14 of Annex 3) operate with the term “minimum access opportunities.”

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­non-discrimination,60 wto members are generally entitled to set up minimum access opportunities in the form of tariff quotas (trqs) on the mfn basis.61 Since the AoA does not cover trqs, this issue is governed by Art. xiii of the gatt.62 Art. XIII:1 of the gatt prohibits discrimination when administering quantitative restrictions (“similar treatment”), and requires fair distribution of quota shares based on the expected trade flows from supplying countries.63 Nonetheless, Art. XIII:2(d) of the gatt explicitly allows wto members to treat those with a substantial supplying interest differently when allocating quota shares among them. This provision does not allow wto members to deviate from the basic mfn principle in Art. XIII:1 of the gatt,64 but rather authorises treating other members with a substantial supply interest differently in proportion to the expected trade shares that would have been imported in the absence of a specific trq. The selection of a representative period for the implementation of Art. XIII:2(d) of the gatt is made by a party imposing trqs.65 Normally, the most recent three-year representative period is used for the calculations.66 Art. XIII:4 of the gatt allows for the reallocation of quotas among the supplying countries, a change of the selected base period, and an option for the reappraisal of special factors involved. These special factors include changes in relative efficiency between domestic and foreign producers, e.g. “the existence of new or additional ability to export,”67 but do not typically cover changes 60 61 62 63

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Non-discrimination treatment is generally expressed by the term “no less f­avourably” while the mfn principle generally only refers to equal treatment. O’Connor, pp. 160–161. Para. 14 of Annex 3 of Modalities 1993. Appellate Body Report ec-Bananas iii WT/DS27/AB/R, para. 157. Allocation “as closely as possible” to the shares which the exporting parties “might be expected to obtain in the absence of such restrictions” is required (chapeau of Art. XIII:2 of the gatt). On the other hand, the dsb findings in ec-Bananas iii could be interpreted in a way that the measure inconsistency with the provisions of Art. xiii of the gatt does not necessarily lead to the non-compliance with the mfn principle of Art. i of the gatt. See Panel Report ec-Bananas iii (21.5-Ecuador ii) WT/DS27/RW2/ECU, para. 7.304., see also O’Connor, p. 163. Art. XIII:4 of the gatt. Panel Report eec-Apples (Chile i) bisd 27S/98, para. 4.8.; Panel Report ec-Bananas iii WT/DS27/R/ECU, para. 7.101. For instance, Chile’s increased apple export capacity was found to be a special factor when allocating quota shares from the Southern Hemisphere. Panel Report eec-Apples, para. 4.17.

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artificially promoted by means not permitted under the gatt.68 By the same token, the dsb in EC-Bananas iii ruled that it would be inconsistent with Art. XIII:2(d) and Art. XIII:4 of the gatt to take into account the special factors for only one member.69 Thus, the reappraisal shall be done for all trade flows in a product’s sector. Currently, trqs are mostly used for fruit, vegetables, meat products and ­cereals followed by dairy products and oilseed.70 trqs are regarded as a more politically successful compromise on market access than the tariff deal, ­although they may be prone to rent-seeking.71 3.1.3.2 Export Subsidies Unlike industrial export subsidies which are prohibited under Art. 3.1. (a) of the scma, granting agricultural export subsidies is generally allowed if they are in compliance with the AoA and member commitments.72 The recently acceded members, as a rule, committed to voluntarily refusing any grants of ­export subsidies.73 In December 2015, the wto members reached a compromise to immediately eliminate most export subsidies by developed states, and set the deadlines for developing states to follow suit.74 Pursuant to the AoA, export subsidies are contingent upon export performance,75 including (but not limited to) those listed in Art. 9 of the AoA (so-called listed export subsidies).76 Non-listed subsidies77 are eligible only if 68

69 70

71 72 73 74 75 76

77

Interpretative Note to Art. XIII:4 of the gatt; Panel Report ec-Bananas iii, para. 6.48. In this regard, the term “special factors” shall not be assimilated to “commercial considerations.” Panel Report ec-Bananas iii, para. 6.48. In 2000, about 217 trqs were reported for cereals and over 120 trqs for oilseed. Abbot P. Tariff Rate Quotas: Failed Market Access Instruments? 77th eaae Seminar / njf Seminar No. 325, Helsinki, 2001, p. 18. Ibid., pp. 12–13. Art. 3.3., 8, 9 and 10.1. of the AoA. See the Accession Protocols of Ukraine, Russia, and China. Ministerial Decision of19.12.2015 WT/MIN(15)/45, paras. 6–11. Art. 1(e) of the AoA. See for analysis of listed export subsidies Fernandes R. Exploring Different Legal ­Approaches to Defining Agricultural Export Subsidies. In: Streatfeild J.; Lacey S. (eds.) New Reflections on International Trade: Essays on Agriculture, wto Accession and ­Systemic Issues, London, 2008, pp. 201–244 (further Fernandes), pp. 215 seq. Non-listed types of export subsidies include subsidizing export credits, export credit guarantees or insurance programmes. Appellate Body Report us-Upland Cotton WT/ DS267/AB/R, paras. 608–628.

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provided in a manner not circumventing (threatening to circumvent78) the member’s commitments.79 Although the dsb decisions varied concerning the reference to the scma by examining agricultural export subsidies,80 it ruled in the majority of relevant disputes that the common interpretation of the term “export contingency” of a subsidy given in Art. 3.1. (a) of the scma should be applicable to agricultural subsidies.81 Hence, exportation must be a de facto or de jure condition of a subsidy provision. The standard “in law or in fact” reflected in Art. 3.1. (a) of the scma is supposed to be met even when there is no legal requirement of granting a subsidy under the condition of exportation, but when there is evidence demonstrating that “the granting of a subsidy … is in fact tied to actual or anticipated exportation or export earnings.”82 Since the scma subsidy definition and the concept of export contingency may be used to interpret rules on agricultural export subsidies, the discrepancy between the AoA and scma approaches seems limited to the measures included in the illustrative list of agricultural export subsidies.83 As if the interaction between the AoA and scma was not complicated enough already, agricultural export subsidies are also regulated by the gatt. 78 “The ordinary meaning of the term ‘threaten’ refers to a likelihood of something happening; the ordinary meaning of ‘threaten’ does not connote to a sense of certainty.” Appellate Body Report us-Upland Cotton, para. 704. 79 Art. 10.1. of the AoA. 80 See e.g. Panel Report ec-Export Subsidies on Sugar (precedence of the scma over AoA) and Panel Report us-Upland Cotton (precedence of the AoA over the scma). Further Fernandes, p. 201. At the same time, the subsidy definition of Art. 1 of the scma is generally applicable to agricultural subsidies (Appellate Body Report us-fsc, para. 7.150.), including export subsidies. 81 The dsb found that the notion of “export contingency” as given in the AoA may be similarly interpreted in the context of the scma, since both agreements use the same word to describe export subsidies. Appellate Body Report us-fsc, para. 141; Panel Report us-Upland Cotton, para. 7.754. In ec-Export Subsidies on Sugar, the dsb, by examining the listed subsidy in the sense of Art. 9.1. (c) of the AoA (“payment on export”), did not apply the contingency approach but found it sufficient when a “connection” to export was ­established (para. 7.275.). Alternatively, the Panel in Canada-Dairy opined that the concept of “export contingency” was pertinent for the purpose of Art. 9.1. (a) and (c) of the AoA (listed subsidies) (WT/DS103/R, WT/DS113/R, paras. 7.40., 7.58. and 7.90.). 82 At the same time, a provision of subsidies to exporting enterprises is not a sufficient criterion to establish an export subsidy under the wto disciplines. See footnote 4 to the scma. 83 Annex i of the scma and Art. 9.1. of the AoA. The scma illustrative list may be used as a “contextual guidance” to examine agricultural export subsidies. See Appellate Body ­Report us-Upland Cotton, para. 647.

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However, the test of an “equitable share of world export” envisaged in Art. XVI:3 of the gatt was applied only once, in the French Wheat Case of 1958.84 After the Uruguay Round, this provision is hardly useful as compliance with the wto disciplines is determined on the basis of member commitments.85 In spite of the lax anti-circumvention disciplines of Art. 10 of the AoA,86 the number of export subsidies for agricultural goods fell by more than half after the Uruguay Round concluded, and today are concentrated in only a handful of sectors (primarily, sugar and animal products).87 In parallel, wto members were feeling relatively free with the expanded use of “indirect” export subsidies in the form of export credits, food aid programmes, combination of ­diverse domestic policy instruments, and state trading. This hidden support for exportation may not be any less damaging than the traditional subsidy forms. 3.1.3.3 Domestic Support88 3.1.3.3(a) Components of Domestic Support Some argue that the sensitive nature of domestic support disciplines89 is the reason agriculture was not fully incorporated into the scope of the scma.90 84

See Conciliation Report bisd 7S/46 French Assistance to Exports of Wheat and Wheat Flour. The latest dsb cases on export competition disciplines, in particular, Panel Report us-Upland Cotton WT/DS267/R and Panel Report ec-Export Subsidies on Sugar did not examine the compliance with Art. xvi of the gatt. 85 Art. 3.3. and Art. 9 of the AoA. 86 The leniency of current export subsidy regulation is massively criticised among scholars. See e.g. Kobayashi T. Pinning Down the Circling Concept of Circumvention: a ­Comprehensive Approach to Anti-circumvention Disciplines Under the wto Agreement on ­Agriculture. In: Japanese Book of International Law, 54, 2011, pp. 365–385. 87 World Trade Report 2006, pp. xxxi–xxxii. For instance, the eu export subsidies have not been granted for the cereals sector since July 2006, although available at the substantial level (15.3 million. t for wheat and 10.5 million. t for coarse grain). A similar situation may be observed for Canada. See eu Notification to the Committee on Agriculture on export subsidies for the marketing year 2008/2009 G/AG/N/EEC/70; Report by the Secretariat on Trade Policy Review (tpr) of the European Union WT/TPR/S/248/Rev.1, p. 111; Report by the Secretariat on tpr of Canada WT/TPR/S/246. 88 The term “domestic support” is used in this research interchangeably with the term “­agricultural subsidies.” 89 Due to the sensitivity of the domestic support issue, the regulation of this pillar is even more complicated than the market access and export subsidies segments, e.g. in the ­interpretation of O’Connor: “Understanding this complex matrix of documents is difficult. Trying to determine if particular members have complied with their obligations is next to impossible.” O’Connor, p. 86. 90 See e.g. O’Connor, p. 24

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Instead, the AoA moved towards “substantial progressive reductions in agricultural support.”91 In that way, when the other two AoA pillars became more similar to the provisions on industrial goods as a result of the Uruguay Round, the domestic support rules, constituting the largest part of the AoA provisions, were excluded from the “normal” approach, while a completely new structure was designed.92 In contrast to industrial subsidies, which are classified as actionable or not (“actionability” approach), the AoA domestic support classification is based on the scale of distortion caused by specific measures (“distortion” approach).93 The difference between the approaches is somewhat artificial since the scma can only take action when subsidies affect trade in a negative way, and thus have a distortive character. In this regard, the common acceptance of the subsidy definition under Art. 1 of the scma for the trade regime in agriculture seems to be very logical. Yet, there are some discrepancies. First, the AoA uses the term “budgetary outlays,”94 as opposed to “financial contribution by a ­government” used by the scma. The AoA expands the scope of subsidies under Art. 1 of the scma inasmuch as an agricultural subsidy may still exist without governmental financial contributions,95 since “all relevant types of support for the purpose of the AoA are subsidies.”96 For the purpose of this work and to avoid overcomplication, the terms “budgetary outlays” and “financial contribution by a government,” will be used interchangeably. Analogous to the export competition pillar, the AoA basically authorises the trade-distorting domestic support prohibited by the scma, within the limits of 91 92

93 94 95

96

Preamble of the AoA. See also Tangermann S. Agriculture on the Way to Firm International Trading Rules. In: Anderson K.; Josling T. (eds.) The wto and Agriculture, Volume ii, Cheltenham, 2005, pp. 130–160, p. 145. The economic outline of this approach was presented in Sub-chapter 1.2.4. Revenue forgone also falls within the scope of budgetary outlays. Art. 1(c) of the AoA. E.g. para. 8 of Annex 3 of the AoA explicitly includes the gap between a fixed external ­reference price and an internal administrative price to the scope of an agricultural subsidy. This case is an example of the alternative financial contribution element foreseen by Art. 1.1. (b) of the AoA. Due to the “exemption-based” definition of reduction commitments, it is “inappropriate to attempt to give an exhaustive definition of ‘support,’” nor is it necessary due to the ­detailed methodology provided for measuring support contained in the text. Panel ­Report ­u s-­Upland Cotton, paras. 7.420.-7.423. However, the dsb came to this conclusion after examining the text of Art. 13(b) of the AoA dealing exclusively with domestic support provided under Art. 6 of the AoA, but not other types of support. It may be argued that the quoted conclusion could not be automatically extended to other categories of domestic support.

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members’ negotiated commitments97 under the obligation to reduce levels of distortive support.98 In that way, the cornerstone of the wto domestic support disciplines is the rule that members shall not exceed the volume of domestic support (“support in favour of domestic producers”) incorporated into their schedules.99 The control over the support levels is executed through the wto notification procedure.100 Thus, wto members agree to submit notifications annually, no later than 90 days after the end of the calendar (or marketing, ­fiscal, etc.) year.101 The AoA elaborated the principle that every domestic support measure should be calculated as distortive except those directly excluded from the calculation by the agreement. With a view to simplify the calculation scheme, the AoA domestic support provisions are usually explained using the coloured boxes concept, which is not included in the text of the AoA.102 There are three types of domestic support measurements computed annually by each wto member in monetary terms (the so-called “amber box”): – Aggregate Measurement of Support (ams) is an indicator for the productspecific or non-product specific domestic support provided in favour of ­agricultural producers, other than the programmes exempted from reduction authorised under Annex 2 of the AoA (so-called “green box”);103 – Equivalent Measurement of Support (ems) is domestic support the calculation of which in accordance with the ams methodology is impracticable;104 – Total Aggregate Measurement of Support (Total ams) is the sum of the entire ams and ems support.105 97 98 99 100

101 102

103 104 105

Art. 6.3. of the AoA. By acceding to the wto, each member state negotiates its own domestic support commitments. Art. 6.1. of the AoA. Art. 3.2. of the AoA. Art. 18.2.-18.3. of the AoA includess a specific obligation for notifications of domestic support measures. See also Annex of Decision on Notification Procedure, which requires notification about any measure covered by AoA, as well as Notification Requirements and Formats (G/AG/2). See G/AG/2. The general subsidy track has a separate notification system: the scma requires all members to notify all subsidies once every two years. Art. 29.3. of the scma. Although the “box”-concept is often criticised for adding confusion to the already complicated concept of domestic support (see e.g. O’Connor, p. 91), it will still be used in this research because, in the author’s opinion, it seems to be the only effective way to demonstrate the distinction between categories of domestic support measures. Art. 1(a) of the AoA, Annex 3 of the AoA. Art. 1(d) of the AoA, Annex 4 to the AoA. Art. 1(h) and 7.2. of the AoA.

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The level of Total ams is bound for every wto member at the committed level (often with gradual reductions). The annually calculated Current Total ams must be compared with the Bound Total ams. The Total Current ams is calculated through the following steps.

Step 1. Exclusion of “green” Measures



Level 1: Overall Criteria

Annex 2 of the AoA provides a non-exhaustive list of exemptions from the ­domestic support disciplines. Measures that fall within the scope of Annex 2 of the AoA shall not be calculated as Current Total ams and are excluded from ­reduction commitments.106 Nevertheless, Art. 7.1. of the AoA imposes an ­obligation on members that classify any of their support measures under the “green box” to maintain the conformity therewith, and, correspondingly, to identify domestic measures fallen within the scope of Annex 2 of the AoA. There are two levels of criteria to be fulfilled by each measure in order to satisfy the “green box” requirements. The “fundamental requirement” of para. 1 of Annex 2 of the AoA compels the absence or presence of most minimal trade-distorting effects or effects on production.107 Although the “green box” is intended to encourage governments to choose interventions that minimise trade and production distortions, the AoA is silent on how exactly to calculate and define such minimally distortive effects.108 Further general criteria includes the provision of support through a publicly funded government programme (i.a. in the form of government revenue foregone) not involving transfers from consumers109 and the absence of price support effect on producers.110 Apparently, the compliance with the first and the third criteria is called to ensure that a measure is not challengeable under the scma, while the second 106 Art. 7.2. (a) of the AoA. 107 Trade-distorting effects and effects on production may be basically assimilated to the notion “adverse effect” as defined in Art. 5 of the scma to establish actionability of a subsidy. 108 In the only dispute concerning the measure classification under Annex 2 of the AoA, the question of how to calculate distorting effects and how to characterize the adjective “minimal,” was left unanswered by the dsb. Panel Report us-Upland Cotton, paras. 7.386.7.387, 7.412. 109 Apparently, this requirement reflects the subsidy element of “financial contribution by government” in the sense of Art. 1.1. (a) of the scma. 110 In essence, this provision excludes the presence of the alternative element to “financial contribution by government” as provided by Art. 1.1. (b) of the scma.

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is supposed to verify whether the measure falls within the domestic support pillar (with a view to separate it from the market access pillar).

Level 2: Policy-specific Criteria



Step 2. Calculation of Domestic Support Measures Outside the Scope of Annex 2 of the AoA

Policy-specific criteria are established for each of the nine exempted measure types, which may be grouped into general services (para. 2 of Annex 2 of the AoA), public stockholding and food aid programmes (paras. 3–4 of A ­ nnex 2 of the AoA), and various direct payment schemes (paras. 5–13 of ­Annex 2 of the AoA). There are two rationales for government programmes falling within the scope of Annex 2 of the AoA: income redistribution and/or the ­correction of market failures. If the first goal is primarily targeted, then a government ­normally introduces direct payments. By doing this, it must be ensured that a farmer would not be able to anticipate the payment, and where it is not ­possible, additional aid eligibility criteria should be established, e.g. upper limitations of support.111 When a government seeks to correct a market failure, it should prove, prior to introducing new policies, that a measure is necessary and that without government intervention, the market would not be able to correct itself.112

Basically all measures not sorted out after Step 1 that constitute subsidies pursuant to Art. 1 of the scma, and/or are considered to be domestic support by the AoA, shall be calculated into a member’s Total ams as a product-specific or non-product specific support for agricultural producers.113 Product-specific support may include market price support, non-exempt ­direct payments,114 or any other subsidy not exempt from the reduction commitment (i.a. input subsidies, marketing-cost reduction measures115).116 ­Market price support is determined by the gap between a fixed external r­eference price (average export prices for a specific agricultural product in the base period) and the applied administered price. The budgetary payments made to 111 Rude, p. 1028. 112 Ibid. 113 Although Current Total ams is to be calculated as close as practicable to the point of first sale of agricultural product, support for processors that benefit producers of the basic product may be included in calculations. para. 7 of Annex 3 of the AoA. 114 The payments not fulfilling the requirements under para. 5 seq. of Annex 2 of the AoA. 115 Para. 13 of Annex 3 of the AoA. 116 Para. 1 of Annex 3 of the AoA.

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maintain this gap, e.g. buying-in or storage costs, are not included in the Total ams.117 On the other hand, if existing import barriers keep domestic prices high, but there is no administered price, market price support is not provided under the AoA.118 Surprisingly, Annex 3 of the AoA does not provide a clue as to which policies may be calculated into the non-product specific ams. The most logical explanation may be that measures not conditional on the production of specific goods and not fulfilling the requirements of Annex 2 of the AoA should be included therein. The ams is calculated on the basis of budgetary outlays, including revenue foregone by governments or their agents,119 where specific agricultural levies and fees paid by producers must be deducted.120 In instances where using government budgetary outlays do not reflect the full subsidy, it is calculated by taking the difference between the price of subsidised goods (services) and the representative market price for similar goods (services), and multiplying that by the total number of those goods or services.121 Due to the complexity of the calculation scheme and the ambiguous character of consumer price support transfers to farmers, members’ Total ams ­reporting is likely often overstated or understated.122

Step 3. Consideration of Other Exemptions

Although only the measures compatible with Annex 2 of the AoA are excluded from the ams/ems calculation, some part of that calculation may be 117 Para. 8 of Annex 3 of the AoA. Thus, it seems that the AoA approach to market price support differs from the early position of the judicial body, where the storage costs were to be calculated into the scope of subsidy. bisd 9S/191 (non-adopted), para. 11 (cited in scm Committee Report Canada-Softwood Lumber SCM/162, para. 156). 118 De Gorter H.; Ingco M. The ams and Domestic Support in the wto Trade Negotiations on Agriculture: Issues and Suggestions for New Rules, Washington, 2002 (further de Gorter, Ingco), p. 3. 119 Para. 2 of Annex 3 of the AoA. It is not clear whether the notion of “agents” in this provision must be interpreted identically to the passage “governments or their agencies” in Art. 9.1. (a) of the AoA (examined in the Appellate Body Report Canada-Dairy, para. 97) that was essentially equated with the term “public body” of Art. 1.1. (a) of the AoA in Appellate Body report us-ad&cvm (China). 120 Para. 4 of Annex 3 of the AoA. 121 This method could be applicable only for other non-exempted measures. Para. 13 of Annex 3 of the AoA. 122 Often, some support measures are reported to be calculated twice, also as import protection measures or export subsidies. See de Gorter, Ingco, p. 3.

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­deducted from the final Total ams amount. There are two layers of these eligible deductions: – de minimis support exemption authorised under Art. 6.4. of the AoA that states both product-specific and non-product-specific domestic support fulfilling the Total ams criteria shall not be calculated and cut if its amount does not exceed five per cent (in the general rule) of that member’s total value of agricultural production123 during the relevant year;124 – so-called “blue box” exemptions, i.e. direct payments under production-­ limiting programmes.125 Where agricultural subsidy regulation is, in principle, a differential treatment of the scma regime as ratione materiae, the AoA imposes its own differential treatment in the form of advantages given to developing countries (as ratione personae).126 Thus, the AoA provides special, more favourable disciplines within the domestic support pillar, namely, an increase of de minimis percentage of up to 10 per cent,127 the right to exclude investment subsidies for the agricultural sector, and to exclude agricultural input subsidies to low-income or resource-poor producers from the Total Current ams calculation.128 In a way, the first exemption may be re-qualified into “green box” measures under para. 11 of Annex 2 of the AoA, but the second one is a pure ams measure. Beyond the issue of expanding distortive subsidies resulting from the AoA differential treatment,129 there are some concerns about the fairness of this 123 Respectively, value of production of a given agricultural product is taken for productspecific support. 124 In accordance to Art. 7.2. (b) of the AoA, wto members which did not take Total ams commitments are not allowed to grant domestic support is excess of the de minimis level. 125 Art. 6.5. of the AoA. 126 Wouters J.; Coppens D. An Overview of the Agreement on Subsidies and Countervailing Measures – Including a Discussion of the Agreement on Agriculture. In: Bagwell K.; Bermann G.; Mavroidis P. (eds.) Law and Economics of Contingent Protection in International Trade, Cambridge, 2010, pp. 7–102 (further Wouters, Coppens), p. 66. 127 Art. 6.4. (b) of the AoA. 128 Art. 6.2. and 15 of the AoA. 129 For instance, Brazil provides high levels of investment subsidies: in 2008/2009 the budget outlays spent on the measures authorised under Art. 6.2. of the AoA corresponded to the country’s annual Total ams commitments. See Report by the Secretariat on tpr of Brazil WT/TPR/S/212, p. 99; Notification of Brazil for domestic support in 2004/2005 and 2005/2006 G/AG/N/BRA/26, p. 18.

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approach that otherwise appears quite equitable at first glance. While some emerging countries like Brazil and Argentina are eligible for the higher domestic support minimums, certain recently acceded members classified as developing nations by the World Bank (e.g. Kyrgyzstan, Georgia, Armenia, and Ukraine), do not qualify for this expanded “de minimus” under the AoA.130 3.1.3.3(b) Patterns of Implementation of Domestic Support Commitments Implementation of the “box” concept by wto members reveals three major tendencies: (1) Accumulation of subsidies from different boxes for specific products.131 The growing ams concentration on specific products is clearly visible132 and is a subject o8mmf bilateral consultations.133 In response to the growing concerns on this issue, the recently acceded Russia incorporated mandatory limits of proportions between product-specific and nonproduct-specific ams into its agricultural commitments.134 (2) Allocation of ams under extended de minimis support of developing countries – large agricultural exporters.135 130 In order to loose their obligations on agricultural liberalisation some cis countries ­applied for the developing country status. None of them succeeded. See Roberts M.; ­Wehrheim P. Regional Trade Agreements and wto Accession of cis Countries. In: INTERECONOMICS, November–December 2001, pp. 315–323 (further Roberts, Wehr­ heim), p. 318. In general, the only post-socialist state which had received the status of a developing country was Romania. 131 The most prominent example is the farm programmes for corn and cotton in the us. See Request for Consultations by Canada WT/DS357/1 of 11.1.2007, as well as Galperin C.; ­Miguez I. Green Box Subsidies and Trade-distorting Support: is There a Cumulative ­Impact. In: Meléndez-Ortiz R.; Bellmann Ch.; Hepburn J. (eds.) Agricultural ­Subsidies in the wto Green Box: Ensuring Coherence with Sustainable Development Goals, ­Cambridge, 2009, pp. 239–257. 132 23 per cent of the Total Current ams notified to the wto is paid to livestock sector, 10 per cent to cereals and 10 per cent to vegetable oils and oilseeds. World Trade Report 2006, pp. xxxi–xxxii. 133 Brazil claims the us includes market loss assistance payments into the non-product ­specific ams instead of product-specific ams. According to the us notifications, almost all product-specific ams is covered within the de minimis category. Notification of the United States on domestic support G/AG/N/USA/66; Request for Consultations from ­Brazil WT/DS365/1 joined by Thailand, Canada, India, Guatemala, and Nicaragua. 134 During the transition period, the relationship between product-specific and ­non-product-specific ams granted by Russia shall stay within an agreed upon range. The sum of product-specific ams must not exceed 30 per cent of the non-product specific ams. See Working Group Accession Report Russia WT/ACC/RUS/70, WT/MIN(11)/2, para. 1187. 135 See Brazil’s Notifications under Art. 18 of the AoA, e.g. G/AG/N/BRA/27.

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Given the general reduction of the Total Bound ams by 10.3 per cent per each year between 1995–2001, the overall steep de minimis support multiplication should not be overlooked.136 (3) The process of box-shifting from “blue box” or “amber box” to the “green box.” The absolute compliance of the notified measures with the requirement of no or minimal trade-distorting effects is questionable, in particular, concerning expanding public stockholding practices and direct payments to producers notified under paras. 5–13 of Annex 2 of the AoA.137 This matter is permanently on the agenda as the amount of “green box” subsidies usually exceeds members’ Bound ams by several times.138 (4) Delay with notifications. Although there has been some recent improvement in the timing and quality of notifications required by Art. 18 of the AoA,139 both developing and developed countries still tend to lag with their notifications on ­domestic support.140 While delays in most developing countries can be attributed to a lack of administrative support, developed countries and certain emerging countries (e.g. India, Brazil) may postpone reporting due to the possible danger of exceeding the limits of their wto commitments.141 In this situation, other wto members may theoretically make use of Art. 18.7. of the AoA142 authorizing a kind of state-to-state control. Since no automatic sanctions for non-compliance with the ­monitoring provisions

136 World Trade Report 2006, pp. xxxi–xxxii. 137 See Nassar A.; Rodriguez-Alcala M.; Costa C.; Nogueira S. Agricultural Subsidies in the wto Green Box: Opportunities and Challenges for Developing Countries. In: MeléndezOrtiz R.; Bellmann Ch.; Hepburn J. (eds.) Agricultural Subsidies in the wto Green Box: Ensuring Coherence with Sustainable Development Goals, Cambridge, 2009, pp. 329–368, p. 331; Devinder S. wto and Agriculture: “Green Box” Subsidies Must Go. In: Economic and Political Weekly, 39(20), 2004, pp. 1997–1998 (further Devinder), p. 1997. 138 For instance, the eu “green box” made up little more than 20 per cent of the total expenditures on agriculture in 1995–2001, while in the us it was over 70 per cent, and in Japan almost 60 per cent. World Trade Report 2006, pp. 135–136. 139 Report on the Workshop on Agriculture Notifications G/AG/GEN/91, p. 25, paras. 111–114. 140 Over one half of the notifications required for the period 1999–2012 are still outstanding, mostly from developing countries, where the absolute majority of non-submitted notifications fall for domestic support and export subsidies. Note by Secretariat G/AG/GEN/86/ Rev.15, p. 4, pp. 13 seq. 141 However, most of submitted notifications do not raise questions, and inversely most disputes do not concern outstanding notifications. Butault, Bureau and others, p. 22. 142 Art. 18.7. of the AoA allows wto members to report to the Committee on Agriculture any measure which it considers ought to have been notified by another member.

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exist within the gatt/wto system, the only r­ emedy for addressing possible conflicts is a recourse to the dispute settlement mechanism. It may be argued that expansion of the “green box” at the cost of other support types is the most worrisome among the mentioned trends, since it is not included in the reduction disciplines. Moreover, direct government payments, largely used by developed countries and classified as “green box” measures, are deemed capable of inducing production as a consequence of risk reduction and the elimination of input purchase constraints.143 For this reason, the concept of minimal or no trade-distortion laid down in para. 1 of Annex 2 of the AoA may be too vague to ensure that de facto distorting measures are ­excluded without a thorough interpretative basis. In order to identify possible weak points, the most common “green” direct payments will be analysed in the following sub-section. 3.1.3.3(c) Decoupled Income Support (Para. 6 of Annex 2 of the AoA) Decoupled144 income support is a form of direct payments (or revenue foregone, including payments in kind) to producers.145 To be eligible under para. 6 of Annex 2 of the AoA, income support shall fulfil the overall (fundamental) criteria and five requirements designed specifically for this instrument: – elaboration of clearly-defined eligibility criteria for producers146 (thereby, subsidy specificity should be avoided as provided in Art. 2.1. (b) of the scma); – non-conditionality of a payment amount on type or volume of production chosen/ harvested after the base period;147 143 See de Gorter, Ingco, p. 8; Rude, p. 1020. The issue of direct exempted measures seems to be rather controversial, based on the consultations opened within the dsb. See e.g. Request for Consultations by Canada of 11.1.2007 WT/DS357/1 joined by the eu, Australia, Brazil, Argentina and Guatemala; Request for Consultations from Brazil of 17.7.2007 WT/ DS365/1 joined by Thailand, Canada, India, Guatemala, and Nicaragua. 144 Neither the AoA, nor Annex 2 thereto gives a definition of decoupled agricultural support. The common understanding of the adjective “decoupled” is something not linked to factors which have effects on the market. Using the language of the general wto track on subsidies, decoupling should guarantee non-specificity in the sense of Art. 2 of the scma. 145 Para. 5 of Annex 2 of the AoA. 146 These criteria may encompass i.a. income, status as a producer or landowner, factor use or production level in a defined and fixed base period. para. 6(a) of Annex 2 of the AoA. 147 Para. 6(b) of Annex 2 of the AoA. The outcome of us-Upland Cotton showed that ­exemptions of eligible crops would exclude the payments from the scope of para. 6 of Annex 2 of the AoA. Appellate Body Report us-Upland Cotton WT/DS267/AB/R, para. 328.

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– non-conditionality of a payment amount on domestic or international prices;148 – non-conditionality of a payment amount on factors of production employed after the base period;149 – no reciprocal requirement to produce.150 The overall idea of decoupled income support suggests that since the direct payments are based on a past, fixed-base period, farmers cannot affect a payment size through their current behaviour and as a result, their short-term production decisions shall only be based on market considerations. However, an extended use of decoupled income support by developed countries that de facto substitutes market price support and output payments may hide certain risks of distortion.151 Furthermore, decoupled income support may also stimulate an increase in production by reducing consumer prices that in turn may stimulate a growth in demand, and correspondingly, a surge of production.152 Nonetheless, in spite of some possible drawbacks, decoupled payments are the most targeted domestic support measures.153 3.1.3.3(d) Insurance Subsidies (Para. 7 of Annex 2 of the AoA) and Deficiency Payments (Para. 8 of Annex 2 of the AoA) Policy measures employed in compliance with paras. 7–8 of Annex 2 of the AoA may be regarded as state-financed substitutes for private risk m ­ anagement instruments (hedging, insurance, options etc.), when the latter may be disadvantageous to producers.154 The efficiency of agricultural insurance markets 148 149 150 151

Para. 6(c) of Annex 2 of the AoA. Para. 6(d) of Annex 2 of the AoA. Para. 6(e) of Annex 2 of the AoA. Especially the recent us practice of shifting towards support that addresses income ­variability, for instance, the Average Crop Revenue Election (acre) programme covering specific cereals and oilseed. See us Notification under Art. 18 of the AoA G/AG/N/USA/80. 152 Dombert M.; Witt K. (eds.) Agrarrecht, Munich, 2011 (further Dombert, Witt), p. 974. 153 While price support benefits not only producers (by one quarter), but also input suppliers and landlords (by one third), one third of the market support total may be written off as a loss and is inefficient. In contrast, decoupled payments provide support for nearly 100 per cent of producers. See Tangermann S. Agrarmärkte und Agrarpolitik der usa und der eu: Konvergenz oder Divergenz?, Lecture of December 2002 through Strubenhoff, Movchan, Buriakovski, p. 101. 154 Although risk management tools (on-farm measures and risk sharing strategies) may be efficient, they also pitfalls and may be too complicated for farmers without any basic knowledge in economics. See Rude, p. 1030; Diaz-Caneja M.; Conte C.G. and others. Risk Management and Agricultural Insurance Schemes in Europe (Study ordered by the

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is hindered by systemic, non-diversifiable risks inherent to farm production resulting in prohibitively expensive premiums or insufficient risk coverage overall.155 This problem is often made worse by the adverse selection156 and moral hazard157 phenomena (both are immanent to agricultural insurance schemes).158 In response to these obstacles, government participation in agricultural insurance schemes may be economically justified for reinsurance or to guarantee the mitigation of systemic risks,159 and for covering small and catastrophic risks otherwise not insurable in private markets.160 Government deficiency payments typically target catastrophic risks and are provided directly or through special insurance programmes. In the event of natural disasters, these measures may be exempt from the wto agricultural disciplines under para. 8 of Annex 2 of the AoA if the following criteria is met: – A government formally recognises the occurance of a “natural or like disaster”161 (subjective evidence of exceptional circumstances); – there is a production loss exceeding 30 per cent of the average production in the preceding base period162 (objective evidence of exceptional circumstances); – compensation is limited to income losses and loss in production factors163 subject to further restrictions to minimise trade distortion;164 – there is no requirement on future production165 (decoupling element). Deficiency payments are prone to moral hazard making them inefficent ­economically. Lesser risks should be addressed with “softer support” through government insurance and income safety net schemes as defined in para.  7

155 156 157 158 159 160 161 162 163 164 165

­European Parliament, project Agricultural Insurance Schemes), jrc Reference Reports, 2009 (further Diaz-Caneja and Conte), p. 9. Rude, p. 1024. Adverse selection is associated with the situation when an agent sharing the risk cannot distinguish between risk types of insurers. Insured producers tend to become less cautious in prevention and/or mitigation of losses. Rude, p. 1024. Diaz-Caneja and Conte, p. 10. oecd 2009 via Tangermann 2011, pp. 3–4. Para. 8(a) of Annex 2 of the AoA. Para. 8(a) of Annex 2 of the AoA. Para. 8(b) of Annex 2 of the AoA. Paras. 8(c)-(e) of Annex 2 of the AoA. Para. 8(c) of Annex 2 of the AoA.

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of Annex 2 of the AoA.166 This insurance structure is not triggered by natural disasters and loss of production, but by loss of income.167 Any other ­factors, i.a. volume of production or prices, may not be considered in the payment amount.168 Thus, the decoupling element stronger here as compared to deficiency payments. Besides, the moral hazard issue is supposed to be tackled by fixing an upper compensation limit at the level not exceeding 70 per cent of a producer’s income losses.169 Despite visibly lesser distortion of insurance payments, their possible cumulation with deficiency payments170 may still be harmful due to producers’ diminished incentive to mitigate losses. The paradox of the wto approach to risk management is that insurance subsidies for specific products will automatically be labelled as “amber box” measures, whereas insurance subsidies for all producers will not be affordable for most developing countries with large agricultural sectors. At the same time, strong government participation in agricultural insurance tends to decrease incentives for private insurance companies and is typically not profitable for them.171 By the same token, because of restricted competition, the list of ­insurable agricultural risks is rather short and full protection from private insurance may not be guaranteed. Therefore, at the end of the day, governments may be still motivated to pursue agricultural insurance schemes. 3.1.3.3(e) Investment Aid (Para. 11 of Annex 2 of the AoA) Another widely used “green box” policy which may have a trade-distortive effect is structural adjustment assistance known as investment aid. ams exemptions for investment aid may be justified under para. 11 of Annex 2 of the 166 Income-safety net schemes are basically decoupled income support triggering only in disadvantageous years (largely used in Canada and the us). 167 Minimal level of producers’ income loss must exceed 30 per cent of the average gross income or the equivalent in net income terms (excluding any payments from the same or similar schemes) in the base period. Para. 7(a) of Annex 2 of the AoA. 168 Para. 7(c) of Annex 2 of the AoA. 169 Para. 7(b) of Annex 2 of the AoA. 170 The limitation of the overall income loss support provided under paras. 7–8 of Annex 2 of the AoA is established at the level of 100 per cent of the total loss. Para. 7(d) of Annex 2 of the AoA. 171 There are only two examples of successful governmental agricultural insurance systems – Canada (functions under market conditions) and Japan. The us and Chinese models are market-based, since the governments set up the rules, develop insurance products and administer the system, but the insurance is provided by private companies. ifc. Establishment of Efficient Agroinsurance System with Active State Participation: Options for Ukraine, Kiev, 2010 (in Ukrainian) (further ifc 2010), pp. 2–3, 5–6.

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AoA under the condition that the aid is necessary for the financial and physical restructuring of producers’ operations in response to an “objectively demonstrated structural disadvantage.”172 The economic features of ­agricultural markets ­described in Chapter 1 may indeed be regarded as such structural ­disadvantages. But since there is no definition of “structural disadvantage,” governments may provide support to overcome any unfavourable market ­obstacles that may result in distortion of comparative advantages.173 In attempts to limit the distortion, wto members reached a compromise on the exempted investment aid. It must be distributed under clearly defined criteria,174 be limited to compensation for the structural disadvantage,175 and be restricted to the period of time necessary for realisation of the investment.176 The requirements on the decoupled aid character177 serve to minimise trade distortion, but may make the aid non-efficient. Furthermore, public support for on-farm investment is reported to distort resource allocation and reduce economic wealth.178 With that in mind, it may be argued that investment aid is only practicable for developing countries with fledgling capital markets where aid should be effectively substituted by private investment over the long term.

Intermediary Summary

Multilateral regulation of agricultural trade represents a compromise between trade liberalisation and the protectionist interests of wto members. It is more advantageous for wto members in comparison to the general regulatory track since the commitments in all AoA pillars are far more generous than for ­industrial goods. Regarding domestic support, it may be contended that the exceptions for calculating the Current Total ams, together with the still ­outstanding conclusion of the indirect effect of expanding de jure ­exempted subsidies (­Annex 2 of the AoA), may constitute a challenge for further ­agricultural liberalisation. Regardless of that, the switch of domestic support from “amber” to “blue” and especially to “green” boxes is still desirable due to an overall decrease of trade distortion associated with that. 172 173 174 175 176 177

Para. 11(a) of Annex 2 of the AoA. Rude, p. 1027. Para. 11(a) of Annex 2 of the AoA. Para. 11(f) of Annex 2 of the AoA. Para. 11(d) of Annex 2 of the AoA. The aid shall not be linked to type or volume of production (para. 11(b) of Annex 2 of the AoA), international or domestic prices (para. 11(c) of Annex 2 of the AoA), or requirement on production (para. 11(e) of Annex 2 of the AoA). 178 Zahrnt, p. 1335.

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3.1.3.3(f) Alternative oecd Approach to Domestic Support The oecd began monitoring farm support provided by its members and major agricultural exporters at the end of the 1980s. Given the lack of any binding ­disciplines on agricultural subsidies within this international organisation, their evaluation does not have any judicial power. Still, other international ­actors, including the wto, use the oecd methodology widely. The oecd is particularly distinct in its approach to agricultural support with the calculation of transfers not only on the basis of public costs, but also taxpayer costs.179 Thus, the oecd takes an economic view on subsidies rather than the “political” stance preferred by the wto. This significant divergence may be explained by the fact that there are different objectives for agricultural aid measurement within the wto and the oecd. The wto monitors the implementation of legally binding commitments, while oecd simply provides an annual evaluation on the implementation of non-binding agricultural policy reform principles, which do not require any reduction of support.180 Another distinction is the rationale for monitoring: the oecd pursues a mere economic comparison measuring the overall level of transfers to farmers, while the wto aims to identify the level of trade-distorting agricultural support provided by its members.181 To achieve these goals, the oecd developed several indicators of ­producer support.182 Most similar to the wto methodology is the Producer Support  ­Estimate (pse),183 an indicator corresponding to the sum of different ­support measures for agricultural producers. The pse is composed of three main groups of measurements: – budgetary transfers, including payments based on inputs, outputs, farmed area, input constraints, overall farming income and other factors; 179 See e.g. oecd. Agricultural Support: How Is It Measures and What Does It Mean?, Paris, 2009. The oecd operates with the term “agricultural support” which seems to be per se broader than the notion “subsidy.” 180 World Trade Report 2006, p. 123. 181 Similarly, the difference between the oecd and eu methods is understandable, since the latter aims to identify state aid capable of affecting intra-eu trade, i.e. aid potentially dangerous for the internal market. 182 The oecd indicators include (gross) monetary transfers granted to individual producers (pse), transfers paid by or benefiting consumers (Consumer Support Estimate or cse) and transfers granted to the sector as a whole (General Services Support Estimate or gsse). The sum of these three components constitutes Total Support Estimate (tse). See e.g. oecd. Agricultural Support: How Is It Measured and What Does It Mean?, Paris, 2009, p. 2. 183 The gsse also usually falls within the scope of domestic support, being non-distortive general services as per para. 2 of Annex 2 of the AoA.

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– market price support measured as a gap created by quotas, tariffs and other restrictions (“policy measures that maintain domestic prices at levels higher (lower) than those at the country border”); – revenue foregone, namely, “implicit tax concessions or fee reductions that lower farm input costs.”184 Based on a “charge on the public account,” budget transfers and revenue ­foregone normally constitute subsidies under the wto rules. But the oecd indicator “market price support” is much broader than the ams component with the same title.185 The oecd considers all measures distorting internal prices regardless of the source of the charge that may be a state, consumers, or agricultural producers themselves (so-called negative support). Therefore, the  oecd methodology permits estimating farm price distortions caused by the entire policy system, not just by subsidies. Consequently, the pse scope is broader than the wto domestic support concept, as the pse also e­ xtends to the other two AoA pillars. Notwithstanding these clear distinctions, the ams is, in fact, based on the pse, but its coverage is narrower (Annex 2 of the AoA measures, export subsidies, and border protection instruments are excluded). It could be summarised that the oecd measurement of agricultural support may be an effective point of comparison for the wto measurement. The ­inclusion of market access and export subsidies into the oecd ­evaluation makes its data a generally accepted reference for the aggregated distortion of agricultural policies. Monitoring in recent years points to rapid growth in distortive agricultural support in developing countries, especially China and Russia,186 and an overall reduction of distortive support among the oecd states.187 U ­ nder the oecd methodology, it would be difficult to determine on the whole whether developed or developing countries provide more ­agricultural support.188 But, developing countries do tend to demonstrate a 184 oecd. Agricultural Support: How Is It Measured and What Does It Mean?, Paris, 2009, pp. 3–7. 185 Annex 3 of the AoA. 186 The level of agricultural support in these two states is similar to that of the eu, if calculated as a percentage of agricultural production, and is even higher as a percentage to the gdps. Almost two thirds of the farm support granted is product-specific and not decoupled. Butault, Bureau and others, pp. 18, 22. 187 The ratio between domestic and border prices went down from 1.70 to 1.12 between 1986 and 2010. Butault, Bureau and others, p. 5. 188 In 2010 the top ten agricultural support providers was a mix of developed and developing countries: headed by Norway with 61 per cent of subsidised agricultural production (tse of gdp – 1 per cent), Russia with 21 per cent (tse of gdp – 1.4 per cent) and the EU-27 with 20 per cent (tse of gdp – 0.7 per cent), followed by Canada with 18 per cent (tse of

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higher share of agricultural expenditures in their gdps compared to developed countries.189 3.1.4 Agricultural Policies in the Framework of the Doha Reform Process 3.1.4.1 The Outcome of the AoA Implementation From the beginning, AoA was designed as a transitional agreement with the long-term aim of incorporating agricultural trade disciplines into general ­regulations on subsidies.190 Art. 20 of the AoA obliged the members to launch the reform process in the year 2000, and next steps were to be determined by the results of the AoA implementation process. Easier said than done. Evaluating the implications of the AoA is complicated because of the its very distinct effects on members.191 Even so, it is a ­common belief that the AoA generally succeeded in improving a­ gricultural subsidy disciplines.192 However, oecd statistics could not confirm the ­reduction trend for all types of agricultural support.193 Thus, the oecd market price support (market access component and the ams in the form of market price support) declined from 77 per cent to 60 per cent of the pse from 1986 to 2004,

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gdp – 0.7 per cent), China with 17 per cent (tse of gdp – 3 per cent), usa with 7 per cent (tse of gdp – 0.2 per cent), Ukraine with 5 per cent (tse of gdp – 2 per cent), and Brazil with 4 per cent (tse of gdp – 0.5 per cent). Butault, Bureau and others, p. 75. The highest tse in gdp was measured in Turkey – 3.1 per cent. Ukraine was the third in the list (2 per cent of the gdp) sharing the rank with Korea (the state is famous for its protective agricultural policies). Ibid. The preamble of the AoA sets forth the short-term mission “to establish a basis for initiating a process of reform of trade in agriculture” and the long-term mission “to establish a fair and market oriented agricultural trade system.” See also similar conclusion by O’Connor, p. 26. Hamwey R. Expanding National Policy Space for Development: Why the Multilateral Trading System Must Change, t.r.a.d.e. Working Papers (South Center), 25, 2005 (further Hamwey). Sykes, p. 624. Though the champions of domestic support provisions did not change in the course of the AoA implementation period, they are still the eu (96.1 billion usd for 1995–2001), us (66.2 billion usd), Japan (41.8 billion usd), and Korea (76 billion usd). In the top ten largest providers there are three Cairns members: Brazil with 3.5 billion usd, ­Canada – 2.6 billion usd and Thailand – 1.9 million usd, although at least over 50 per cent of their domestic support fell within the “green box.” See World Trade Report 2006, pp. 135–136. See Sub-chapter 3.1.3.3(f). Tangermann by analysing oecd pse calculations did not r­ eveal a systematic decline of agricultural support which was rather fluctuating. Tangermann S. Has the Uruguay Round Agreement on Agriculture Worked Well? Working Papers of ­International Agricultural Trade Research Consortium 01–1, 2001 (further Tangermann 2001), p. 20.

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while the share of payments based on output and input use (included into the ams) remained almost constant at about 14 per cent. The percentage of “other payments” (basically “green box” measures) grew from 10 per cent in 1986 to 26 per cent in 2004.194 At the same time, the overall pse of the oecd members was cut in half between 1986 and 2010.195 Logically, price policies are the main source of the pse reduction. This data made clear that developing states, by reducing price support, distributed their farm support through less ­trade-distorting measures. Despite some progress, domestic support is responsible for a small portion of this positive impact.196 Agricultural economists suggest further tightening of domestic support commitments to help reduce market access barriers and not impair existing commitments.197 One should take into account other trade barriers beyond the AoA pillars, in particular sps and tbt regulation, which may be of even greater importance to the de facto liberalisation of agricultural trade. The small number of disputes concerning agricultural trade during this period198 is not evidence of trade system efficiency. Tangermann writes that the rather generous commitment levels set across all the columns can explain this phenomenon.199 The extended use of specific trade concerns (stc) for agricultural issues200 may also have contributed to a substantial reduction 194 For summary see World Trade Report 2006, p. xxxii. 195 Butault, Bureau and others, p. 5. 196 Cheong, Jansen, Peters, p. 13. Liberalisation of tariff barriers accounts for 93 per cent of world economic welfare, while domestic support – solely for 5 per cent and export ­subsidies – for 2 per cent. Anderson K.; Martin W.; Valenzuela E. The Relative Importance of Global Agricultural Subsidies and Market Access, Washington, 2005, p. 2. 197 Lax domestic support commitments may not combat prohibitively high import tariffs in non-ad-valorem forms for a large range of agricultural products which are direct ­answer to cheap subsidised imports. O’Connor, p. 21. For details see also url: http://www .globalsubsidies.org/en/media-portal/the-wto-and-subsidies. For more detailed assessment of the AoA see e.g. Orden D.; Blandford D.; Josling T.; Brink L. wto Disciplines on Agricultural Support: Experience to Date and Assessment of Doha Proposals, ifpri ­Research Brief 16, 2011. 198 Only 129 of the 329 complaints brought before the dsu in 1995–2004 involved problems relating to trade in agricultural products, but only 32 of them resulted in Panel reports and 23 in Appellate Body reports. Solely 11 out of these 32 disputes claimed violations of provisions of the AoA. O’Connor, p. 91. After 2003 the number of agricultural disputes did not show major growth. 199 Tangermann 2001, pp. 32–34. 200 According to the information submitted during wto Public Forum 2012 94 per cent of all stcs refer to agricultural trade.

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in judicial procedures.201 The relatively low number of agricultural disputes, particularly in the domestic support pillar, is not expected to help accelerate reform,202 since members may feel safe and not experience the threat of external pressure.203 Among the possible positive consequences of implementing the AoA, it is worth mentioning the expansion in agricultural trade after 1995, albeit at the slower pace than industry trade,204 as well as liberalizing reforms in several countries. But still, it is not obvious whether it is primarily domestic or international changes responsible for triggering the national reforms.205 Furthermore, since there is no information how trade would have developed in the absence of wto regulation, a pertinent evaluation of the AoA trade impact seems to be beyond the reach.206 3.1.4.2 General Overview of the Negotiation Process (2000–2005) The agricultural negotiations were launched in March 2000. It was decided to negotiate food policies separately and not include them into the general gatt framework. The first phase of negotiations, directed at establishing starting positions, resulted in the submission of 45 reform proposals. It finished in early 2001, even before the new round of multilateral trade negotiations had launched in November 2001. Agriculture was then included into the line-up of the wto reform process. Correspondingly, the Doha Development Agenda (dda) made a reference to the long-term AoA objective proclaiming the goal of “substantial reductions in trade-distorting domestic support,” “reductions of, with a view to phasing out, all forms of export subsidies,” and “substantial ­improvements in market access.”207 The start of the Doha round coincided with the second phase of the agricultural negotiations, which foresaw detailed work for reaching a ­consensus on 201 Market access restrictions absolutely prevail over the domestic support in the disputes over agricultural trade with several large disputes on export subsidies. 202 Petersmann argues that interpretation of wto provisions by the judicial body should contribute to trade liberalisation and increase of the members’ bargaining power in the domains not ready for consensus-based decisions. Hence, “the gatt bicycle” (reciprocal liberalisation) was replaced by “the wto tricycle” (adding interpretation by the dsb and the Appellate Body). Petersmann 2005, pp. 127–128, 131–135, 142. 203 Peer-to-peer review under the framework of Committee on Agriculture and the tprm may not always create substantial level of insecurity. 204 Tangermann 2001, p. 19. 205 Ibid., p. 21. 206 See Ibid., p. 2. 207 See the mandate for agricultural negotiations in para. 13 of the Doha Ministerial Declaration.

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changes in agricultural disciplines. Negotiations in this phase mostly took the form of member consultations and informal off-the-record meetings. The third phase followed with the goal of preparing the Agricultural Modalities by the set deadline of March 2003.208 The first draft of agricultural modalities proposed in February 2003 by Mr. Harbinson209 was criticised by the major member-exporters for ­being insufficiently ambitious and for failing to take into account non-trade concerns,210 while developing countries supported the document. The second draft, not much amended, was already published in March 2003. The decision on the draft was suspended until the Ministerial Conference in Cancun, scheduled for September 2003. Meanwhile, the us and the ec in August 2003 jointly proposed their own approach for establishing the modalities on agriculture.211 The outline was supposed to become a basis for further proposals of other members. At this phase, negotiations stalled due to the conflicting models of ­domestic support commitments for developed and developing countries.212 This was one of the key reasons why the Ministerial Conference in Cancun failed.213 Following ten months of suspended negotiations214 a compromise was reached for the so-called July 2004 Framework215 that restated the dda agricultural commitments,216 introduced the concept of overall trade-­distorting domestic support (otds) which was to be subject to reduction,217 and proclaimed the review of “green box” rules with the goal of ensuring its non-­distortive 208 209 210 211 212

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Para. 14 of the Doha Ministerial Declaration. Negotiation document TN/AG/R/12-3. Negotiation document TN/AG/R/6. Framework for Establishing Modalities in Agriculture resulted in Annex A to the Draft Cancun Ministerial Text (known as del Castillo text JOB(03)/150/rev.1). Some developed countries proposed that their domestic support reductions were contingent upon other countries reduction of import tariffs. fao. The State of Agricultural Commodity Markets, 2006, p. 3. On the pre-history of the Cancun failure see Harbinson S. The Agriculture Negotiations: The Road from Doha and How to keep the negotiations on a Positive Track. In: Petersmann E.-U. Reforming the World Trading System: Legitimacy, Efficiency, and Democratic Governance, Oxford, 2005, pp. 121–126. See for details O’Connor, pp. 423 seq. The Framework (Doha Work Programme adopted by the General Council on August 1 2004) was designed as a pre-stage for new Agricultural Modalities. Annex A and paras. 1, 3, 6 of the Doha Work Programme. In a nutshell, the otds shall incorporate all measures calculated into the Current Total ams including those subject to deduction. Annex A and para. 9 of the Doha Work Programme.

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­character.218 In December 2005, the Hong Kong declaration ­confirmed the agreement of July 2004 and announced the commitment to fully eliminate export subsidies by the end of 2013.219 Although largely supporting further differential treatment for agricultural subsidies,220 all groups of wto members were unanimous in their commitment to reduce Total ams.221 The most radical reduction for all “non-green” support, i.e. “blue box” and ams support (including de minimis ams), was proposed by the G-20 group of developing countries.222 The us and the ec agreed with this approach, although their proposals on reduction were not as ambitious.223 The course of the G-20 wto group was also largely supported by agricultural exporters (the Cairns group), which perceived the Doha process as an opportunity to deliver a substantial reform.224 Promoting their vision, the Cairns countries insisted on revising the “green box” criteria to try and ensure a truly non-distortive character of exempted measures.225 The group also proposed to fix maximal caps for direct payments notified under paras. 5, 6, 7 and 11 of Annex 2 of the AoA in order to prevent any potential distortions.226 The ec, in its turn, emphasised the ­multifunctional 218 Annex A and para. 16 of the Doha Work Programme. 219 Hong Kong Ministerial Declaration WT/MIN(05)/DEC. On the agricultural negotiation procedure in 2000–2008 see Hepburn J.; Bellmann C. Doha Round Negotiations on the Green Box and Beyond. In: Meléndez-Ortiz R.; Bellmann Ch.; Hepburn J. (eds.) Agricultural Subsidies in the wto Green Box: Ensuring Coherence with Sustainable Development Goals, Cambridge, 2009, pp. 36–69 (further Hepburn, Bellmann), pp. 43–44. 220 E.g. Communication by the Cairns Group Outlining the Data Needed to Calculate Base otds JOB(09)/118, paras. 6–8. 221 Brink L. wto Constraints on u.s. and eu Domestic Support in Agriculture. In: The Estey Centre Journal of International Law and Trade, 7(1), 2006, pp. 96–115 (further Brink), p. 97. 222 Along that, the G-20 group proposed establishing de minimis reduction rates dependent on the amount and form of distortive domestic support provided by specific members. Brink, p. 98. 223 See e.g. ec Comprehensive Negotiation Proposal G/AG/NG/W/90. 224 Cairns Group Negotiation Proposal on Domestic Support G/AG/NG/W/35 concerning food security and developing countries problems proposed real cuts of distorting support. See also Leask D. It Is Broke. So Let’s Fix It (A Cairns Group perspective on the wto Agriculture Negotiations) presented on 21.2.2003, p. 6. 225 G/AG/NG/W/35. 226 The proposed amendments to Annex 2 of the AoA were directed to restrict the “base period” definition (for paras. 5, 6 of Annex 2 of the AoA); limitation of income support in time (for para. 6(e) of Annex 2 of the AoA); extension of period for average gross income calculation (for para. 7(a) of Annex 2 of the AoA); limitation of a compensation amount (for para. 7(b) of Annex 2 of the AoA); limitations for payments for disasters (for

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character of agriculture, while generally supporting a review of the “green box” exemption.227 The G-20 group did not provide any common strategy on ­Annex 2 modification.228 Concerning export competition, developed countries leaned toward ­reducing export subsidies rather than completely eliminating them.229 This approach was met with resistance from the developing world. This short overview of negotiation reform positions shows how difficult it was to find a mutual solution between wto members in the context of ­agricultural policies. Since the wto is a “member driven” international organisation, it is largely subject to the challenge of multilateral negotiations, where the stakes are high and positive results, if any, are not immediately visible. Add in the decisive role of consensus in the wto and the chance of overall ­success is rather scarce. Due to the difficulties of negotiations based on consensus, the only possible outcome of the deal could be the implementation of minimum standards, which are typically not efficient in meeting initial goals. As a ­response to this issue, Schropp proposes to concentrate on elaboration of efficient default rules rather than on compliance rules, since it could turn out to be more effective in achieving the overall expectations.230 While this suggestion obviously has its merits, it may be argued that first, the default rules (the scma) are already applicable for agricultural goods after the “peace clause” expiry, and second, that elaboration of separate default rules for agriculture would not be less demanding than finding a consensus on compliance rules. By the mid-2000s the wto agricultural negotiations had yet to find common ground for a compromise,231 but in August 2008, members did succeed in

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para. 7 of Annex 2 of the AoA), establishment of structural adjustment assistance instead of deficiency payments (para. 8 of Annex 2 of the AoA), modification of payments under environmental programmes (para. 12 of Annex 2 of the AoA). G/AG/NG/W/35. G/AG/NG/W/90 paras. 1, 10. Devinder, pp. 1997–1998; Hepburn, Bellmann, p. 52. Further on assessment of domestic support reform proposals see Orden D.; Blandford D.; Josling T.; Brink L. wto Disciplines on Agricultural Support: Experience to Date and Assessment of Doha Proposals, ifpri Research Brief 16, 2011, pp. 5–7. G/AG/NG/W/90 paras. 5–9; ec Proposal on Export Competition G/AG/NG/W/34. Schropp S. Trade Policy Flexibility and Enforcement in the World Trade Organisation: A Law and Economics Analysis, Cambridge, 2009, pp. 211, 295. To make a long story short, the negotiations on the agricultural modalities after Cancun were delayed, suspended and again renewed. See for details McMahon J. eu Agricultural Law, London, 2007 (further McMahon 2007), pp. 378–380.

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­preparing the new draft version of Modalities.232 This document is supposed to be the basis for further negotiations, if any, on member schedules. 3.1.4.3 Evaluation of Preliminary Modalities Compromise The Modalities 2008 confirmed the principles established in the Doha Work Programme, including the overall reduction of the otds233 and the a­ doption of the tiered otds reduction formula,234 i.e. a gradual reduction according to the base otds level and its components (with a maximum reduction of 80  per cent and a minimal reduction of 55 per cent).235 The compromised otds ­approach should continue the practice of differential treatment agreed upon, with a lower level of otds reduction for developing countries236 and no otds cuts for the recently acceded members (rams), e.g. Ukraine.237 Nevertheless, the differential treatment does not extend to the obligations on limits for ­product-specific support.238 These rather ambitious domestic support disciplines shall be implemented gradually.239 The Modalities 2008 also introduced a new edition of Annex 2 of the AoA with modified and extended criteria for all covered measures.240 Most of the Cairns group proposals were included into the draft text, but not the one on ­direct payment caps.241 It may be argued that the revised requirements for single “green box” measures will contribute to the reduction of distortion risks. 232 The latest revised version (the fourth one) is dated on December 2008. Revised Draft ­Modalities for Agriculture TN/AG/W/4/Rev.4 of 6.12.2008 (further Modalities 2008). 233 The Total ams, de minimis support and “blue box” measures must be included into the otds. Modalities 2008, para. 1. 234 Modalities 2008, para 1. 235 The Cairns concept for the base reduction level was taken. See Modalities 2008, para. 1 comparing to G/AG/NG/W/35. 236 Modalities 2008, para. 7. 237 Modalities 2008, paras. 9, 13–14, 33. Would Ukraine have not been exempted from the otds disciplines, it would have found itself within the group of wto members committing to the minimal level of reduction. The explanation of the rams exclusion should be their already tight Bound ams accession commitments. 238 Modalities 2008, para. 27. 239 Modalities 2008, para. 5. 240 Modalities 2008, para. 53, Annex B. 241 All in all, after comparing the negotiation proposals, it could be claimed that the text of the draft Modalities 2008 was visibly influenced by the Cairns group on wto agricultural negotiations. This impact could not be explained by the economic power of the group (their share in the world agricultural trade constituted only around 25 per cent in 2009, where the eu made up over 40 per cent and the eu and the us together contributed to more than a half of the world agricultural exports), but rather by the positive reputation

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That may be useful, since the fundamental criterion on (minimal) trade distortion has not been clarified in the draft modalities. The other AoA pillars will be subject to large amendments, too. As for market access rules, it is expected to cut import tariffs (again, except for the rams),242 and to target the tariff escalation problem.243 In the export competition ­domain, the general elimination of export subsidies244 as well as the ­addition of disciplines for other export competition measures – i.e. export credits and insurance, state trading and food aid – was agreed upon.245 At this point, it is hard to assess who would benefit most from the new regulation, if implemented. Being a compromise, the draft Modalities 2008 may favour developing countries given modalities’ solution for the tariff ­escalation problem, elimination of export subsidies, large cuts of certain ­domestic ­support, and some policy space left by means of the differential treatment. On the other hand, since the “green box” support will remain loosely regulated, ­developed countries may further expand their agricultural support ­programmes. ­Notwithstanding some clearly positive results, the text of draft Modalities 2008 has been criticised. First and foremost, current wto ­agricultural trade regulation, particularly for domestic support, is already very ­complex and in fact, the Doha reform process was expected to help simplify these regulations.246 But the latest Modalities are without a doubt even more complicated than the existing rules. Furthermore, some scholars have expressed concerns about the draft’s ­efficiency. They argue that the proposed domestic support reductions are not enough to bring total “non-green” support below current levels, but that ­together with the new market access commitments they could freeze the current state of play.247 In the same vein, the revised “green box” regulation does not introduce any restrictions for direct payments; thereby the policy shift into the “green area” and its further expansion could not be prevented. Unlimited use of exempted subsidies in the future may add to the significant existing imbalance between developed and developing countries’ interests. Developing countries do not have the financial resources to redistribute subsidies between

242 243 244 245 246 247

of the leading Cairns members who have more moderate farm policies compared to most developed states. See for statistics http://cairnsgroup.org. Modalities 2008, paras. 61–63, 67. Modalities 2008, paras. 84 seq. Modalities 2008, paras. 162–163. Modalities 2008, paras. 165–168, Annex K. O’Connor, p. 25. Gifford M.; Montemayor R. An Overview Assessment of the Revised wto Draft Modalities for Agriculture, 2008, p. 5, url: http://www.ictsd.org/downloads/2008/05/­overviewpaper4 -20-081.pdf.

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the boxes, but because they are eligible for differential treatment they will remain more flexible in their use of “non-green” types of support.248 By the same token, elimination of export subsidies is supposed to encourage national reforms that change price support policies to direct income support to producers.249 Accordingly, a further expansion of the “green box” should be envisaged. Moreover, some topical issues were left unresolved by the Modalities 2008, among others, the decision on the “peace clause.” Finally, the dda signed 14 years ago is becoming dated. The document does not address new emerging issues such as possible instruments to combat food security concerns and the inclusion of biofuel subsidies into agricultural negotiations.250 3.1.4.4

The Latest Development: Any Hope of Completing the Negotiations? In December 2008, the wto Ministerial Conference collapsed due to a disagreement among members on the precise terms of the agricultural security safeguard mechanism (ssm). Several years of very weak development in negotiations on Modalities 2008 followed.251 After the outburst of the food price crisis, other international actors joined the discussion on the future of agricultural policies.252 But the outlook in general was rather pessimistic.253 In December 2013, the Bali Ministerial Conference gave hope for getting the agricultural negotiations back on the track by providing some trade-offs for developing countries. The Bali and succeeding Nairobi packages254 made visible progress towards a partial consensus on the Modalities 2008, namely on export competition disciplines, most disturbing “green box” measures, safeguard measures and trq administration. Implementing these deals is dependent

248 Ibid., p. 7. 249 Ibid., p. 14. 250 The food crisis 2007–2008 and the following world financial crisis contributed to a raise of protectionist voices. See for instance, Basic principles of an alternative AoA by Solidarité. 251 McMahon J.; Desta M.G. The Agreement on Agriculture: Setting the Scene In: McMahon J.; Desta M.G. (eds.) Research Handbook on the wto Agreement on Agriculture: New and Emerging Issues in International Trade Law, Cheltenham, 2012, pp. 1–44., pp. 38–42; McMahon J. The Negotiations for a New Agreement on Agriculture, Leiden, 2011 (further McMahon 2011), pp. 247–281. 252 See Final Declaration at the G8 Agriculture Ministers Meeting in Rome, 2009 and McMahon 2011, p. 247. 253 The year 2011 was reported to be “the last window of opportunity” to conclude negotiations. Negotiation Document WT/GC/M/128, p. 29. 254 WT/MIN(13)/DEC, WT/MIN(13)/31 – WT/MIN(13)/45; WT/MIN(15)/DEC, WT/MIN(15)/ 31 – WT/MIN(15)/48.

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on member engagement, as establishing an effective monitoring mechanism would be conditional on their informational support. Currently, the wto is trying to promote a solution for the agricultural compromise and emphasizes a “doable” outcome for all members. Still, it is not clear whether the Modalities 2008 should remain the base for further negotiations. It should be reiterated that the key problem of the current multilateral ­negotiations is not the delayed agricultural agenda.255 In this context, the ­rejection of the “single package” approach may help accomplish or at least ­accelerate agricultural talks.256 Despite all of the challenges, finalising the agenda is still worth it as the economic stakes are very high.257 Intermediary Summary The gatt/wto system is the first example of multilateral regulation in ­agricultural trade. After the establishment of the wto in 1995, trade in agriculture has a separate regulatory track within the world trade system (AoA). Member commitments within all pillars of the agricultural rules are more flexible ­compared to the rules for industrial goods. To increase predictability, some members may have incentives for introducing stronger agricultural disciplines with their preferential partners. 3.2

Agricultural Commitments within Regional Trade Agreements

3.2.1 Issues Emerging with Proliferation of rtas258 3.2.1.1 Regulation of the rtas within the wto System There are two options for pursuing trade liberalisation: co-operation (the most prominent example is participation in the wto) and liberalisation through 255 Cotton subsidies and safeguard mechanisms are the last topics of the agricultural negotiations where not even a preliminary compromise has been reached. Re-negotiation of some topics that were later included in the Bali and Nairobi packages has also been reported. High-level Trade Experts Group. The World Trade and the Doha Round, 2011, paras. 3.28.-3.29., 3.48.; wto. Annual Report 2013, pp. 22 seq. 256 The Eighth Ministerial Conference 2011 called to recognise the lack of success for the “single package concept” and to unlock the negotiations. wto. Annual Report 2013, pp. 22 seq. 257 Successful dda implementation is expected to bring the annual global output growth for 135 billion eur (0.24 per cent of the current global gdp) and annual export increase for 310 billion eur (2.56 per cent growth). wto. wto Trade Negotiations: Facts and Figures on the Doha Development Agenda, Press release of 28.1.2011, p. 1, see also High-level Trade Experts Group. The World Trade and the Doha Round, Geneva, 2011, para. 3.22. 258 The term “rta” is used as an overarching notion for all forms of regional economic integration. For the purpose of this research, a rta is not interchangeable with the notion

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bilateral (regional) treaties (integration). The first aims to reduce trade ­restrictions, while the second generally prohibits them. In this regard, some consider rtas to be the only “winning” solution for trade liberalisation.259 They may also facilitate expansion of extended trade liberalisation. It was observed that countries that implemented one rta found it easier to replicate rtas with multiple partners, since many of the required legal and institutional changes were already in place.260 rtas are associated with two kinds of benefits: static (replacement of costlier domestic goods with cheaper imports leading to a reduction in consumer prices) and dynamic (increase in competiveness within the covered territory).261 rtas may also stimulate economic reforms since the obligations taken by a government would weaken positions of a reform-resistant lobby, and increase the potential international bargaining power of a state.262 Consequently, regional economic integration may generate competition between different national economic and legal systems and, as a result of that, regulatory competition among states.263 Furthermore, it is believed that closeness of systems (markets) better reflects the interests of relevant parties.264 On the other hand, rtas may also cause certain trade-diverting effects on world trade flows.265 rtas are an example of fragmentation and regionalisation in international law.266 The so-called “spaghetti bowl phenomenon” (first “preferential trade agreements” (pta) which stays mostly for unilateral trade preferences, in particular, General System of Preferences (gsp). 259 If an exporting state decides to liberalise multilaterally, avoiding rtas, its export competitors will be tempted to enter into rtas with other willing partners with the goal of taking the market from the original exporting state. If a competitor chooses regional economic integration, then others should also follow this path not to lose. Kolsky Lewis M. Trade Liberalisation Policy. In: Buckley R.; Lo V.; Boule L. (eds.). Challenges to Multilateral Trade: the Impact of Bilateral, Preferential and Regional Agreements, Alphen aan den Rijn, 2008, pp. 21–40 (further Kolsky Lewis), pp. 28, 31. 260 Maruyama W. ptas and the Erosion of the wto’s mfn Principle. In: Stanford Journal of International Law, 46, 2010, pp. 177–197, p. 189. 261 Perdikis N. Trade Agreements: Depth of Integration. In: Kerr W.; Gaisford J. (eds.) Handbook on International Trade Policy, Cheltenham, 2007, pp. 106–119 (further Perdikis), pp. 109–111. 262 Ibid. 263 See Snyder F. Regional and Global Regulation of International Trade: Studies in European Law and Integration, Oxford, 2002, pp. 49–51. 264 ilc Report, p. 106, paras. 205–206. 265 wto. World Trade Report 2011: The wto and Preferential Trade Agreements: From ­Co-existence to Coherence (further World Trade Report 2011), pp. 105–106. 266 The purpose of regionalisation is to strengthen own position through the optimal use of regional advantages, to stay competitive, and to achieve profits through integration.

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mentioned by Bhagwati) attributes to rtas the re-bilateralision of trade structures which causes major tariff rate diversification for identical goods, leads to imbalances in the rules of origin, and, as a result of that, increases administrative and transaction costs.267 Summarizing the above arguments, it seems that regional integration may be actually be the second best choice for wto members, and hence, the ­second-best method of trade liberalisation.268 However, the boom of regional ­integration during the last two decades, primarily in reaction to the fall of the Eastern bloc, and in the 2000s to the stalemate of the wto Doha Round negotiations, should not be underestimated. By 2008, 35 per cent of world trade was flowing through rtas.269 There are four types of regional economic integration. A free trade zone (also fta as a free trade agreement) eliminates custom duties and other trade restrictions between signatories. The principal drawback of this form is that it often does not provide a solution to the rules-of-origin problem and incurs substantial costs to solve this issue. A more advanced model of integration, a customs union (cu), effectively combats the rules-of-origin problem by fixing a common external duty, but may discriminate against third states.270 In fact, a cu is nothing more than a fta with a common external trade policy that may erode the economic and political sovereignty of its signatory states.271 Furthermore, a cu brings forward the issue of equality between participants, since a larger state usually insists upon its authority over customs issues for the whole union.272 For those reasons, cus are not as common as ftas.273

267 268 269 270

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Hingst U. Auswirkungen der Globalisierung auf das Recht der Völkerrechtlichen Verträge, Kiel, 2001, pp. 137–138. See Tietje, p. 128. See Lester S.; Mercurio B. (eds.) Bilateral and Regional Trade Agreements: Commentary and Analysis, Cambridge, 2009 (further Lester, Mercurio), pp. 178–181; Perdikis, pp. 109–111. World Trade Report 2011, p. 7. See ­Roberts, Wehrheim, pp. 316–317; Behrens P. Integrationstheorie: Internationale Wirtschaftliche Integration als Gegenstand Politologischer, Ökonomischer und Juristischer Forschung. In: Rabels Zeitschrift für Ausländisches und Internationales Privatrecht, 45, 1981, pp. 8–50 (further Behrens), p. 27. Perdikis, p. 116. Viner J. Political Aspects of Customs Union. In: O’Rourke K. (ed.) The International Trading System, Globalisation and History, Volume ii, Cheltenham, 2005 (first published in Viner J. The Customs Union Issue, New York, 1950, pp. 82–107), pp. 289–290. At the beginning of the 21st century, only ten per cent of all regional integration constructs were customs unions. Perdikis, p. 107. More than three-quarters of all rtas fall within ftas. World Trade Report 2011, p. 6.

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The other two types of integration, internal market and economic union, are associated with a greater loss of sovereignty and are hardly represented in practice. The most fitting example is the European integration project.274 All in all, the ftas outnumber customs unions and the more elaborate integration types. They are considered more feasible politically and more efficient economically.275 Nevertheless, the level of implementation for signed rtas in all forms remains low,276 allegedly due to the question of political will. The map of regional integration is a web of partial systems within the international economic order. These systems constitute independent legal regimes with jurisdictions often reaching beyond the trade domain.277 Thus, deeper ­integration may extend further than wto-covered areas (so-called “behindthe-border barriers”).278 That being said, international obligations within rtas are able to diminish policy space of participating states more than international co-operation.279 In regard to the interplay between rtas and the wto regime, one in fact deals with two parallel legal orders that may contradict each other.280 ­Questions over whether regional integration supports or diminishes the wto’s 274 Where the internal market has been functioning in the European Union since the early 1990s, the formation of the European Economic Union has not been accomplished yet. On the forms of economic integration see Tietje, pp. 118–122. 275 ftas tend to reduce tariffs, where cus may lead to an overall tariff rise (due to increase of collective economic power, pressure of sectoral interests, especially in the agricultural sector). Perdikis, pp. 107, 116. See also Facchini G.; Silva P.; Willmann G. The Customs Union Issue: Why Do We Observe So Few of Them?, CESifo Working Paper 2426, Munich, 2008 and Kemp M. Normative Comparisons of Customs Unions And Other Types of Free Trade Association. In: European Journal of Political Economy, 23, 2007, pp. 416–422. 276 As at the end of July 2013, 575 rtas had been notified to the wto (the largest share under Art. xxiv of the gatt), where only about 379 of them were in force. url: http://www.wto .org/english/tratop_e/region_e/region_e.htm. On the expansion of rtas within the wto system see ilc Report, p. 108, para. 210. 277 ftas and other forms of integration primarily serve economic goals, but have been gaining more political importance. Tietje, p. 107, n. 104. 278 In practice “beyond wto topics” are represented by competition policy, environmental laws, investment and movement of capital. Such kinds of provisions are most often incorporated into agreements, where at least one party is a developed state. World Trade Report 2011, p. 11. 279 See Hamwey. 280 The main example is a restrictive impact of regional integration on the mfn principle, a “cornerstone of the gatt” and “one of the pillars of the wto trading system.” Appellate Body Report Tariff Preferences to Developing Countries WT/DS246/AB/R, para. 101. See also Tietje, p. 127; Lester, Mercurio, p. 178; Kolsky Lewis, pp. 25–26.

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role and whether rtas are “building blocks” or “stumbling blocks” of multilateralism, (i.e. whether regional trade advantages would cause states to expand external free trade, or whether, being satisfied with the acquired benefits, they would lose motivation for multilateral negotiations), have no clear answer.281 At the same time, it is assumed that the rtas, in seeking to eliminate “behindthe-border-barriers,” may have the potential to improve coherence between regional trade regulation and the multilateral trading system, if based on the subsidiarity principle.282 Subsidiarity in this context would mean having a complementary character in the wto regulated areas and a substitution for multilateralism in the areas where bilateral or regional integration would be more efficient. The wto law directly authorises rtas in the form of ftas and cus, “between the territories of contracting parties,” under conditions set forth in Art. XXIV:4–9 of the gatt.283 These provisions, in fact, spell out the general rule of international law contained in Art. 41 of the vclt (so-called inter se agreements). Allegedly, this tolerance on the wto side pursues the goal of gradual global trade liberalisation via bilateral and regional liberalisation (following the interpretation of the first part of Art. XXIV:4 of the gatt). At the same time, a rta formation between members and non-members is controversial, as it is not directly authorised.284 To date, the gatt/wto system has had very little experience in this area.285 Art. xxiv of the gatt provides the following requirements for the formal eligibility of rtas: 281 Tietje, p. 128; Lester, Mercurio, p. 178, Kolsky Lewis, pp. 24–25, Perdikis, p. 112. In this ­context, the impact of the recently emerged rtas with deeper integration beyond the simple tariff liberalisation needs a very sophisticated system of measurement. World Trade ­Report 2011, pp. 14–15. 282 World Trade Report 2011, pp. 15–16. 283 rtas are also eligible for developing countries in accordance with Decision of 28.11.1979 (L/4903), as well as for trade in services under Art. v of gats. On the history and rationale of Art. xxiv of the gatt see Chase K. Multilateralism Compromised: The Mysterious ­Origins of the gatt Article xxiv. In: World Trade Review, 5, 2006, pp. 1–30, pp. 3 seq. 284 Theoretically, such treaties may be authorised by the decision of wto members in ­accordance with Art. XXIV:10 of the gatt. 285 Kyrgyzstan refused to participate in the formation of the cu with Russia, Kazakhstan and Belarus (all non-members by that time) in the early 2000s due to the threatening high compensations to wto trade partners, but not on the ground of the non-permissibility of rtas with non-members. In 2015, Kyrgyzstan and Armenia (both wto members) ­acceded to this cu, but by that time Russia had become a wto member and the accession of ­Kazakhstan was being prepared.

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– Adherence to the goal of trade facilitation rather than the raising of trade barriers for third parties (Art. XXIV:4 of the gatt);286 – a general prohibition on increased custom duties287 and on the more restrictive character of other regulations of commerce applied for trade with third parties (Art. XXIV:5(a) and (b) of the gatt).288 The evaluation of the total amount of customs duties is based on an overall assessment of weighted average tariff rates and of customs duties collected. As for other regulations of commerce for which quantification may be difficult, the examination of individual measures, regulations, products covered, and trade flows affected may be required;289 – have no effect on mfn tariffs applied by the signing parties to other wto members while adjustment of mfn rates through negotiations is possible (Art. XXIV:9 of the gatt in conjunction with Art. XXIV:8(a)(i) and (b) of the gatt); – submission of a plan and a schedule of regional integration for possible recommendations by other wto members (Art. XXIV:5(c) and XXIV:7 of the gatt), being quasi the pre-establishment procedural requirement; – compliance with the definition of a cu or a fta respectively given in Art. XXIV:8 of the gatt. The key element of these definitions is the elimination of all internal barriers (duties and other restrictive regulations of commerce290) to “substantially all (bilateral) trade” in products originating in the territories of rta-partners 286 The dsb found that this provision does not set forth a separate obligation itself, but rather falls within the overriding and pervasive purpose of Art. xxiv of the gatt which informs the other relevant paragraphs of the provision. See Appellate Body Report Turkey-Textiles WT/DS34/AB/R, p. 11 287 If a contracting party proposes to increase any duty rate inconsistently with the provisions of Art. ii of the gatt, the procedure set forth in Art. xxviii of the gatt (compensatory adjustment) shall apply (Art. XXIV:6 of the gatt). 288 The major difference between this requirement for ftas and cus is that for the latter the increase of restrictions is evaluated “on the whole,” where the requirement for ftas prohibits increase of (any single) restrictions. In this regard, it was reported that some wto members interpret this difference as a prohibition of any increase of mfn duties or imposition of any other regulation of commerce by the formation of a fta. See WT/ REG/W/37 of 2.3.2000, para. 44. 289 Para. 2 of the Understanding on Article xxiv of the gatt. This approach should be applicable to both cus and ftas. See WT/REG/W/37, paras. 41–42. 290 The expression “restrictive regulations of commerce” given in Art. XXIV:8 of the gatt implicates internal restrictions within rtas in opposite to the external dimension taken in Art. XXIV:5 of the gatt. However, it is argued that some internal disciplines may also

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(Art.  xxiv:8(a)(i) and (b) of the gatt), where exceptions may be only permitted under Art. xi–xv and xx of the gatt.291 This restriction on the scope of economic integration seems to be aimed at preventing countries from setting up rtas that insulate less efficient sectors from import competition. Since there is no consensus on what constitutes “substantially all trade,” most rtas exclude some sensitive products or sectors from their scopes.292 The question of timing for the measurement of intra-rta trade coverage is also important. To date, there is no unanimity whether transitional periods usually agreed on in rtas (at least for some products) shall be evaluated in the light of the definitions contained in Art. XXIV:8 of the gatt.293 Beyond that, cu parties are obliged to maintain substantially the same external trade regulation (Art. XXIV:8(a)(ii) of the gatt). This provision does not require each rta member to apply the same duties and other regulations of commerce as other members with respect to trade with third countries. The word “substantially,” in this context applies to both qualitative and quantitative components, where the quantitative aspect is more emphasised in ­relation to duties.294 The compatibility of rtas construction with the provisions of Art. xxiv of the gatt has not been examined by the wto judiciary system yet.295 Though, the Appellate Body in Turkey-Textile confirmed that Art. xxiv of the gatt may justify a measure that is inconsistent with gatt provisions when two conditions are met: full compliance with Art. XXIV:8 and 5 of the gatt, influence external trade, e.g. sps and tbt measures, competition rules. WT/REG/W/37, paras. 45–46. 291 The requirement on “substantially all trade” is referred to internal trade between rtas partners. In this regard, the Appellate Body in Turkey-Textiles (p. 9) found that Art. XXIV:8(a) of the gatt offered “some flexibility.” Nevertheless, the extension of the scope of the eligible measures to safeguards and anti-dumping measures has not been clarified yet. See WT/REG/W/37, paras. 57–58. 292 The wto refers to the study of the rtas signed by four major trade states that points to about seven per cent level of trade exclusion, mostly for agriculture, in particular, processed food, and labour-intensive manufactured products (e.g. footwear, motor vehicles). World Trade Report 2011, p. 6. 293 Transitional periods are usually referred to as “interim agreements.” See WT/REG/W/37, para. 48. 294 “Something closely approximating ‘sameness,’” but not “‘comparable’ trade regulations having similar effects with respect to the trade with third countries” are required to fulfil the criterion on “substantially all trade.” Appellate Body Report Turkey-Textiles, p. 9. 295 In Turkey-Textile the Panel assumed arguendo that the arrangement between Turkey and the ec was compatible with the requirements of Art. XXIV:8(a) and 5(a) of the gatt and did not examine the issue. Appellate Body Report Turkey-Textiles, p. 12.

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and ­demonstration that the regional economic integration “would be prevented if it were not allowed to introduce the measure at issue.”296 At the same time, the rta signatory parties that are also wto members are to search for an alternative and less restrictive measure.297 In general, the wto has weak control over the implementation of rtas. The requirement to formally notify the wto Committee on rtas aims to increase transparency, but is often only followed after an rta is signed, or even already in force.298 It may be argued that the delay in notifications serves to prevent other members from exercising their right to submit recommendations on a rta, as they are supposed to have a mandatory nature.299 The recommendations basically constitute a consensus-based examination procedure pursuant to the general rules on decision-making under Art. IX:1 of the wto Agreement.300 They may not, however, extend beyond the question of the likelihood of the rta formation in accordance to Art. XXIV:8 of the gatt within the ­period contemplated by the parties to an outstanding agreement (in other words, they may concern exclusively the “reasonableness” of the proposed period). Due to the obscurity of current regulation, the issue of rta eligibility was to be clarified during the wto Doha Round.301 The negotiations resulted in the provisional adoption of a transparency mechanism obliging members to submit information on newly signed rtas “as early as possible,” usually ­directly a­fter the parties ratify the rta.302 Non-participating wto members would have a year following a rta notification to scrutinise the rta. 296 Appellate Body Report Turkey-Textiles, p. 11. Such justification may be secured, “only if the measure is introduced upon the formation of a customs union, and only to the extent that” (accession to a cu usually equals to the formation). This conclusion was made after the examination of the text of the chapeau to Art. XXIV:5 of the gatt. Appellate Body Report Turkey-Textiles, p. 8. 297 Appellate Body Report Turkey-Textiles, p. 12. 298 rta notifications are required by Art. XXIV:7 of the gatt and Art. V:7 of gats (“shall promptly notify”). The scope of notification was set in Note from the Chairman “Standard Formate for Information on Regional Trade Agreements” WT/REG/W/6, as well as Technical Cooperation Handbook on rtas WT/TC/NOTIF/REG/1. 299 Art. XXIV:5(b) of the gatt reads as: “The parties shall not maintain or put into force … such agreement if they are not prepared to modify it in accordance with these recommendations.” 300 Tietje, p. 141. 301 The Doha Development Agenda (dda) includes a mandate to negotiate aiming at “clarifying and improving disciplines and procedures under the existing wto provisions applying to regional trade agreements.” Para. 79 of the Doha Ministerial Declaration. 302 Decision of the wto General Council “Transparency Mechanism for Regional Trade Agreements” WT/L/671.

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At the end of the day, the negotiations on the rta transparency rules did not advance.303 3.2.1.2

Potential Conflicts between Legal Orders: Globalisation v. Fragmentation Conflicts are inherent to the very nature of international law due to a variety of lawmakers, the trend of amendments over time and the lack of centralised law enforcement (fragmentation).304 The progress of international law ­revealed further issues, i.a. a shift from a law of “co-existence” to a law of “cooperation” (multiplication of norms with a view to achieve common goals), development of international dispute settlement mechanisms etc.,305 which tend to contribute to additional fragmentation. The deepening of regional economic integration and the expansion of wto membership increases the possibility of conflict,306 not only between the wto rules and rtas provisions, but also between the rules of different rtas. As they are regulated at national, ­regional and multilateral levels, agricultural policies – with subsidies as their core ­component – could be caught up in the clash of regimes. The definitions of a conflict vary.307 The common perception is that the ­precondition of a conflict is overlapping ratione materiae, personae and temporis of two legal norms.308 In general, there are two leading approaches to the ­essence of a conflict. The “subject-matter approach” reflected in Art. 30 of the  vclt could not always be enforced effectively, since there are a variety of legal instruments with “melted” subject matters.309 The alternative approach would be the adoption of a broader definition of a conflict as “a situation where two rules or principles suggest different ways of dealing with a problem.”310 A ­narrower, opinion suggests a conflict is present when it is “impossible to ­comply with all requirements of two norms.”311 In this context, the word “comply”

303 304 305 306

World Trade Report 2011, pp. 15–16. ilc Report, p. 10; Pauwelyn, pp. 12 seq. Pauwelyn, pp. 17 seq. Conflict is defined as a form of interaction between international legal norms, where the other form is accumulation (adding to or confirming rights and/or obligations). Ibid., pp. 161 seq. 307 For the overview of the range of approaches to legal conflicts see Pauwelyn, pp. 167–172. 308 Ibid., pp. 165 seq. 309 The ilc took the position that this approach had to be rejected. See ilc Report, p. 18. 310 ilc Report, p. 19. 311 Similarly, pursuant to Pauwelyn, conflict is a situation where “one norm breaches, has led or may lead to breach of another norm.” Pauwelyn, p. 199.

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­implies r­ espect for obligations and making use of permissions.312 Thereby, conflicts may be sub-divided further. First, legal conflicts may be normative, that is, when one norm constitutes a breach of another norm. Second, there may be conflicts of applicable law (necessary and potential)313 that may, in principle, be ignored if none of the parties to an obligation raise any concerns.314 The wto interpretation of a conflict of norms seems to be broad enough to cover not only necessary conflicts (i.e. mutually exclusion of norms).315 The dominating international practice uses the principle of “legislative i­ ntent” and the principle of “maximum effectiveness” of treaties316 which ­imply interpretation of norms in a manner that avoids conflicts, namely, in the light of an intention to produce effects in accordance with existing law and not in ­violation of it.317 In this regard, the interpretation aims to seek a reconciliation of norms, where two norms are generally deemed to be reconcilable when there is at least one way of complying with all their requirements.318 ­Conversely, two norms may have a “cancelling effect” without being in conflict. That would be

312 The “impossibility of compliance with the norms at least for one person or at one time or in one place or with regard to one object or under one condition” would be enough. A conflict may be triggered by situations when the same act is a subject of different types of norms (obligatory and prohibitory norms): one norm requires an act, while another norm ­requires or permits an act or omission which cannot be performed at the same time; a norm prohibits a necessary precondition of another norm; a norm prohibits a “necessary consequence” of another norm. See Sadat-Akhavi S.A. Methods of Resolving Conflicts ­between Treaties, Leiden, 2003 (further Sadat-Akhavi), pp. 5–11. 313 Pauwelyn, p. 175 seq. 314 ilc Report, p. 28. 315 The conflict will also take place where one norm prohibits what another permits. Panel Report ec-Bananas (Complaint by Ecuador) WT/DS27/R/ECU, para. 7.1.59. At the same time, the Panel in Indonesia-Autos and the Appellate Body in Guatemala – Cement limited conflict to its strict definition. See Panel Report Indonesia-Autos, para. 14.99; Appellate Body Report Guatemala-Cement, para. 65. Nevertheless, since the Appellate Body in Guatemala-Cement explicitly mentioned that a conflict may appear where two norms “cannot be read as complementing to each other,” Pauwelyn argues that the wto approach is open to a broader interpretation of a conflict. See Pauwelyn, pp. 190–195 and seq. See also the discussion on mandatory/discretionary rules in Sub-chapter 3.1.1. 316 Sadat-Akhavi, p. 99. 317 icj case 1957 the Right of Passage over Indian Territory (Preliminary Objections) (­Portugal v. India). See ilc Report, p. 26. In case of ambiguity of treaties the principle expressio unius est exclusio alterius (to express one thing is to exclude the other) is to be applied. See for details Sadat-Akhavi, pp. 28–32. 318 Therefore, concurrent permissive norms could never be in conflict. Sadat-Akhavi, p. 34.

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the case when their application creates undesirable and frustrating situations without a conflict.319 The legal framework charged with resolving conflicts arising out of fragmentation is established by the vclt.320 rtas, as a “treaty” in the sense of Art. 2(1) of the vclt, are also governed by general international law, but could theoretically apply alternative interpretation rules to those in Art. 31 of the vclt.321 To reconcile possible conflicts between the wto/gatt and rtas, it must be kept in mind that the regionalism is, in fact, a kind of lex specialis.322 Therefore, the widely accepted maxim of legal interpretation postulating that special law derogates from general law must be applied.323 Yet the effect of any single case of lex specialis should be assessed on the ground of the nature of its general law,324 where the general treaty must control the application of the lex specialis rules and cannot be set aside automatically.325 In the case of rtas, one faces a speciality in regard to parties that triggers application of the rules on successive treaties326 based on the principle that lex posterior derogat lege priori (Art. 30 and Art. 41 of the vclt). Hence, when a conflict arises between wto provisions and a rta signed by wto members, there is a case of modification of the multinational agreement, governed by the provisions of Art. 41(1)(a) and 41(2) of the vclt (as the gatt provides the possibility for modification of the treaty). Consequently, if a wto member performs its obligations under a rta consistent with the requirements of Art. xxiv of the gatt, it should not infringe any gatt provision. However, another wto member affected by the same rta is free to submit a non-violation or situation claim (Art. XXIII:1(b) or (c) of the gatt). A rta within the wto system must be interpreted in accordance with Art. 31(3)(c) of the vclt,327 whereby “any relevant rules of international law 319 Sadat-Akhavi, p. 34. 320 The conventional track of conflict resolution under the vclt, when both conflict norms (treaties) remain in force, foresees the option of amendment (for all parties) (Art. 40 of the vclt) and the option of modification (for certain parties only) (Art. 41 of the vclt). See for details ilc Report, p. 15. 321 As a general rule, Art. 31(3)(c) of the vclt is a basis for examining the rules of public international law on interpretation of rta provisions. 322 A rta is intended as an application of modification of a general wto rule or even as a deviation from this rule. ilc Report, p. 102, para. 195. 323 Ibid., pp. 34–35. 324 Ibid., p. 64. 325 Ibid., p. 22. 326 Ibid., p. 61, para. 113. 327 The principle of “systemic integration” reflected i.a. in Art. 3.2. of the dsu. See ilc Report, pp. 135, 208.

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applicable in the relations between the parties” must be considered by the interpretation. In this context, the wto bodies had different outcomes in the examination of whether an rta was to be taken into account.328 Vice versa, it is arguable whether wto case law may be used to interpret rtas in accordance with Art. 31(3)(b) of the vclt.329 That is typically accepted when a rta provision incorporates a corresponding wto provision by reference or by replicating the wording.330 When there is at least one non-member state among the constituent parties of a rta, Art. 30(4)(b) of the vclt331 should be applied, i.e. the signatory wto members are supposed to resolve possible intra-rta conflicts pursuant to the rules of Art. 41 of the vlct, and the relationship between members and nonmembers should be governed by the rta. This last scenario is not regulated by the vlct conflict rules. In this situation, a respective wto member must choose the treaty under which it will carry out its obligations. But since it is required to follow all treaties under the principle, pacta sunt servanda, it is likely that a wto member will, by default, violate the provisions of one of the treaties in choosing one over the other.332 In respect to this, the problem of violating the mfn treatment obligation primarily arises in the event of participation by non-wto-members in rtas.333 Clearly, the vclt rules on successive treaties are inconclusive. For that reason, the ilc recommends signatories of rtas include conflict rules into the text of their treaties.334

328 Panel Report Chile-Price Band WT/DS207/R, paras. 7.81.-7.86.; Appellate Body Report ecBananas iii WT/DS27/AB/R, para. 167 seq. See ilc Report, pp. 224–226. In Panel Report ec-Biotech the dsb posed that the Panel may take into account the norms of international norms if it considers them to be informative in that case (paras. 7.93., 7.95.). 329 Art. 31(3)(b) of the vclt provides that: “any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation.” 330 The argument against the out-of-wto use of the respective interpretation is that in accordance to Art. IX:2 of the wto Agreement only the Ministerial Conference and the General Council have the exclusive authority to adopt interpretation of the wto agreements. See Lester, Mercurio, pp. 114–120. 331 Art. 30(4)(b) of the vclt reads as: “The treaty to which both States are parties governs their mutual rights and obligations.” 332 ilc Report, p. 62, para. 115. 333 Won-Mog Choi. Legal Problems of Making Regional Trade Agreements with Non-wtoMember States. In: Journal of International Economic Law, 8(4), 2005, pp. 825–860. 334 Art. 30(2) of the vclt: “When a treaty specifies that it is subject to, or that it is not to be considered as incompatible with, an earlier or later treaty, the provisions of that other treaty prevail.” On the types of conflict clauses see ilc Report, p. 135, paras. 267–268.

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3.2.1.3 Legal Approximation as an Instrument to Escape Conflicts Integration has three distinct, but interconnected, dimensions (economic, political and legal).335 Harmonisation, one of the instruments of integration, is characterised by co-operation through intergovernmental or supranational instruments to achieve specific tasks.336 Where harmonisation may run in all dimensions of integration, the convergence in the legal area could be the most challenging. Legal harmonisation or harmonisation of economic regulation, serves to eliminate differences between regulatory regimes of individual countries,337 and may also take place beyond the economic integration process while ­facilitating trade. Legal harmonisation may proceed by using one or all of these three methods: – fulfilment of obligations under legally binding agreements (“hard law”); – establishing non-binding recommendations or guidelines encouraging countries to adopt harmonisation measures voluntarily (“soft law”); – harmonisation on own initiative on the basis of mutual consultations (“­policy coordination”).338 The “hard law” method is the most efficient and reliable way of harmonisation, although it is rather difficult to execute. The intra-rta harmonisation on the regional level within the eu, and the practice of external harmonisation ­pursued by the eu, is a relevant example of implementing this “hard law” method.339 This specific harmonisation case needs to be introduced briefly. For areas not covered by the exclusive Union competence, the eu usually demands mutual recognition between the Member States (e.g. Title v of the tfeu) and often fix that in treaties with developed countries (mostly for 335 See Behrens. 336 The other ways may be elite networking (no model role), emulation (model foreign programme), and penetration (coercive nature, states are forced to borrow the experience of external actors). Bennett C. What Is Policy Convergence And What Causes It? In: British Journal of Political Science, 21(2), 1991, pp. 215–233, pp. 220 seq., in particular pp. 225–227. 337 Nakagawa defines economic regulation as government intervention in the market activities of business and private citizens for the purpose of achieving certain economic policy goals. Nakagawa J. International Harmonisation of Economic Regulation, Oxford, 2011, pp. 1–2. 338 There are also several alternatives to harmonisation, such as mutual recognition (widely used by the eu), extraterritorial application of domestic law (mostly in competition law, used by the us and the eu); border control. Ibid., pp. 3–4, 7–9. 339 Soft law mechanisms are widely used in the eu external relationship (e.g. enp).

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standardisation issues). eu agreements with developing countries normally replace mutual recognition by incorporating obligations for a treaty partner on legal harmonisation with the so-called eu acquis communautaire, which should contribute to the elimination or reduction of trade restrictions caused by regulatory discrepancies.340 The eu legislation does not provide a definition of acquis communautaire that embraces the entire body of common E ­ uropean norms.341 Therefore, in opposition to mutual recognition, harmonisation foresees a certain impact of European law on third countries’ legal o­ rders. ­Harmonisation to the acquis342 may appear in several forms: the most common legislative form (adoption of the national legal system or accession to the international treaties signed by the eu343), an administrative form (approximation to the European Commission practice), and judicial form (application of European law by national courts).344 Although adaptation to the acquis is a requirement for countries that are candidates to accession (so-called “accession acquis”345), lower stages of integration and cooperation may also call for approximation to the acquis.346 The acquis covered by international agreements vary from one agreement to ­another. In essence, two types of harmonisation clauses may be distinguished. The “hard” “approximation clauses”347 foresee voluntary adoption of the acquis 340 It is presumed that trade liberalisation may depend on harmonisation as a result of removal of obstacles to trade. Evans A. Voluntary Harmonisation in Integration between the European Community and Eastern Europe. In: European Law Review, 22, 1997, pp. 201–220 (further Evans), pp. 202–203. 341 The acquis is the body of common rights and obligations binding on all the eu Member States, including primary and secondary legislation, the case law of the Court of Justice, declarations and resolutions adopted by the eu; instruments under the cfsp; international agreements concluded by the eu and those entered into by the Member States among themselves within the sphere of the eu’s activities. url: http://ec.europa.eu/ enlargement/policy/glossary/terms/acquis_en.htm. 342 Within the eu the notion “harmonisation” is normally substituted by “approximation” or “convergence.” 343 For economic regulation the second components mostly concerns the wto/gatt regime. 344 Evans, p. 203. 345 The accession acquis contains 35 chapters, i.a. agriculture and rural development and food safety, veterinary and phytosanitary policy. 346 Communication from the Commission to the Council and the European Parliament “Wider Europe – Neighbourhood: A New Framework for Relations with our Eastern and Southern Neighbours” (com(2003) 104 final) of 11.3.2003 encouraged states neighbouring the eu to adhere to the eu’s common values and called for the adoption of the vast scope of acquis in order to enter the eu markets (p. 4). 347 For instance, in Stabilisation and Association Agreements with the Balkan States.

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in priority areas as an imperative condition for market access liberalisation. The “soft” “evolutionary clauses” are non-binding instruments that make further co-operation (integration) progress with a respective partner dependant on harmonisation with the priority acquis.348 There is also a possibility of “voluntary harmonisation,”349 when a third country approximates its legislation to the acquis without requiring a legal obligation to do so. Voluntary harmonisation may proceed directly (adoption of European law) or indirectly (adoption of the legislation of an eu Member State which has already accomplished the harmonisation). Intermediary Summary International legal order has been facing the process of legalising international organisations that tends to reduce the policy space of participating states. In parallel, there is a strong tendency toward fragmentation in both horizontal and vertical dimensions of the international legal system. These developments may increase the risk for legal conflicts. In the context of trade law, the area with the greatest potential for a clash of regimes (in its vertical dimension) is between the wto/gatt system and regional agreements. wto members are, in general, committed to complying with the wto provisions. However, regional integration projects may p ­ review exemptions from the wto general norms, provided they are compatible with the provisions of Art. xxiv of the gatt.350 Possible conflicts between the wto/gatt law and rtas should be examined in light of the vclt, unless the rtas do not entail a special regulation. Since the wto is a member-driven ­organisation, violations of member obligations under the wto agreement, or nullification or impairment of member benefits, are addressed exclusively by wto members, not by the wto itself. 3.2.2 Incorporation of Agriculture into Trade Deals 3.2.2.1 General State of Play As established in previous sub-chapters, endogenous factors can potentially limit a country’s policy space. In response to external influences like the 348 Petrov R. Exporting the Acquis Communautaire through European Union External Agreements, Baden-Baden, 2011 (further Petrov 2011), p. 199; Petrov R. How Far to Endeavour? Recent Developments in the Adaptation of Ukrainian Legislation to eu Laws. In: European Foreign Affairs Review, 8, 2003 (further Petrov 2003), pp. 1–17. These clauses were predecessors of the “more for more” – principle. 349 Following the classification of Nakagawa, this may be an example of the “soft law” harmonisation (footnote 338 to this Chapter). Within the eu, this phenomenon may be associated with “conditional differentiation” in the eu external policy. Evans, p. 201. 350 Other two escape clauses for rtas are not analysed in this research.

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d­ evelopment of international law and globalisation, which contributed to limitations of state economic sovereignty, the principle of relative freedom of state regulation351 has emerged. This principle is strengthened by the publicchoice theory that declares that protective norms are indispensable for a state in the course of progressing international liberalisation, as they should play the role of a security valve.352 In the environment of possible national resistance, the primary goal of international economic law is to guarantee legal security to economic actors,353 since that is probably the most efficient instrument to escape the “prisoners’ dilemma.” In that way, globalisation forces states to cooperate with each other in bilateral, plurilateral and multilateral dimensions. However, it is argued that agricultural subsidy reforms affecting all trading partners equally are not effectively addressed through bilateral agreements, but must be tackled multilaterally.354 International organisations’ increased role in legal decision-making and their ability to introduce a range of “international policies” restricting the national policy space,355 make global subsidy disciplines and control o­ bjectively achievable. Nevertheless, the commitments on internal policies are ­expected to be rather flexible, since an overly tight policy space could ­disincentivize further trade liberalisation356 leading to a lax enforcement of commitments. With respect to agricultural subsidies, this observation should be interpreted in a way that only mutually acceptable disciplines for all states could be effectively implemented. As a consequence of this approach, although the multilateral disciplines on agriculture are supposed to contribute to agricultural negotiations within rtas, the sector remains one of the least present regional agreements (entirely excluded or restricted by trqs and safeguards357). The sensitive character of agricultural imports due to concerns regarding food security and producers’ income may explain this.358 351 This principle does not make states subjects of international permissive or prohibitive norms, but rather lets these norms set up spaces for regulative freedom of a state. Tietje, p. 43. 352 Ibid., p. 44. 353 Ibid., pp. 40, 154. 354 High-level Trade Experts Group. The World Trade and the Doha Round, Geneva, 2011, para. 4.28. On advantages of multilateral approach to agriculture Bilal, pp. 89–90. 355 Every state found itself in the complicated position between securing its policy space and extracting benefits from international co-operation. See Hamwey, p. 5. 356 Goldstein, Martin, pp. 247–248. 357 Lester, Mercurio, p. 146. 358 Ibid., p. 143. See Sub-chapter 1.2. on basic problems of agricultural markets.

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Broadly speaking, the extent of agricultural liberalisation is dependent on the specific commercial interests of one or both rta partners in this trade.359 There is a greater chance of inclusion of agricultural trade into the rta scope, if participating countries have similar production costs or significant political cohesion.360 At the same time, when one of the parties is an agricultural ­exporter, the probability of free agricultural trade is unlikely.361 The treatment of agricultural trade within rtas is characterised by a high degree of reciprocity (inter-sectoral and cross-sectoral trade-offs) and restriction on exports, whereas limitations concerning market access are usually ­enhanced by the possibility for market entry due to geographical proximity.362 The level of domestic protection may determine the eligibility of quantitative trade restrictions between rta partners.363 As for domestic support, especially in a coupled form, this issue may complicate negotiations on the fta stage, and is often set aside for a further stage of integration.364 By the same token, agricultural cohesion does not happen in practice but at more advanced stages of integration. The most prominent example is the Common Agricultural Policy (cap) in the eu (introduced at the stage of the cu (eec)). In that particular case, the trigger was a strong political rationale for i­ntra-community liberalisation of agricultural trade, while the price for that was a high protection against third countries’ imports. Due to the need for “paybacks” in the external dimension, intra-rta agricultural integration ­remains a very rare phenomenon.365 Within the territory of the MERCOSUR (nominally, the stage of internal market), agricultural trade is also formally free. This liberalisation may be 359 Usually a rta party with the largest market sets the scene in agricultural negotiations. China may be the only example of a large market which tends to include agriculture into its rtas. Lester, Mercurio, pp. 163, 165–167. 360 Lester, Mercurio, p. 145. 361 The only example of full inclusion of agricultural trade at the stage of fta may be the fta between Australia and New Zealand which are both major agricultural exporters and carry on liberal agricultural policies. Agriculture is also included into the scope of nafta and cufta, but with safeguard mechanisms. Lester, Mercurio, p. 163; Dell’Aquila C.; Sarker R.; Meilke K. Regionalism and Trade in Agrifood Products, International Agricultural Trade Research Consortium, Working Paper 99-5, 1999 (further Dell’Aquila, Sarker, Meilke), p. 14. 362 Lester, Mercurio, p. 144. 363 Thus, the cufta and the nafta contain restrictive clauses on trade in cereals, where the right to quantitative import restrictions is extinguished, if the level of protection on the domestic market is higher than that in the partner country. See further on this tendency Lester, Mercurio, pp. 154–156; Dell’Aquila, Sarker, Meilke, p. 10. 364 Lester, Mercurio, pp. 178–181. 365 Ibid., p. 148.

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e­ xplained by a rather homogeneous membership (almost all members are major exporters of agricultural products) and structural reforms which eliminated state monopolies, subsidies, and support prices in the earlier stages of economic integration.366 Full or partial exclusion of agriculture from the free trade regime, or special restrictions for trade in agricultural goods within rtas (not foreseen by Art. xi–xv, xx of the gatt), may raise logical concerns regarding the compliance of such rtas with the requirement of Art. XXIV:8 of the gatt on elimination of all internal barriers to “substantially all trade.” Since there have been no wto disputes on this issue yet, it is hard to know how this concern would be handled. Presumably, if the whole agricultural sector of food exporting countries or the most export-oriented sub-sectors are left beyond the scope of free trade, the requirement of Art. XXIV:8 of the gatt could not be fulfilled. The partial exclusion should be calculated as a share of the total estimated bilateral trade.367 3.2.2.2 The eu Approach to Agricultural Trade within the rtas The delay of the wto Doha Round forced the eu to concentrate efforts on bilateral trade agreements.368 Most of them are concluded in the form of ­Association Agreements in accordance with the procedure in Art. 217 of the tfeu (earlier Art. 310 of the teu) and preview to some extent the participation of the partner states in the eu system.369 In spite of the growing number of rtas,370 the share of preferential imports in the eu external imports remains below the world average, allegedly due to low tariff reductions overall.371 The preferences for agriculture are even s­ maller 366 Lester, Mercurio, p. 153; Dell’Aquila, Sarker, Meilke, p. 11. 367 Exclusion of agricultural trade should be analysed “in relation to its practical significance for the overall trade coverage” of a rta. Report of the Working Party on Agreement between the European Communities and Portugal L/3901 of 13.9.1973, para. 15. 368 Communication from the Commission to the Council, the European Parliament, the ­European Economic and Social Committee and the Committee of the Regions “Global Europe: Competing in the World” COM/2006/0567 final of 4.10.2006. 369 The association on the legal base of Art. 310 of tec corresponds to the integration form “creating special, privileged links with a non-member country which must, at least to a certain extent, take part in the Community system.” C-12/86 Gmuend ecr 1987 3747, para. 9. 370 As of May 2017, the eu had over 30 rtas in force, including Customs Union Agreements (with Turkey, San Marino, and Andorra). The negotiations on five additional ftas have been completed and several fta negotiations, i.a. with Japan, the MERCOSUR and the us are in process. 371 eu preferential imports make up about 60 per cent with an average duty reduction at around 68 per cent. The world average constitutes, correspondingly, 77 per cent and 87 per cent. World Trade Report 2011, p. 227.

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since the full incorporation of agricultural trade into the eu rtas is highly uncommon. In fact, trade in basic agricultural products is usually ­protected by trqs where processed food may be liberalised to a larger extent (e.g. fta with Israel). Reciprocal, gradual, agricultural liberalisation was also found tolerable, for instance, within the deals with Chile and Morocco.372 The specificity of the  Morocco agreement is a possibility for modifying agricultural commitments in the event of policy modifications by the fta partners.373 The deepness of integration does not seem to have a substantial impact on the extent of agricultural liberalisation. In that way, the Customs Union Treaty with Turkey excludes agricultural products from free trade concessions and is limited to setting a common objective for moving towards free movement of agricultural products.374 At the same time, the examples of Argentina and ­Brazil that both, by now, do not have any preferential trade agreements with the eu in force,375 demonstrate that successful agricultural trade does not, in fact, require free trade instruments.376 It may be conceded that expanded exports is not just a result of preferential trade regimes, but is also attributable to an increased demand on specific products. A large share of agricultural imports within rtas concluded under Art. 217 of the tfeu are usually administered by trqs. Yet, trqs may be also opened to 372 In case of eu–Chile fta the tariff elimination had to be achieved in the course of ten years. Art. 71(1) and Art. 72(1) of Agreement establishing an association between the E ­ uropean Community and its Member States, of the one part, and the Republic of Chile, of the other part of 30.12.2002 (oj L 352 30.12.2002 p. 3); Art. 16 of Euro-Mediterranean Agreement establishing an association between the European Communities and their Member States, of the one part, and the Kingdom of Morocco, of the other part of 26.2.1996 (oj L70 18.03.2000 p. 2). 373 Ibid., Art. 20(1). 374 On the other hand, Turkey took a comprehensive obligation to approximate its agricultural policies to the cap mechanisms. Art. 2 and 24–25 of Decision No. 1/95 of the ec-Turkey Association Council of 22.12.1995 on implementing the final phase of the Customs Union (oj L 35, 13.02.1996). 375 Co-operation between the eu and these states is currently covered by the Framework Trade and Economic Co-operation Agreements. Council Decision 90/530/EEC (oj L 295 26.10.1990 p. 66) and Council Decision 95/445/EC of 30.10.1995 (oj L 262 1.11.1995 p. 53). Nevertheless, Argentina and Brazil as MERCOSUR members are participating into the negotiations on the bi-regional fta with the eu. 376 The eu is Argentina’s major trade partner and its main export market (representing 17.9 per cent of total agricultural exports) even ahead of Brazil (respectively, 16 per cent). ­European Commission. Argentina: Country Strategy paper 2007–2013 of 23.04.2007, pp. 11, 13.

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mfn suppliers. In-quota tariffs tend to be substantially lower than out-of-quota tariffs.377 The major issue of eu trqs for cereals is the fact that the quota ­allocation does not guarantee access to entire eligible import volumes.378 The reason for that is the eu’s self-sufficiency for all main cereals, except for maize, at the level between 90 and 100 per cent.379 In respect to this, the trqs purpose is merely to secure inputs for feed processing.380 The practice of trq underfilling, albeit a concern,381 is generally c­ ompatible with the wto/gatt approach towards members’ market access commitments, which are “commitments on conditions of competition for trade, not on volumes of trade.”382 Furthermore, at the very end, the role of trqs is extremely limited nowadays. As eu import tariffs for cereals are currently bound to zero, the trqs are basically set aside. Only the barley sector is affected. Compared to the treatment of other agricultural sub-sectors in rtas, the eu trade regime for cereals seems to be among the most sensitive areas.383 The only examples of full liberalisation may be attributed to development considerations (in the case of the Western Balkan and the acp countries) where the resulting volume of trade is rather small. Nonetheless, the eu allegedly offered 377 The average eu in-quota tariff for agricultural products amounted to 8 per cent at the beginning of the 2000s, when the average out-of-quota tariff reached 45 per cent. oecd. The Uruguay Round Agreement on Agriculture: An Evaluation of its Implementation in oecd Countries, Paris, 2001. 378 In 2016 the trq for common wheat was filled with 490 000 t wheat out of over 3 million t of the eligible volumes (2015 – with 790 000 t; 2014 – with 124 000 t, and 2013 – with 1,2 million t). At the same time, in 2011–2012 (period of high prices) the trq for common wheat was used in full. A similar pattern may be observed for barley: in 2016 only 6 000 t out of 307 000 t were imported (2015 – only 122 t; 2014 – around 25 000 t;) while in 2011–2012 the trq volumes were used in full. Maize is the only grain where trqs tend to be used in full on a continuous basis. Thus, in 2010–2016 trqs opened for maize for the whole volume of around 2.7 million t were completely filled. G/AG/N/EU/12; G/AG/N/EU/16; G/AG/N/ EU/24; G/AG/N/EU/30; G/AG/N/EU/33; G/AG/N/EU/37. 379 lmc International. Evaluation of Measures Applied Under the cap to the Cereals Sector (published by the European Commission), Brussels, 2012 (further lmc International), p. 12. 380 Ibid., p. 64. 381 See Understanding on Tariff Rate Quota Administration Provisions of Agricultural Products, as Defined in Article 2 of the Agreement on Agriculture WT/MIN(13)/39, as well as paras. 115–124 of Modalities 2008. 382 Panel Report eec-Oilseed i, para. 150. 383 For instance, grain trade with the ceecs was the last agricultural sector to be liberalised in 2002, only two years before the countries’ eu accession.

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the MERCOSUR a full liberalisation for durum wheat and barley imports, while maize and common wheat should remain protected by trqs.384 3.2.2.3 eu–Ukraine Trade Cooperation 3.2.2.3(a) Partnership and Cooperation Agreement (pca) In 1989, the eec and the ussr concluded the Trade Development and Cooperation Agreement. However, after just two years the treaty became obsolete due to the fall of the Soviet Union. To design the relationship with the post-­Soviet states, the ec established a new instrument, Partnership and Cooperation Agreements (further pca),385 to support transition processes in the region.386 pcas were essentially mixed agreements concluded under Art. 133 and 308 of tec and Art. 300(2)-(3) of tec387 (nowadays Art. 297 and 352 of the tfeu). For the purpose of the pca, the ec divided the cis into neighbours and nonneighbours. The agreements with the neighbours contained so-called “evolutionary clauses” envisaging possible fta conclusion, and therefore referred to the interim character of pcas.388 Another specific pca feature was the imposition of some gatt obligations on the cis states that were not among the gatt signatories.389 Apparently, the pca parties could not interpret the references to particular gatt provisions in a way that allowed them to govern their bilateral trade relations by the gatt rules. They were rather used to create an external reference point which was acceptable to the counterparts. 384 E.g. usda. eu-Mercosur Bilateral Trade Negotiations – Update, gain Report, Washington, 2004, p. 2. 385 Petrov classified pcas as entry-level agreements that endorse potential interest in developing further mutual cooperation between the parties. Petrov 2003, p. 3. Further on pcas Hillion C. Institutional Aspects of the Partnership between the eu and nis. In: Common Market Law Review, 37, 2000, pp. 1211–1235, p. 1215; Van der Loo G. The eu–Ukraine ­Association Agreement and Deep and Comprehensive Free Trade Area: a new legal instrument for eu integration without membership?, Leiden, 2016 (further Van der Loo), pp. 52 seq. 386 See Hillion C. The Evolving System of European Union External Relations as Evidenced in the eu Partnerships with Russia and Ukraine, Leiden, 2005 (further Hillion 2005), pp. 16–24. The pcas concluded with the cis were supposed to be different from the agreements with the ceecs and the Baltic states, so-called European Agreements. Communication of the Commission on the Community’s Relations with the Independent States of the Former Soviet Union (P/92/1) of 9.1.1992. 387 Hillion 2005, pp. 24–25. 388 Petrov 2011, p. 153. 389 Provisions of the pre-1995 pcas were based on gatt 1947 provisions, not the wto agreements.

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The very first pca was signed in 1994 with Ukraine (since 1998 in force).390 Besides various political aspects, the eu–Ukraine pca established economic objectives and development components.391 The parties incorporated a very limited circle of gatt provisions, including Art. i,392 x393 of the gatt, and agreed on their interpretation in accordance with the gatt practice.394 The parties also took on certain gatt-like commitments, e.g. national treatment395 and the prohibition of import restrictions. At the same time, a row of exemptions396 and a special safeguard procedure against imports from Ukraine397 was authorised. Supposedly, before Ukraine’s wto accession, the gatt-based provisions were to be used only to the extent limited by the pca and could not be interpreted in the light of the gatt, since the parties’ intention to do so was not reflected in the text of the agreement. The ec and Ukraine also committed themselves to bilateral trade at ­market-related prices,398 but did not spell out this obligation. Thus, the obligation may be interpreted broadly and include export duties, price control measures, as well as (export) subsidies. The evaluation of the pca achievements in the year 2003 documented Ukraine’s partial non-compliance with the abovementioned trade-related provisions,399 including discriminatory measures affecting ­exporters (first of all, vat reimbursement).400 Despite some shortcomings, bilateral trade between Ukraine and the eu substantially increased, albeit asymmetrically, during the first years of the pca implementation.401 In parallel to the pca, Ukraine, like most other cis, b­ enefited from the European gsp. However, this scheme maintains low 390 The pca was concluded for an initial period of ten years. As no successive agreement replaced it in 2008, it was renewed automatically year by year pursuant to Art. 101 of pca. 391 pca economic objectives included promotion of trade, support for Ukrainian efforts to develop its economy and to complete the transition into a market economy (Art. 1 of pca). Title vii of the pca was devoted to economic co-operation (“economic co-operation aimed at contributing to the process of economic reform”). Art. 52(1) of pca. 392 Art. 10(1) of pca. 393 Art. 16 of pca. 394 Art. 89 of pca. 395 Art. 15 of pca. 396 Art. 14 and Annex ii to the pca. 397 Art. 18 of pca. 398 Art. 17 of pca. 399 Joint Report on the Implementation of the Partnership and Co-operation Agreement between the eu and Ukraine, 2003, para. 62. 400 Ibid., paras. 73 seq. 401 While the share of Ukrainian goods in eu total trade made up only 0.4 per cent, the eu’s share in Ukraine’s trade exchange exceeded 20 per cent. Ibid., para. 60.

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r­ eductions for agricultural products and basically covered only vegetable oils from Ukraine. In addition to the purely trade-related commitments, the eu–Ukraine pca also identified priority areas for cooperation, i.a. public standards in agriculture and agro-industrial sector (processing).402 The components of ­agricultural cooperation (Art. 60 of pca) were concentrated on the agrarian reform in Ukraine (including modernisation, privatisation and restructuring of the sector) with consideration of environmental concerns and food security issues. The parties also envisaged a gradual approximation of food standards, including sps standards. As acknowledged earlier, the pca instrument was designed to be p ­ rovisional. The incorporated “evaluation clause” made the launch of negotiations for a bilateral free trade agreement conditional on Ukraine’s progress in economic reforms and in the pca implementation (in particular, trade-related provisions under Title iii and state aid disciplines of Art. 49).403 Although this option was reserved also for some other cis, the pcas lacked sufficient incentives to encourage cis countries to accelerate harmonisation with the eu.404 The attempts to deepen cooperation with the most important Eastern partners, ­Russia and Ukraine, by adopting the eu Common Strategies,405 supplementing the pcas, and establishing strategic partnerships, did not show quick progress. The ec was looking for further differentiation among the cis with a view to find more efficient cooperation instruments. 3.2.2.3(b) European Neighbourhood Policy (enp): A Soft Law Instrument for Deeper Co-operation In 2003, the Commission published the communication, “Wider Europe,” that expressed European ambitions of regional trade liberalisation.406 One of the document’s ideas was the establishment of a closer economic relationship 402 Art. 52(2) of pca. 403 Art. 4 of pca. 404 Dambrowski M.; Taran S. The Free Trade Agreement between the eu and Ukraine: ­Conceptional Background and Economic Context and Potential Impact, case Network Studies and Analysis, 437, 2012 (further Dambrowski, Taran), p. 35. 405 Common Strategy instrument was introduced by the Amsterdam Treaty (Art. 1(10) of the Treaty of Amsterdam of 2.10.1997 (Art. J. 13(2) of the modified Title v)). See ­European Council Common Strategy on Ukraine of 11.12.1999 1999/877/CFSP (oj L 331 23.12.1999  p. 1). 406 Communication from the Commission to the Council and the European Parliament “Wider Europe – Neighbourhood: A New Framework for Relations with our Eastern and Southern Neighbours” com(2003) 104 final of 11.3.2003.

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with the nearest Eastern and Southern eu neighbours. Thereby, the pre-­ concept of the European Neighbourhood Policy (enp) was born. Before 2004, the enp  was in the construction phase, made up purely of soft law (mostly delivered in the form of the Commission’s recommendations) and did not have any legal effect.407 The enp provisions were formalised in 2004–2005 (the execution phase)408 due to a favourable political climate and the Eastern ­Enlargement 2004. The Commission presented enp as a legal instrument without precedent that was based on Art. 181a of tec409 (Art. 211 of the tfeu). The key enp principles were defined as joint ownership of the process, together with shared values and common interests.410 The Commission identified enhanced cooperation to attain the full benefit of the instruments in place (i.e. pcas for the Eastern neighbours) as the short-term enp aim.411 That was supposed to be achieved through tailor-made Action Plans containing key priorities for cooperation with each partner.412 The Action Plans may be characterised as “soft law steering instruments” that should provide more flexibility in comparison to binding international treaties.413 The eu–Ukraine enp Action Plan was signed in 2005 for a period of three years.414 The core of the document consisted of political rather than  traderelated commitments. Two basic responsibilities taken by Ukraine in trade concerned the implementation of the pca trade commitments and wto accession.415 Later, the Commission described a long-term enp goal of formatting a ­network of bilateral agreements among the enp partners, possibly leading to the creation of a Neighbourhood Economic Community.416 That was a start of the promotion for a “stronger enp.” 407 Van Vooren B. A Case Study of Soft Law in eu External Relations. In: European Law ­Review, 34(5), 2009, pp. 696–719 (further Van Vooren), p. 705. 408 Van Vooren, p. 708. 409 Communication from the Commission “European Neighbourhood Policy: Strategy Paper” com(2004) 373 final of 12.5.2004, p. 26. 410 Ibid., p. 8. See on the enp Van der Loo, pp. 85 seq. 411 Ibid., p. 15. 412 Ibid., pp. 7–8. 413 Van Vooren, pp. 701, 709. 414 Decision of the eu–Ukraine Co-operation Council dated on 21.2.2005 (further Action Plan). 415 Para. 2.3.1.(1) of Action Plan. 416 Communication from the Commission to the European Parliament and the Council “A Strong enp” com(2007) 774 of 5.12.2007, p. 5; Commission’s Non-Paper Expanding on

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In March 2007, the eu and Ukraine launched negotiations about a future Association Agreement with a free trade component that was to replace the pca.417 In that way, the “evaluation clause” foreseen in Art. 4 of pca was activated. With a goal to support Ukraine in the negotiation process, the parties signed the Association Agenda in 2009 which replaced the Action Plan.418 Given that Ukraine had already become a wto member by that time, trade-related ­topics in the bilateral relations became concentrated on “beyond wto issues,” i.a. food standards and sps measures along with legislative approximation in these areas.419 The negotiation process was also accompanied by eu’s technical and ­administrative support provision to Ukraine. Since the early 1990s, the eu had been assisting Ukraine through the tacis programme, which was replaced by a more targeted enp instrument (enpi) in 2007.420 The task of the enpi was to promote sustainable development in the enp partner states, together with approximation to eu policies and standards in the priority areas agreed on in the Action Plans.421 After the Lisbon Treaty came into force,422 the Commission reviewed the enpi status under the competence acquired through Art. 209(1) and 212(2) of the tfeu with the goal of simplifying the instrument and establishing closer links to eu internal instruments and policies.423 In 2011, the Commission also proposed introducing the so-called “more for more” principle, postulating “specific provisions on differentiation for financial allocations and for the

417 418

419 420 421

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the Proposals Contained in the Communication of the Commission to the European ­Parliament and the Council on “Strengthening the enp” “enp – a Path Towards Further Economic Integration” com (2006) 726 of 4.12.2006. Regulation of the Parliament of Ukraine No. 684 of 22.02.2007; Mandate of the European Commission of 22.1.2007. Para. 5 of eu–Ukraine Association Agenda to prepare and facilitate the implementation of the Association Agreement (Decision of the eu–Ukraine Cooperation Council dated on 23.11.2009). eu–Ukraine Association Agenda, p. 18. European Neighbourhood and Partnership Instrument. Ukraine: Country Strategy Paper 2007–2013, p. 9. Regulation of the European Parliament and of the Council No. 1638/2006 of 24.10.2006 laying down general provisions establishing a European Neighbourhood and Partnership Instrument (oj L 310 9.11.2006 p. 1). Art. 8 of the teu obliges the eu to develop a special relationship with neighbouring countries with the aim of establishing an area of prosperity and good neighbourliness at the eu’s borders. Proposal for a Regulation of the European Parliament and of the Council establishing a European Neighbourhood Instrument com(2011) 839 final of 7.12.2011, pp. 2, 7.

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p­ rogramming process” among the enp partners.424 According to this approach, the eligibility for enp support is to be evaluated on the ground of special policy tools, i.a. enp Country Progress Reports.425 It can be argued that the “more for more” principle is essentially an existing part of the joint ownership concept already developed in the early enp stages. The enpi assistance priorities for Ukraine during the period of 2007–2013 were based on the policy objectives defined in the eu–Ukraine Action Plan,426 including the promotion of trade (sub-priority 2.1. of the Action Plan) and support for infrastructure (priority 3 of the Action Plan).427 The agricultural sector was not mentioned among the priorities.428 The National Indicative Programme (nip) for Ukraine 2011–2013 introduced new priorities, including facilitation of the entry into force of the eu–Ukraine aa.429 This priority in particular envisaged transposition and implementation of both the eu and international acquis across a range of sectors, i.a. agriculture, as well as r­ egulatory approximation in the areas covered by the eu–Ukraine aa, i.e. implementation of rules addressing state aid and sps measures. As for the agricultural ­sector, the nip 2011–2013 addressed only a rural development component aimed at reducing rural poverty. All in all, the eu seemed to be worried rather about sps standards of Ukrainian agricultural production than about the market access or state aid issues in the agricultural sector. The role of the food price crisis in the political upheaval in the Southern Mediterranean pushed the eu to respond in 2011 to the agriculture-related concerns with a new enp instrument – the European Neighbourhood P ­ rogramme for Agriculture & Rural Development (enpard).430 The policy must be tailored for each enp state on a long-term basis by using the best eu ­practices. In the 2014–2020 programming period, partner countries are required to ­indicate three sectors for cooperation with the eu.431 The enpard is supposed 424 Ibid., p. 9. Rec. 4 of Parliament and Council Regulation No. 232/2014. 425 Joint Communication to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. “Delivering on a New European Neighbourhood Policy” join(2012) 14 final of 15.5.2012, p. 6. 426 European Neighbourhood and Partnership Instrument. Ukraine: Country Strategy Paper 2007–2013, p. 12, para. 5.2. 427 Ibid. 428 Ibid., p. 17. 429 enpi. National Indicative Programme for Ukraine 2011–2013, pp. 8–9. 430 Joint Communication by the High Representative of the Union For Foreign Affairs and Security Policy and the European Commission “A New Response to a Changing Neighbourhood” com(2011) 303 of 25.5.2011, p. 15. 431 The Commission’s Press Release “New Commission Approach on Agriculture in Neighbourhood Launched” of 31.5.2012.

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to be concentrated on the social rural dimension, food security, i.a. quality ­standards, and improvement of administration.432 The concept of the enp support instruments, including the enpard, is based on the pre-accession eu programmes (sapard and ipa), but the two tracks are parallel and typically do not overlap. The agricultural assistance within the enpard is to be granted, provided that it is linked to the Action Plans and mixed agreements in place, i­ ntegrated into national or regional strategies, synergised with other programmes, and accompanied by participation of sector stakeholders.’433 In this respect, it may be argued that the enpard is a specific form of the “more for more” principle for the agricultural area, although its bond to the adherence to the common values is rather unclear in this context. To date, the enpard projects were launched only in the Southern partner nations and in Georgia.434 3.2.2.3(c) The Concept of the dcfta Currently, the enp is supposed to be in the maturation phase.435 It is based on Art. 8(2) of the teu included in the Lisbon Reform Treaty and on mixed agreements with the enp partners. The dcfta is a new instrument within eu external trade policy that was developed for the purposes of the enp and the EaP.436 The legal basis of the treaty is Art. 37 of the teu and Art. 217 in conjunction with Art. 218(5) and (8) of the tfeu.437 432 Clark J. ENPARD, Presentation during the 28th fao Regional Conference for Europe, April 2012, url: http://www.fao.org/fileadmin/user_upload/Europe/documents/Events_2012/ ERC_2012_-_Side_events/presentations/ENPARD_en.pdf. 433 Ibid. See also European Commission. International Aspects of Agricultural Policy: Background document for the Advisory Group on International Aspects of Agriculture, 2012, p. 42; Cornaro M. eu support to agricultural and rural development in the Neighbourhood, url: http://ec.europa.eu/enlargement/taiex/dyn/create_speech.jsp?speechID=24 901&key=8d88b2741e6f96e71f7a741e1ae39a1d, p. 8. 434 Joint Communication to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions “European Neighbourhood Policy: Working towards a Stronger Partnership” join(2013) 4 final of 20.3.2013, para. 34. See also http://enpard.ge/en/. 435 Van Vooren, p. 702. 436 Communication from the Commission to the Council and the European Parliament “Strengthening the enp” com(2006)726 of 4.12.2006; Communication “A Strong enp.” See also Dambrowski, Taran, p. 26. The preceding “deep” fta concept emerged in the course of the Barcelona Process and later was a base for ftas between the eu and some nonEuropean partners such as Chile and South Korea. Dambrowski, Taran, p. 48. More on the dcfta concept Van der Loo, pp. 226 seq. 437 See e.g. Council Decision 2014/295/EU of 17.3.2014 on the signing, on behalf of the ­European Union, and provisional application of the Association Agreement between the

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Besides aiming towards the highest possible degree of liberalisation that shall limit agricultural products excluded from the free trade regime, ­d cftas are determined to escape the pitfalls of the so-called “shallow” integration that covers only trade in goods and does not extend to the institutional ­dimension.438 In this context, dcftas should provide dynamic439 regulatory convergence in the areas affecting bilateral trade, particularly sps ­measures, trade administration, customs and competition. By the same token, the ­agreements should foresee a “high degree of commitment to complex and broad-ranging reforms.”440 Providing the compliance with the “more for more” principle, dcftas could lead to a gradual integration of the most advanced partner states into European internal market.441 Given the high stakes, the ripeness for dcfta negotiations is conditional on a partner’s wto membership and his “sufficient progress towards common values and principles.”442 The first eu partner that acquired a dcfta invitation was Ukraine. The eu–Ukraine dcfta as a cornerstone of the Association Agreement443 is the most extensive international treaty signed by Ukraine after its accession to the wto.444 This agreement was initially designed as “a template and a point of reference” for the agreements with other enp partners.445

438

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441 442 443

444 445

­ uropean Union and the European Atomic Energy Community and their Member States, E of the one part, and Ukraine, of the other part, as regards the Preamble, Article 1, and Titles i, ii and vii thereof (oj L 161 29.5.2014 p. 1). Communication from the Commission “A Strong enp,” p. 4. Two dimensions of deep ­integration – extensive and the intensive – should be distinguished. The former refers to an extension of policy areas covered by an agreement while the second considers an institutional depth of the agreement. On the phenomenon of “shallow” integration see wto. World Trade Report 2011, p. 9. In this context, dynamism is supposed to mean updating approximation to the eu regulatory development. Joint Communication by the High Representative of The Union For Foreign Affairs And Security Policy and the European Commission “A New Response to a Changing Neighbourhood” com(2011) 303 of 25.5.2011, pp. 8–9. Ibid., p. 8. Ibid., p. 9. Similarly to the pcas, aa is a mixed agreement governed by Art. 217 of the tfeu, but with a stricter institutional dimension. Thus, where pca Councils do not issue binding decisions (see e.g. Art. 85 of eu–Ukraine pca) in opposite to the aa Councils (see Art. 476–477 of eu–Ukraine aa). Dambrowski, Taran , p. 10. Petrov 2011, p. 235.

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The “more for more” principle is anchored in the dcfta with Ukraine in two ways: through a strong contingency on common values446 and a conditionality of the dcfta implementation upon accelerated fundamental economic, political and institutional reforms in Ukraine.447 Thereby, even the economic part of the deal stipulates the goal of political convergence between the dcfta partners.448 It may be conceded that the eu–Ukraine aa shows a stronger degree of legalisation than the preceding legal instrument (pca). Besides the fact that the dcfta should constitute norms of direct action both for Ukraine and the eu,449 the decisions of the Association Council may have priority over Ukrainian law by virtue of Art. 463(1) of eu–Ukraine aa. The dispute settlement mechanism450 could lead to more effective conflict resolution than with the dsb where other wto members could intervene. That still, however, may not be applied by the parties due to the trending preference for the wto judicial procedure over dispute resolution under the rta.

Intermediary Summary

The eu is reluctant to give any membership prospective to its Eastern and Southern neighbours. In turn, these countries plan to deepen economic integration with the eu through specific enp instruments, in particular, dcftas. This type of agreement is supposed to ensure a higher degree of liberalisation, i.a. in the agricultural sector, compared to previous ftas. Furthermore, wide 446 Importance of common values is reflected in the Preamble and Art. 1.2. (a) of eu–Ukraine aa. See also Joint Staff Working Document “Implementation of the European Neighbourhood Policy in Ukraine: Progress in 2012 and Recommendations for Action” accompanying the document Joint Communication to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions “European Neighbourhood Policy: Working towards a Stronger Partnership” swd(2013) 84 final of 20.03.2013, p. 2; Fuele S. Ukraine and the World: Addressing Tomorrow’s Challenges Together, Speech during the 9th Yalta Annual meeting on 13 September 2012. 447 Preamble and Art. 1.2. (e) of eu–Ukraine aa. See also Dambrowski, Taran, p. 24. 448 That was why negative assessment of developments in Ukraine in 2010–2013 put the entire dcfta project in question in summer-autumn 2013. See Joint Staff Working Document “Implementation of the European Neighbourhood Policy in Ukraine: Progress in 2012 and recommendations for action” accompanying the document Joint Communication to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions “European Neighbourhood Policy: Working towards a Stronger Partnership,” pp. 3, 10; Resolution of the European Parliament 2012/2889(rsp) of 13.12.2012 on the situation in Ukraine, in particular para. 10. 449 Para. 4 of Mandate of the European Commission of 22.1.2007. 450 Chapter 14 of eu–Ukraine aa.

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coverage of the instrument should effectively confront non-tariff barriers to trade, beginning with sps standards. The impact of dcfta on trade in sensitive agricultural goods can be analysed using the example of the outcome of the deal for Ukraine’s grain sector. 3.2.2.3(d) Agricultural Commitments within the eu–Ukraine dcfta The eu–Ukraine dcfta aims to gradually establishing a free trade area between the parties (with a maximum transition period of ten years).451 The commitments on transitional implementation periods seem to be a normal practice within the rtas concluded by the eu.452 The parties agreed on a gradual elimination of import duties453 and incorporated a stability clause, the so-called “standstill provision,” which does not permit increasing import duties between parties or introducing new duties.454 Agricultural goods are not explicitly excluded from the free trade regime under the dcfta, but are partly protected by trqs on both the Ukraine and eu sides. In comparison to Ukraine, the eu fixes a longer list of de facto exemptions.455 Importation of Ukrainian cereals is also limited by the trqs. Knowing the pre-history, those could be viewed as a secured access. Thus, as a response to growing imports from the cis,456 the eu launched trqs for barley and ­common wheat in 2002/2003457 for around 3 million t per 451 Art. 25 of eu–Ukraine aa. 452 For instance, Art. 6 of Euro-Mediterranean Agreement establishing an association ­between the European Communities and their Member States, of the one part, and the Kingdom of Morocco, of the other part; Art. 57 of Agreement establishing an association between the European Community and its Member States, of the one part, and the Republic of Chile, of the other part of 30.12.2002, as well as evolutional clause in Art. 74 thereof. 453 Art. 29 in conjunction with Art. 27 of eu–Ukraine aa. 454 Art. 30 of eu–Ukraine aa. 455 Annex i to the eu–Ukraine aa. 456 At the end of the 1990s, Ukraine exported less than 0.2 million t grain to the eu, while already in 2002 the exports surged to 5.5 million t (including 4.5 million t wheat). After introduction of the trq, the level of cereals imports from Ukraine fell to 1.2 million t in 2004, including around 0.65 million t wheat. eurostat/comext October 2010. 457 The trq system replaced the high import protective Margin of Preference system (mop) which used to automatically increase external duties when prices fell below the reference price. The trigger for the reform was allegedly the outcome of the wto dispute on Chilean Price Band System that was similar to the mop, as well as the eu’s goal to reduce agricultural interventions before the Eastern Enlargement with a view to overcome budget constraints. For details see ebrd; fao. Perspectives and Options for eu Grain Trade with Ukraine: Ukraine Grain Sector Review and Policy Options Project, 2009 (further ebrd, fao, 2009), p. 20.

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year,458 including country-specific quotas for the us (over 0.5 million t) and for Canada (about 38 000 t) as a form of compensation authorised under Art.  ­x xviii of the gatt.459 The remaining quota volume was divided into four equl parts; each was open to all countries during one quarter of the year.460 Ukraine had a concern about the non-allocation of a country-specific quota for common wheat. In Ukraine’s opinion, the eu violated the provisions of Art. 10 and 60 of pca.461 The eu argued that the mfn principle was not violated as the market access (also in-quota access) to the eu market for Ukrainian cereals was at the mfn level. Ukraine, as a non-wto member, did not have a right to the mechanisms authorised by Art. xiii and xxiii of the gatt which ensured allocations for the us and Canada.462 It seems to be hard to rebut these arguments of the eu. Nevertheless, it may still be argued that Ukraine did have a right to be included into the trq for common wheat after 2002/2003 due to a steep growth of Ukraine’s grain exports to the eu. The fact that Ukraine only acceded to the wto in 2008 might not be decisive in this context.463 Nevertheless, it was not an option for Ukraine to make use of the r­ e-­negotiation procedure for compensation to exporters as provided in Art. ­x xviii of the gatt after the accession, as Ukraine did not export ­substantial amounts of grain to the eu in the so-called recent “representative period” (­foreseen in Art. XIII:4 of the gatt), which was determined as 1998–2001. Therefore, Ukraine could not 458 Art. 2 of Commission Regulation No. 1067/2008 of 30.10.2008 opening and providing for the administration of Community tariff quotas for common wheat of a quality other than high quality from third countries and derogating from Council Regulation (ec) No. 1234/2007 (oj L 290 31.10.2008 p. 3). 459 Art. 3 of Commission Regulation No. 1067/2008. 460 Ibid. The trqs for 307 000 t were open under the similar conditions for barley, although without an allocation of country-specific quotas. Commission Regulation No. 2305/2003 of 29.12.2003 opening and providing for the administration of a Community tariff quota for imports of barley from third countries (oj L 342 30.12.2003 p. 7). 461 Joint Report on the Implementation of the Partnership and Co-operation Agreement between the eu and Ukraine, 2003, paras. 70 seq. 462 Ibid. 463 In ec-Poultry dispute the eu tariff quota calculation was challenged on the ground that imports from China, a non-member that time, had been included into the trq allocation. Both Panel and the Appellate Body established that Art. xiii of the gatt did not require inclusion of exclusively wto members into trqs calculations, but rather “efficient suppliers.” The question of non-members’ inclusion into the trq allocation was left without an answer. At the same time, the Panel referred to the fact that the dsb had not ruled in the previous relevant disputes that this would be prohibited. Panel Report ec-Poultry WT/ DS69/R, paras. 230–233; Appellate Body Report ec-Poultry WT/DS69/AB/R, paras. 106 seq.

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be compensated.464 Moreover, apparently, Ukraine would have faced opposition from the us and Canada (already holding the country-specific quotas). Above all, the obligation to compensate as established by Art. xxviii of the gatt, constitutes indemnification of damages incurred by an exporter as a consequence of non-inclusion into a trq. In this case, after the eu introduced trqs, Ukraine’s grain export vector simply switched to other regions, predominantly to the Middle East and Northern Africa. Thus, the fact of any damages occurring on Ukraine’s side is very questionable. Since Ukraine was interested in acquiring as large trq volumes as ­possible from the eu, the crucial point within the dcfta negotiations concerning trqs for grain was the determination of a three-year trade base period as ­required by Art. xiii of the gatt.465 Given that the negotiations on trq volumes took place in 2009–2011, the three-year base period had to include the year 2008, which was characterised by exceptionally high grain imports from Ukraine due to suspended import duties in the eu and abundant grain yields in Ukraine. If that year’s statistics had have been calculated into the trq base period, the volume of trq for common wheat would have allocated around 1.2 million t.466 At the same time, the calculation of the average exports in 2009–2011 or 2010–2012 would not have substantially reduced the trq volume (1–1.3 billion t).467 The final deal on trqs for cereals468 is controversial. First, annual market access for common wheat at the level of 0.95 million t is lower than the calculation of any suitable three-year base periods under Art. xiii of the gatt. Second, considering the trade statistics for 2012, the agreed trq for common wheat constitutes only 2/3 the current level of common wheat exports, while the trq for maize at the annual level of 0.4 million t is narrower than the real

464 See ebrd, fao, 2009, p. 20. 465 See Sub-chapter 3.1.3.1. 466 The trq for barley was expected at the level of 0.125 million t and for maize – 0.4 million t. ebrd, fao, 2009, p. 17. 467 Ukraine’s wheat exports to the eu amounted to 0.2 million t in 2007, 2.8 million t in 2008, 2.3 million t in 2009, 94 000 t in 2010, 1.4 million t in 2011, and 1.5 million t in 2012. State ­External Trade Information Service of Ukraine. url: http://dzi.gov.ua/pres-relizi/ asociaciya-z-es-zagrozi-ta-mozhlivosti-dlya-ukrayinskoyi-zernovoyi-galuzi (accessed on 6 December 2017). 468 The trqs are to be opened for common wheat and flour (0.95 million t with an increase up to 1 million t in five years); for barley (0.25 million t with a gradual increase to 0.35 million t), oats (4000 t); maize (0.4 million t with a gradual increase to 0.65 million t). Annex i to the eu–Ukraine aa.

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trade volumes by ten times.469 Moreover, in July 2013, eu import duties for cereals (wheat, maize, rye, and sorghum) were bound to zero.470 The current import in-quota tariff on barley is 16 EUR/t and out-quota tariff, correspondingly, is 93 EUR/t.471 As a consequence, the only cereal that should obtain a certain market access improvement under the eu–Ukraine aa is barley.472 The increase in barley imports is expected due to the “real” elimination of trade protection since import duties on common wheat and maize were often ­suspended in previous years.473 However, since the eu is itself a large barley exporter, the import expansion for Ukrainian barley is not predicted. The eu–Ukraine aa does not rectify the tariff escalation concern in the grain sector since the trq for processed grain products from Ukraine is very small.474 In turn, Ukraine’s market access to processed cereals originating in the eu will be protected by import duties during a five-year transition period.475 Since the eu is one of the world’s leading producers and exporters of grain,476 the first impression might be that the eu does not have any interest in the supply of Ukrainian cereals. But according to the oecd calculations, the eu grain market, especially the feed grain segment (non-food wheat, barley, and maize), is getting tighter due to an increasing demand and no trend of ­internal overproduction.477 Indeed, the eu common wheat imports rose 34  per cent 469 The maize exports from Ukraine to the eu corresponded to 1.2 million t in 2008, 0.78 million t in 2009, 0.6 million t in 2010, 2.5 million t in 2011, and 6.1 million t in 2012. ebrd, fao, 2009. 470 For comparison, in 2008 the eu’s applied tariffs for Ukrainian wheat were fixed at 10.4 per cent and for maize at 7.4 per cent. Eurostat. The zeroing of duties was ruled with a reference to Art. 136(1) of Single cmo Regulation 2007. Commission Implementing Regulation No. 674/2013 of 15.7.2013 fixing the import duties in the cereals sector applicable from 16 July 2013 (oj L 193 16.7.2013 p. 14); Commission Implementing Regulation No. 196/2014 of 28.2.2014 fixing the import duties in the cereals sector applicable from 1 March 2014 (oj L 61 1.3.2014 p. 3). 471 eu taric Database. 472 Ukraine exported barley to the eu at the level of 30 000 t in 2007, 0.3 million t in 2008, 0.2 million t in 2009, 3 000 t in 2010, 87 000 t in 2011, and 0 t in 2012. ebrd, fao, 2009. 473 In 2008 the eu’s applied tariffs for Ukrainian wheat were fixed at 10.4 per cent, for maize – at 7.4 per cent, and for barley – at 6.6 per cent. Eurostat. 474 This trq is restricted to 2000 t per annum. Annex I-A to the eu–Ukraine aa. 475 Annex I-A to the eu–Ukraine aa (Chapter 11). 476 www.faostat.fao.org; www.comtrade.un.org. 477 Future grain imports from Ukraine are envisaged at the level of 9–10 million t, i.a. 5–6 million t wheat. As for the oilseed sector, the rise in consumption is not accompanied by the surge of production either. Therefore, the imports are forecasted at a rather high level of 20 million t. See ebrd, fao, 2009, p. 8.

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in 2015/2016 compared to the period of 2010–2014, where the share of Ukraine increased from 29 to 49 per cent.478 In the same period, eu maize imports grew 40 per cent, while Ukraine’s portion laid between 59–63 per cent.479 At the end of the day, the trq trade regime with the eu may be advantageous for Ukrainian agriculture. First of all, meat and milk products are granted access to the European market where their exports were earlier restricted.480 Moreover, it may be presumed that the rationale behind the trqs is to ensure a gap for market access which should help overcome barriers associated with eu agricultural subsidies, inasmuch as respective bilateral disciplines are not established.481 Anyway, the allocation of the country-specific agricultural trqs is not a per se market entry guarantee482 for the entire trqs volume. Even if the trq will not be filled due to decreasing internal eu import demand caused by expanding domestic subsidised production, Ukraine could hardly find a proper legal instrument to combat that challenge.483 The only chance may be to take advantage of a nullification or impairment claim.484 After the “peace clause” expiry, agricultural policies may be challenged under Art. xxiii of the gatt no matter whether a member complies with its ams commitments or not (pursuant to Art. 13(b)(iii) of the AoA).485 Differently from the grain sector, Ukraine’s imports of oilseeds and ­vegetable oils are not restricted by any import protection measures. The elimination of the incumbent import tariffs on vegetable oils may boost the imports. 478 Committee for the Common Organisation of Agricultural Markets. eu Cereals Trade 2015/2016 Marketing Year, 25.8.2016, url: https://ec.europa.eu/agriculture/cereals/ trade_de. 479 Ibid. 480 According to dg Health & Consumers, only one meat producer and two poultry producers from Ukraine are allowed to the European market (approved in 2013). The list of the authorised dairy plants is much longer (approvals of 2011–2012). 481 Further in Chapter 4. 482 Market access is determined in this context as legal and administrative conditions imposed by importing countries under agreed trade rules. Market entry, in its turn, depends on exporter’s competitiveness, characteristics of supply chains, and a market structure. Cheong, Jansen, Peters, p. 12. 483 “The recognition of the legitimacy of an expectation relating to the use of production subsidies therefore in no way prevents a contracting party from using production subsidies consistently with the General Agreement.” Panel Report eec-Oilseed i, para. 148. 484 Imposition of protective measures in a manner which prevents tariff concessions from having any impact on the competitive relationship between domestic and imported goods was found incompatible with Art. xxiii of the gatt. Panel Report eec-Oilseed i, para. 152. 485 See Sub-chapter 4.1.8.

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Though, in opposite to the goods subject to the trqs, imports of oilseed products may be restricted due to safeguard measures eligible under Art. 5 of the AoA.486 In spite of certain limitations, the final commitment on agricultural market access within the eu–Ukraine aa may be regarded as an achievement seeing as Ukraine acquired some reductions for the relatively high eu mfn tariffs.487 Furthermore, other dcfta components, i.a. legal approximation, shall ­create further mechanisms for an effective market entry. Compared to the eu–­ Georgia and eu–Moldova aas, Ukraine will be still protected from European agricultural exports given that not all import duties will be eliminated. By the same token, trade self-regulation mechanism should balance an increase of Ukrainian exports to the eu.488 3.2.2.3(e) Compliance of the eu–Ukraine aa with Art. xxiv of the gatt Art. xxiv of the gatt is applicable between the eu and Ukraine as both are wto members. Additionally, Art. 25 of eu–Ukraine aa reiterates the observance of this provision. To verify the dcfta compliance with the gatt, one should start with its analysis under the fta definition given in Art. XXIV:8(b) of the gatt. In this context, two parts should be examined: the elimination of duties, and the elimination of other restrictive regulations of commerce with respect to ­substantially all trade between the parties. Regarding the first part, it seems that bilateral trade flows will be predominantly duty-free. Agricultural ­imports from Ukraine would be restricted by trqs, including extensive dutyfree trqs for basic grain products which is a major segment of eu–Ukraine ­agricultural trade. However, trq application is explicitly allowed between fta parties u ­ nder Art. XXIV:8(b) of the gatt as long as conformity with the provisions of Art. xiii of the gatt is ensured. Agricultural import duties imposed by Ukraine will be eliminated over the course of the transitional period not exceeding seven years. This commitment is also eligible within an interim fta agreement foreseen by Art. XXIV:5(c) of the gatt. The industrial sector will be subject to nearly complete and immediate elimination of import tariff protection. In this regard, the elimination of 486 Art. 40 of eu–Ukraine aa. 487 In 2011 the eu mfn average tariff for agricultural goods made up 15.2 per cent (4.1 per cent for non-agricultural products). WT/TPR/S/248/Rev.1, pp. 107–109. 488 In case of the open access to the eu Ukrainian grain will export to the eu and Ukraine’s export share in North Africa and Near East could be acquired by France. ebrd, fao, 2009, p. 19.

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duties with respect to substantially all trade should to be achieved, regardless of the concern for fairness with the trq allocations. As for of other restrictive regulations of commerce in the inter-rta trade, the parties of the agreement in focus made use of the eligible exceptions authorised by Art. XI and Art. xx of the gatt (Art. XXIV:8(b) of the gatt). Since it is unclear how far the notion of “regulation of commerce” may be ­extended, it can be presumed that the dcfta should generally comply with this requirement. The fundamental requirement for the economic integration laid down in Art. xxiv:4 of the gatt seems to be recognised, too. In the author’s view, the eu–Ukraine dcfta may be qualified as a voluntary agreement of closer integration that seeks to facilitate bilateral trade. Given that the dcfta imposes only bilateral measures, there should be no barriers for trade with other wto member states, at least based on the dcfta text. In respect to these findings, the requirement of Art. XXIV:5(b) of the gatt is supposed to be satisfied. Turning to the procedural demands for fta formation established by Art.  XXIV:7 of the gatt, the wto Committee on rtas received a notification about the dcfta negotiations and about the treaty signature in summer 2014.489 It is not clear how much information is required by Art. XXIV:7(a) of the gatt,490 since the dsb has never interpreted the procedural component of rta formation. The eu and Ukraine submitted the data in accordance with the normal wto practice.491 Assuming the parties fulfil the procedural requirements of Art. xxiv of the gatt, and the implementation period will not reveal any external restrictions to trade, the eu–Ukraine aa compliance with the provisions of Art. xxiv of the gatt should be achieved. The model of temporary unilateral elimination or reduction of import ­duties applied by the eu in 2014, i.e. unilateral implementation of free trade,492 489 www.rtais.wto.org. 490 The required data include “information regarding the proposed union or area as will enable them to make such reports and recommendations to contracting parties as they may deem appropriate.” 491 See Standard Format for Information on Regional Trade Agreements WT/REG/W/6. 492 Regulation No. 374/2014 of the European Parliament and of the Council of 16.4.2014 on the reduction or elimination of customs duties on goods originating in Ukraine (oj L 118 22.4.2014 p. 1) amended by Regulation No. 1150/2014 of the European Parliament and of the Council of 29 October 2014 (oj L 313 31.10.2014 p. 1) applied since April 2014, until the establishment of the eu–Ukraine aa. See also Van der Loo, pp. 233.

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should not contradict the provisions of Art. xxiv of the gatt, provided that it is stipulated to be an “interim agreement leading to formation of free trade area” in the sense of Art. XXIV:5(b) of the gatt. .



Intermediary Summary

Analysis of the substantive obligations in regard to the disciplines of Art. xxiv of the gatt shows the general compliance of the eu–Ukraine aa with wto provisions. Despite the substantial degree of agricultural liberalisation d­ emonstrated in the eu–Ukraine aa, eliminating tariff trade barriers does not seem to ­guarantee access to the European market. Among others things, the entry of Ukrainian agricultural goods may face the barrier of public standards or other mandatory provisions. In this regard, as stated in Sub-chapter 3.1.5, the method of legal approximation may reconcile regulatory conflicts. 3.2.2.3(f) Agricultural Policy Approximation under the dcfta The approximation clause of the eu–Ukraine pca was evidently a “soft ­approximation clause” (an “endeavour clause”).493 Later on, the Common Strategy 1999 encouraged Ukraine to accelerate the approximation process and expanded the scope of priority areas.494 The focus, however, remained on soft law instruments.495 Nevertheless, by virtue of Art. 4 of pca, the conditionality of further economic integration between the eu and Ukraine was s­ ubject to implementation of trade-related measures and state aid disciplines incorporated into the pca. That, in fact, could be done exclusively through the ­adjustment of legal norms. The pca also referred to other harmonisation mechanisms, namely, the obligation to comply with the principles of a market economy and Ukraine’s ­accession to the wto.496 The first commitment was indeed binding, where the second was not directly required, but highly recommended.497 493 Art. 51(1) of pca reads as follows: “Ukraine shall endeavour to ensure that its legislation will be gradually made compatible with that of the Community.” As Petrov duly noted, there is no direct link to the evolutionary clause (incentive for harmonisation on Ukraine’s side as a prerequisite to get into a fta with the eu) and that condition cannot be found among the objectives of the agreement either. Petrov 2003, p. 7. 494 Paras. 20 and 52 of the European Council Common Strategy on Ukraine. 495 E.g. the Fifth eu–Ukraine Summit Joint Statement C/02/195 of 4.7.2002, p. 3. 496 Art. 2, 5 and 15 of pca. 497 Subsequent soft law instruments, primarily the Action Plan, directly referred to the Ukraine’s commitment to accede to the wto.

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The launch of the enp highlighted the role of legal approximation by distinguishing eu partners according to their economic structure and current level of harmonisation with eu legislation.498 Developed under the enp framework, the eu–Ukraine Action Plan 2005 stipulated a gradual legal approximation of Ukrainian law to European economic regulation as declared in Art. 51 of pca.499 The Association Agenda was concentrated only on sectoral approximation (“implementation of relevant elements of the acquis communautaire”500). That bilateral document called for, among other things, the preparation to implement the agricultural acquis by establishing a dialogue.501 Actually, the agricultural dialogue between Ukraine’s Ministry of Agriculture and the dg Agriculture and Rural Development had been launched under the auspices of the enp even prior to the beginning of the dcfta negotiations.502 One of its aims was to contribute to a deeper understanding of the agricultural and rural development policies of each party.503 A permanent dialogue was also established between Ukrainian competent authorities and eu services on food safety, and was called upon to improve access to food products in the eu and Ukrainian markets.504 The Association Agenda proposed the development of a sectoral Action Plan, and aimed to increase cooperation and assistance in the agricultural sector, i.a. by studying the eu’s experience when transitioning to direct support for agricultural producers.505 To the author’s knowledge, this proposal was not implemented. Based on the above, it is clear that the pre-dcfta bilateral instruments did not provide any binding obligations for Ukraine to pursue legal harmonisation with European regulation. 498 Communication from the Commission “European Neighbourhood Policy: Strategy Paper,” p. 15. 499 Sub-chapter 2.2 of eu–Ukraine Action Plan. 500 eu–Ukraine Association Agenda, p. 4. 501 Ibid., p. 30. 502 The eu–Ukraine Agricultural Dialogue is a soft law mechanism. Para. 6 of Memorandum of Understanding on Dialogue on Agriculture between Ukraine’s Ministry of Agriculture and dg Agriculture and Rural Development dated on 18.10.2006: “This memorandum does not contain international obligations for each party, is not an agreement in the point of view of international law.” The MoU is based on the pca provisions and was supposed to be a contribution to the implementation of the Action Plan. 503 The cooperation instruments are concentrated on an information exchange for production matters and food safety issues. Para. 3 of Memorandum of Understanding. 504 enpi. National Indicative Program for Ukraine 2011–2013, p. 6. 505 eu–Ukraine Association Agenda, p. 30.

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Nonetheless, the adaptation of Ukrainian law to European law506 was formally launched in 1998 by adopting Ukraine’s Strategy for Integration to the European Union.507 In 2000, the Programme of Integration to the European Union was issued and foresaw legal harmonisation in the priority areas.508 The detailed National Adaptation Programme509 was issued only in 2004 and officially started the harmonisation work. A voluntary harmonisation approach was taken.510 Only the priorities agreed on in Art. 51 of pca were explicitly included in the programme. The process of adaptation was divided into stages, with the first one to proceed until the pca was in force.511 A range of legislative acts directly and indirectly linked to agricultural trade were to be aligned with a long list of eu company law and selected ecj cases.512 The eu–Ukraine aa states that further economic integration between the parties is conditional on progress made in the dcfta implementation and Ukraine’s convergence to the eu, i.a. through a gradual legal approximation.513 The latter is expected to contribute to the elimination of regulatory discrepancies and therefore, to a more homogeneous operational environment for economic actors that is claimed to be indispensable for an effective fta.514 In comparison to the soft law approximation instrument of Art. 51 of pca (“endeavour to ensure”), the mechanism agreed on in Art. 474 of eu–Ukraine aa is of a mandatory nature (“will carry out”). Art. 475(5) of eu–Ukraine aa 506 Ukrainian legislative practice operates with several notions, namely, “adaptation,” “approximation” and “harmonisation,” without distinguishing them from each other. Petrov 2003, p. 10. 507 President Order No. 615/98 of 11.6.1998. 508 The programme foresaw, among others, harmonisation in the field of agricultural statistics and sps measures. Paras. 7.2.5. and 8.2.3. of President Order N 1072/2000 of 14.9.2000. 509 Law No. 1629-IV of 18.3.2004 (with amendments) defined adaptation as a procedure of making law in compliance with the acquis communautaire (Chapter ii) and identified the importance of this process for Ukraine’s European integration which, in its turn, was supposed to be the priority of the state’s external policy. Part 3 of Law of Ukraine No. 1629-IV. 510 The programme declared a goal to attain the third Copenhagen criterion and the Madrid criteria. Parts 1–2 of Law No. 1629-IV. 511 Chapter iv of Law No. 1629-IV. 512 Chapter v, Part 2 of Law No. 1629-iv. 513 See the Preamble of eu–Ukraine aa. Although the Ukrainian legislature operates with a notion “adaptation” and legal literature tends to use the term “harmonisation with European law,” these notions are not mentioned in the dcfta which widely uses the term “(legal) approximation.” Differently, Annex iii to the eu–Ukraine aa contains the schedule for “alignment” of Ukrainian law with European law and Annex xxxvii thereto mentions both harmonisation and approximation models. 514 Note 52 to the eu–Ukraine aa.

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constitutes an “evolutionary clause” establishing that approximation of traderelated legislation shall be a condition for further opening markets. Harmonisation is supposed to become more efficient with a monitoring mechanism for Ukraine’s legal approximation to eu norms and the obligatory reporting by Ukraine.515 Together with the strict enforcement clause of Art. 476(1) of eu–Ukraine aa,516 and the foreseen sanctions for non-compliance,517 the assessment procedure for implementing and enforcing adopted legal acts should tighten up the mostly declarative character of the legal reform in Ukraine. In the field of agriculture and rural development, a mechanism for g­ radual approximation was chosen as a key instrument.518 Areas of co-operation ­include the enhanced harmonisation of issues addressed in the framework of international organisations (say, the wto) and the exchange of best practices on support mechanisms for agricultural policies and rural areas.519 Art. 405 of eu–Ukraine aa requires assistance from both parties for the gradual approximation of Ukrainian laws to relevant eu legislation and regulatory standards, in particular those listed in Annex xxxvii to the eu–Ukraine aa. Hence, it may be concluded that at least some degree of support must be provided for the entire agricultural acquis, not only for those explicitly mentioned in the agreement. The list provided in Annex xxxvii to the eu–Ukraine aa constitutes only “legislative references” concentrated in five areas of approximation: quality policy (for particular sectors), organic farming,520 gmo 515 Art. 475(2) of eu–Ukraine aa. 516 Art. 476(1) of eu–Ukraine aa provides that “the Parties shall take any general or specific measures required to fulfil their obligations under this Agreement. They shall ensure that the objectives set out in this Agreement are attained.” 517 Art. 478(1) in conjunction with Art. 478(3)(b) of eu–Ukraine aa entitles a party to take appropriate measures in case of a violation by the other party of any essential element of the agreement as indicated in Art. 2 of eu–Ukraine aa. By choosing the appropriate measures, priority shall be normally given to those which least disturb the functioning of the dcfta (Art. 478(2) of eu–Ukraine aa). Under the general rule appropriate measures may not suspend any rights or obligations set up in the trade sector. However, the violation of Art. 2 of eu–Ukraine aa constitutes an exception of this rule. Thus, the bilateral economic relationship is made dependent upon further political development in Ukraine. 518 Art. 403 of eu–Ukraine aa. 519 Art. 404(h), (j) of eu–Ukraine aa. 520 Council Regulation No. 834/2007; Commission Regulation No. 889/2008 of 5.9.2008 laying down detailed rules for the implementation of Council Regulation (ec) No. 834/2007 on organic production and labelling of organic products with regard to organic production, labelling and control (oj L 250 18.9.2008 p. 1); Commission Regulation No. 1235/2008

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regulation,521 biodiversity, and marketing standards.522 Basically, Ukraine is free to cherry-pick eu legal provisions for approximation in the agricultural sector, and can modify the draft list of reference legislation.523 Certain eu ­legislative acts in the above areas were already included in the approximation plan in the early 2000s.524 It is not clear whether they will serve as a ­reference for further approximation work. The only area where the approximation does not carry a “pick-and-choose” character is organic farming where harmonisation includes all essential European regulations. Thus, the process of ­agricultural approximation could be quite flexible, adding the fact that this is the only sector with no set timetable for approximation. The dcfta ­implementation reports for 2015–2016 acknowledged certain progress in the agricultural legal approximation.525 Notwithstanding a rather wide scope of foreseen harmonisation, the ­already delivered agricultural approximation only extends to sps measures

521

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525

of 8.12.2008 laying down detailed rules for implementation of Council Regulation (ec) No.  834/2007 as regards the arrangements for imports of organic products from third countries (oj L 334 12.12.2008 p. 25). Commission Recommendation on guidelines for the development of national strategies and best practices to ensure the co-existence of genetically modified crops with conventional and organic farming of 23.7.2003. Including Council Directive 66/402/EEC of 14.6.1966 on the marketing of cereal seed (­Series i Volume 1965–1966 P. 143); Council Directive 2002/57/EC of 13.6.2002 on the marketing of seed of oil and fibre plants (oj L 193 20.7.2002 p. 74). Art. 4a(1) and 11(a) of the latter provide restrictions for gmo seeds. Chapeau to Annex xxxvii to the eu–Ukraine aa. The practice to place issues which are to be renewed (renegotiated) and amended in annexes to a basic treaty is quite common. See Hingst U. Auswirkungen der Globalisierung auf das Recht der Völkerrechtlichen Verträge, Kiel, 2001, p. 171. Parliament and Council Directive 2001/18/EC of 12.3.2001 on the deliberate release into the environment of genetically modified organisms and repealing Council Directive 90/220/EEC (oj L 106 17.4.2001 p. 1); Council Directive 90/219/EEC of 23.4.1990 on the contained use of genetically modified micro-organisms (oj L 117 8.5.1990 p. 1); Council and Parliament Regulation No. 178/2002 of 28.1.2002 laying down the general principles and requirements of food law, establishing the European Food Safety Authority and laying down procedures in matters of food safety (oj L 31 1.2.2002 p. 1); Council Regulation No. 2092/91 of 24.6.1991 on organic production of agricultural products and indications referring thereto on agricultural products and foodstuffs (oj L 198 22.7.1991 p. 1) repealed by Council Regulation No. 834/2007 of 28.6.2007 on organic production and labelling of organic products and repealing Regulation (eec) No. 2092/91 (oj L 189 20.7.2007 p. 1). See para. 8 of Part 9 of Law N 1629-IV. Reports on Implementation of the association Agenda and the Association Agreement between the European Union and Ukraine. url: http://www.kmu.gov.ua/kmu/control/ en/publish/article?art_id=248402431&cat_id=248402399.

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and ­certification.526 The basic regulatory acts were not involved in the harmonisation procedure. By pursuing the harmonisation work, Ukraine will avoid the traps of legal transplants turning up in the ceecs527 practice. Thus, the ceecs tended to copy eu legal norms without much consideration for their compatibility with national legal orders.528 The most integrated eu mechanisms (i.a. the cap), have reportedly leaned toward this strategy the most.529 This ties in with the concern over whether simple compliance with a norm of the acquis makes it effective, i.e. whether the implementation of eu norms in states with other regulatory and economic traditions would have the same effect as within the old eu Members.530 Redundant work should be also avoided. For instance, by examining Ukraine’s law in its compliance with the AoA (as a part of the acquis), ­approximation e­ xperts verified the legal conformity to the AoA provisions and the eu rules on farm support schemes, but not to Ukraine’s commitments before the wto.531 Concurrently, assessment of the legal compliance 526 Para. 2 of cmu Order No. 1073 of 19.5.2010; cmu Order No. 612 of 29.6.2011; cmu Order No. 620 of 26.4.2003. See also Joint Report on the Implementation of the Partnership and Co-operation Agreement between the eu and Ukraine, 2003, para. 53. 527 The patterns of agricultural approximation to the eu law on the fta stages were similar to the eu–Ukraine dcfta approach. See White Paper presented by the Commission “Preparation of the Associated Countries of Central and Eastern Europe for Integration into the Internal Market of the Union” com(95) 163 final of 3.5.1995, Chapter “Secondary legislation as a means of removing barriers,” para. 3.13. 528 The ceecs picked up the integration model of patches (i.e. incorporation of specific l­ egal texts into national law). The other methods of integration include copying (policy borrowing), templates (loose approximation), thresholds (meeting minimum standards). See Jacoby W. The Enlargement of the European Union and nato. Ordering from the Menu in Central Europe, Cambridge, 2004; Herrnfeld, p. 17. 529 Gordon M.; Hubbard M.C.; Hubbard L. The Folly of eu Policy Transfer: Why the cap Does Not Fit Central and Eastern Europe, Regional Studies, 43, 2009 (further Gordon, Hubbard), pp. 6–8. 530 In this context, legal acts adapted to European law may be considered legal transplants. See Jozon M. Why Legal Transplants Instead of More Adaptation Within the Process of Legal Approximation in the Central-Eastern European Member States of the eu and the Candidate Countries? In: Romanian Journal of European Affairs, 6(1), 2006, pp. 80–95, pp. 81, 84–85. 531 See State Department for Adaptation of Ukrainian Legislation to the acquis communautaire of Ukraine’s Ministry of Justice. Grain Market: Comparative Legal Analysis of Regulation, Kiev, 2009 (in Ukrainian) (further State Department for Legislative Adaptation 2009). However, since Ukraine did not commit to reduce “amber box” measures, the ­classification of its policies under Art. 6.5. of the AoA is, in principle, groundless.

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with outdated eu regulation is not uncommon.532 Furthermore, the surveys concerning the level of legal adaptation sometimes make false reference to eu legislation, e.g. in the case of the analysis of the procurement mechanism in Ukraine according to Law on State Support instead being assessed for its compliance with the rules on public interventions under the eu Single cmo Regulation 2007.533 It may be that voluntary harmonisation in this area does not serve any purpose because of the extent to which the eu’s highly distortive agricultural interventions are decreasing and price support has shifted ­towards direct payments to producers. Ukraine may want to consider further legal approximation for some practical elements of the agricultural trade. For instance, the catalogue of grain products does not correspond to the eu rules, as oilseed is defined as a grain in Ukraine.534 Another example is insufficient harmonisation with the ­European quality standards for cereals.535 To date, Ukraine’s partial approach to harmonisation with eu law has ­proven rather inefficient.536 Besides the issues arising in legislative work, various contradictions are established during the implementation stage, p ­ articularly on a local level.537 In this regard, it may be suggested that the process of ­legal ­approximation in Ukraine should not be limited to the basic legislative ­method, but be supplemented by the interpretative method (the so-called pro-­ European interpretation of law).538 ­ oreover, in absence of a requirement on limitation of production the direct support M granted in Ukraine could not be conform with the “blue box” criteria. 532 State Department for Legislative Adaptation examined agricultural support measures ­eligible under Law on State Support in 2007 in their compliance with a partially outdated European legal base, including Guidelines for State Aid in Agriculture for 2000–2006 and Council Regulation No. 1257/1999 repealed in 2005 by Council Regulation No. 1698/2005. State Department for Adaptation of Ukrainian Legislation to the acquis communautaire of Ukraine’s Ministry of Justice. Overview of the State of Adaptation of Ukrainian Legislation to the Acquis Communataire, Kiev, 2007 (in Ukrainian), p. 302. 533 State Department for Legislative Adaptation 2009. 534 Art. 1.11. of Law on Grain. At the same time, the definition “processed grain” includes only flour, feed and by-products, but not oilseed meal and vegetable oils (Art. 1.20. of Law on Grain in comparison to Parts i and v of Annex i to the Single cmo Regulation 2013). 535 E.g. regulation on admixtures and contaminators. State Department for Legislative Adaptation 2009. 536 Dambrowski, Taran, p. 47. 537 Ibid. 538 On the ceecs experience see Maresceau M.; Montagutti E. The Relations between the eu and cee: a Legal Appraisal. In: Common Market Law Review, 32, 1995, pp. 1327–1367,

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Intermediary Summary

The unique thing about the eu–Ukraine aa is that it extends beyond the “­shallow” integration topics by proposing mechanisms of mandatory and voluntary legal and regulatory approximation. That should ensure further bilateral trade expansion by overcoming non-tariff barriers. In this regard, it is ­presumed that Ukraine should play an active role in ensuring the treaty’s effective implementation. 3.2.2.4

Overview of the Agricultural Components of Ukraine’s rtas in Force 3.2.2.4(a) The fta between Ukraine and the efta States The signing of a fta by the efta States and Ukraine on 24 June 2010 was definitely a step toward the prospective eu–Ukraine dcfta. Although the efta market is small and added trade liberalisation will not contribute greatly to the growth of Ukraine’s gdp, this agreement is Ukraine’s first fta concluded with developed countries (moreover, a fta with a fta) and so should be an interesting study case for further bilateral trade agreements. The efta-Ukraine fta is a “double” instrument consisting of the “core” fta that covers trade in goods, services and investment, along with complementary Agreements on Agriculture, concluded simultaneously between Ukraine and each efta State individually.539 At the same time, the “core” fta shall also be applicable to processed agricultural products specified in Annex ii to the fta.540 However, Annex ii excludes trade in processed food from free trade by authorizing customs duties.541 The exclusion of agriculture from the fta must be explained by the exemption of agricultural goods from the scope of the efta.542 The texts of the Agreements on Agriculture are identical, where the concessions incorporated into the Annexes vary.543

539 540 541 542 543

p.  1327; Lazowski A. Adaptation of the Polish Legal System to European Union Law: ­Selected Aspects, Sussex European Institute Working Paper, 45, 2001, p. 12. Art. 1.1.1. of efta-Ukraine fta. Art. 2.1.1. (b) of efta-Ukraine fta. Import duties may not exceed the gap between domestic and world prices. Art. 1 of Annex ii to the efta-Ukraine fta. Art. 8 and Annex v to the Convention Establishing European Free Trade Association of 21.6.2001 (consolidated version of 1.7.2013). Art. 3 of Agreement on Agriculture between Iceland and Ukraine of 24.6.2010; Agreement on Agriculture between Kingdom of Norway and Ukraine of 24.6.2010; Agreement on Agriculture between Switzerland and Ukraine of 24.6.2010 (further efta-Ukraine Agreements on Agriculture).

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The efta States and Ukraine confirmed their commitments to all other ­international obligations, i.a. obligations under the wto/gatt regime.544 Some wto instruments are referred to or directly incorporated into the fta text, i.a. Art. xi, iii, xvi, xvii, xx of the gatt, the scma, as well as sps and tbt Agreements.545 These commitments, except for the subsidy disciplines underpinned in Art. 2.13.2. of efta-Ukraine fta, are also valid for the Agreements on Agriculture.546 Thus, similarly to the dcfta approach, the efta-Ukraine fta excludes the domestic support issue from the free trade agenda. Nonetheless, it is suggested that due to the expiry of the “due restraint” clause, some scma provisions are applicable to agricultural subsidies in the bilateral relationship between each efta State and Ukraine.547 Ukraine also confirmed its wto commitments on export duties548 and committed itself to no less favourable treatment of the efta States if there is ever a reduction or elimination of export duties between Ukraine and the eu.549 Due to the fact that Ukraine currently applies export duties on only one agricultural product, sunflower seeds, which are not a processed product, the above ­commitment would not extend to oilseed duties for the reason that trade in basic agricultural goods is excluded from the scope of the “core” fta.550 All in all, the liberalisation of agricultural imports within the efta-Ukraine fta is a one sided game. While Ukraine committed itself to eliminating ­import duties for less sensitive agricultural products (some seeds, vegetable crude oils) by 2012, and for the others in the course of transitional periods of up to seven years,551 the efta markets remain more protected seeing as how some products are not covered by the elimination, and most agricultural goods could e­ nter markets solely within the volumes of small trqs.552 As a result, 544 545 546 547 548 549 550

Art. 1.3.1. of efta-Ukraine fta. Correspondingly, Art. 2.6., 2.7.1., 2.13., 2.12., 2.17., 2.8. and 2.9. of efta-Ukraine fta. Art. 7 of efta-Ukraine Agreements on Agriculture. See Chapter 4. Art. 2.4.2. of efta-Ukraine fta. For details see Chapter 7. Art. 2.4.3. of efta-Ukraine fta. According to Art. 7 of efta-Ukraine Agreements on Agriculture, the provision of Art. 2.4.3. of efta-Ukraine fta does not apply to trade in agriculture. 551 The goods’ category “0” (para.1 of Annex i to the efta-Ukraine Agreements on Agriculture) is subject to immediate elimination of import duties and includes wheat for sowing, rape seeds for sowing, crude oils other than for technical or industrial uses. The category “5” (para. 3 of Annex i to the efta-Ukraine Agreements on Agriculture) covers most grain seeds, crude oils; where category “7” (para. 4 of Annex i to the efta-Ukraine Agreements on Agriculture) encompasses most animal products, flour and non-crude sunflower oil. 552 Annex ii to the efta-Ukraine Agreements on Agriculture.

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the import protection against Ukraine’s most competitive products will be maintained.553 Therefore, the extent of agricultural liberalisation under the efta-Ukraine fta is very modest.554 Since agricultural exports from Ukraine may be ­potentially high, the fulfilment of the wto criterion of “substantially all trade” ­required by Art. XXIV:8(b) of the gatt555 might be endangered for the eftaUkraine fta. 3.2.2.4(b) Early Economic Integration within the cis The process of economic integration within the post-Soviet states commenced in the early 1990s in the wake of the transition process. A number of declarative legal acts were endorsed but hardly implemented.556 Since the early 2000s, one could observe a legalisation trend in some integration structures of the region. The implemented bilateral treaties between cis partners tend to restrict agricultural trade by means of non-tariff measures with a view to circumscribe unauthorised re-exports of goods and/or to protect domestic markets or own balance of payments.557 The agricultural exemptions have quite a non-­ systematic character: they are incorporated into additional protocols,558 while 553 For example, Norway applies import tariff for sunflower crude oil for feed purposes at 160 per cent or 4.40, where the mfn applied tariff reaches 4.88. For sunflower crude oil for other purposes the mfn tariff is already duty-free. Similarly, Switzerland liberalised only single positions for cereals and some categories of sunflower oils. All agricultural products are eligible for safeguard measures. Art. 8 of efta-Ukraine Agreements on Agriculture in conjunction with Art. 2.16.1. of efta-Ukraine fta. 554 The parties foresee further agricultural liberalisation which pace will depend on trade patterns. Art. 6 of efta-Ukraine Agreements on Agriculture. 555 efta States and Ukraine reiterated their commitment to comply with Art. xxiv of the gatt in Art. 1.1.2. of efta-Ukraine fta. 556 Due to that feature, the cis integration is often referred to as a “pick and mix” regime where agreements were signed and ratified selectively with a large number of reservations. Thus, the cis is regarded to be more about de jure regionalism as opposed to de facto regionalism. For details see Dragneva R.; Wolczuk K. Russia, the Eurasian Customs Union and the eu: Cooperation, Stagnation or Rivalry?, Chatham House Briefing Paper, 2012 (further Dragneva, Wolczuk), p. 3; Roberts, Wehrheim, pp. 316, 319, 321–322. 557 Within the wto accession negotiations Russia submitted the notification in 1996 claiming that over 40 per cent of its total fta trade with the cis partners was exempted from the free trade regime. WT/ACC/RUS/9/Add.1, para. 83. See also Roberts, Wehrheim, pp. 321–322. 558 E.g. Art. 1 of Agreement on Free Trade Between the Government of the Republic of Georgia and the Government of Ukraine of 9.1.1995 (WT/REG121/N/1).

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each fta party may unilaterally adjust the commitments.559 A limited degree of agricultural trade liberalisation within the cis in the 1990s may be explained by the fact that integration did not primarily aim to eliminate tariff protection in the region, but merely ensure inter-industry links. As for trade in grain, bilateral cis ftas tended towards certain liberalisation, although the free trade regime could be suspended as a reciprocal exemption.560 Besides the bilateral track, efforts were made for implementation of plurilateral integration projects. After the collapse of the economic union plan in 1993, almost all cis signed the plurilateral fta on 15 April 1994. The treaty was, however, not enforced.561 Its disciplines were rather vague given that no effective binding mechanism to ensure compliance with the signatories’ obligations was created. After the breakdown of the fta project, the cis members focused on sectoral initiatives. Among other things, it was expected that a more coherent trade strategy in agricultural would be beneficial for all. Nonetheless, the resulting Agreement of Common Agricultural Market within the cis signed in 1997, became another example of a de jure agreement.562 One of the reasons for its failure could be a lack of interest among the participating counties, which were competitors in the same markets.563 The late 1990s strategy of wto accession seemed to be more efficient in promoting trade within the cis than the existing inter-regional rtas. Furthermore, binding itself to multilateral trade rules was an effective way to escape the complexity of the “spaghetti bowl” within the cis integration structures. 559 Ukraine extended these protocols unilaterally several times with Russia and Moldova. 560 For instance, the fta between Russia and Ukraine of 1993 allowed reciprocal exemptions in answer to export duties, quotas and licenses set by the partner. Free Trade Agreement between the Cabinet of Ministers of Ukraine and the Government of the Russian Federation of 24.6.1993 (WT/REG250/N/1). 561 Even Russia, albeit the main proponent of the project, did not ratify the fta 1994 and the Amending Protocol of 2.4.1999. See WT/REG82/N/1 submitted by Kyrgyzstan; Shadikhodjaev S. Trade Integration in the cis Region: A Thorny Path towards a Customs Union. In: Journal of International Economic Law, 12(3), 2009, pp. 555–578 (further Shadikhodjaev); pp. 557–559. 562 Agreement on cis Common Agricultural Market of 6.3.1998. Russia terminated its participation in the agreement in 2007. The Agreement is formally in force for Ukraine (with reservations). 563 Serova E. Agricultural Transition and Integration to the World Economy: nis Case. In: Csáki C.; Forgács C. (eds.) Agricultural Economics and Transition: What Was Expected, What We Observed, the Lessons Learned, Volume i, 2007, Budapest, 2007, pp. 117–132, p. 122.

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3.2.2.4(c) Sub-integration within the cis Despite the collapse of the cis fta, a group of cis members ­attempted to launch sub-regional integration, although without the participation of Ukraine.564 By 2000, the sub-grouping had transformed into the Eurasian Economic Community (eec), an international organization that promoted a binding character of agreements between its members, and de jure prohibited reservations to the free trade regime, although it maintained a right to trade restrictions and quotas, as well as a fragmented character of regulation.565 Ukraine became an observer in the eec in 2002. In 2003, another sub-integration structure emerged between Belarus, ­Kazakhstan, the Russian Federation and Ukraine – the Agreement on the Establishment of the Common Economic Zone (fta).566 Supposedly, the main goal of the project was to induce Ukraine into more intense economic integration, seeing that Ukraine was reluctant to proceed in the eec format.567 The ­Ukrainian Parliament ratified the agreement with a reservation that this legal act, and any subsequent agreement, would not be in breach of the Ukrainian constitution.568 This approach delayed the treaty implementation. In parallel, pursuing the eec integration strategy, Russia, Belarus and Kazakhstan agreed on the establishment of the Eurasian Customs Union (ecu) in 2007.569 The compact ecu Treaty (contains only eight articles) guaranteed free movement of goods within the ecu, advantageous trade conditions with third countries, as well as the development of parties’ economic integration (it is not, however, clear whether the integration within the ecu or integration in general was implied). Art. 5 of the ecu Treaty prohibited maintaining a more favourable customs regime with third countries compared to the rules for the intra-ecu trade. The role of this provision is unclear, due to the fact that the ecu Treaty guaranteed free movements of goods, i.e. elimination of duties, within its territory.

564 There were rather unsuccessful efforts in the mid-1990s to create a customs union between Russia, Belarus, Kazakhstan, Kyrgyzstan and Tajikistan. See Dragneva, Wolczuk, p. 3; Shadikhodjaev, pp. 559–562. 565 Treaty on the Foundation of the eec of 10.10.2000. See also Dragneva, Wolczuk, p. 3. 566 Agreement on the Establishment of the Common Economic Zone (Free Trade Agreement) between Ukraine, Belarus, Kazakhstan, the Russian Federation of 19.3.2003 (entry into force on 20.5.2004) WT/REG254/N/1 – ua. 567 Shadikhodjaev, p. 554. 568 WT/ACC/UKR/152, paras. 506–507. 569 See Treaty on the Customs Union between Russian Federation, Belarus and Kazakhstan of 6.10.2007 based on the Eurasian Economic Community Treaty of 10.10.2000.

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Art. 1 and 3 of the ecu Treaty basically harmonised the customs union definition for the treaty purpose with the requirements of Art. XXIV:8(a) of the gatt, whilst limiting trade exceptions to an even narrower circle of cases than eligible under the gatt. After the establishment of the Eastern Partnership in 2009, economic integration within the ecu accelerated. The ecu Common External Tariff launched in the beginning of 2010570 and in just two years, by 1 January 2012, the cu was upgraded to the common economic space (single market). This level of integration foresees development of common policies. Furthermore, by 2015, the parties agreed to advance the organisation to the economic union, the ­Eurasian Economic Union (eeu).571 The eeu is a very ambitious project and foresees deepening integration by further development of supranationality and legalisation,572 as well as common policies (unified regulation). ­Expectedly, ambitious plans for further integration within the eeu require ­further approximation of partners’ trade regulation. Even before substantial harmonisation work started, the ecu activities were subject to a large number of regulatory acts. The resulting complexity and fragmentation was the catalyst for codifying the legal regime in 2011.573 The result of this process was implementation of the extensive eeu Treaty, which incorporates the largest part of the agreements concluded under the auspices of the ecu. The eeu shows a high degree of legalisation. The decisions of its executive body, the eeu Commission, are legally binding and directly applicable at the national level.574 The major concern in this regard is the decision making by a qualified majority that may give Russia more influence within the rta. At the

570 The ecu Common External Tariff was reported to consolidate, in fact, most of the Russia’s temporary anti-crisis tariff increases and correspondingly to extend them to the other members. Van Berkum S.; Dvortsin L. Implications of the Establishment of the Customs Union between Russia, Kazakhstan and Belarus for the Dutch Agribusiness, The Hague, 2011 (further Van Berkum, Dvortsin), p. 15. 571 Declaration on Eurasian Economic Integration of 18.11.2011; Eurasian Economic Union (eeu) Treaty of 29.5.2014. 572 On the role of the Eurasian Commission see Art. 18 and Annex 1 of the eeu Treaty, on the eeu Court see Art. 19 and Annex 2 of the eeu Treaty. 573 Decision of the Intergovernmental Council of the ecu No. 73 of 15.3.2011. As for September 2013, according to the website of the ecu Commission there were 13 eec agreements, 38 agreements “directed to the completion of the treaty basis for the Customs Union,” and 38 “other international agreements of the Customs Union.” http://eurasiancommission.org/. 574 Art. 5 of the Agreement on the Eurasian Economic Commission of November 2011 and Decision No. 15/2009 of the ecu Intergovernmental Council.

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same time, direct access of private parties to the dispute settlement mechanism575 may, to a certain extent, rectify possible decision-making imbalances. At the same time, some trade restrictions within the common market are still authorised by Art. 29 of the eeu Treaty. They partially overlap with the exceptions of Art. xx and xxi of the gatt, but also extend to sps measures imposed in compliance with Chapter xi of the eeu Treaty. Yet, the intra-rta sps rules are largely based on the wto sps Agreement.576 Similarly, the ­non-discrimination requirement for eligible trade restrictions is also based on the chapeau of Art. xx of the gatt (mutatis mutandis Art. 2.3. of the sps Agreement). A party may be eligible for derogation from eeu obligations in order to fulfil its required international obligations, as per Art. 29(1)(5) of the eeu Treaty. However, that may be at odds with Art. 6(2) of eeu Treaty, which declares that international agreements with third parties577 shall not contradict the basic principles, goals and rules of the eeu, in particular, formation of the single market as required under Art. 4 of the eeu Treaty. In that event, if an eeu member performs his obligation under a bilateral rta concluded with a third state, even if it is inconsistent with the eeu regime, the member will presumably be excused by the escape clause of Art. 29(1)(5) of the eeu Treaty, though his action may be considered in violation of Art. 6(2) of the eeu Treaty. Hence, it appears that there is a need for reconciling the conflicting eeu norms. For now, Art. 6(2) of the eeu Treaty may be interpreted on the basis of the tailormade legal instrument, the Treaty on the Functioning of the Customs Union in the Multilateral System (in force since November 2011).578 This legal act does not prevail over the eeu Treaty,579 but rather provides a basis for interpretation, and was concluded in response to Russia’s wto accession to establish rules for interaction between the ecu (rtas with participation of non-wto 575 Art. 13(3) of the Statute of the eec Court (Agreement of 9.12.2010). 576 Art. 56(1) of eeu Treaty has some connotations with Art. 2.2. of the sps Agreement (except for requirement for “sufficient scientific evidence”). A level of protection above international standards is authorised on the ground of the “respective scientific assessment,” which supposedly should mean the assessment required under Art. 3.2.-3.3. and 5 of the sps Agreement. 577 Unilateral trade preferences under the rtas concluded before 2015 are permitted. Art. 35 and 102(1) of eeu Treaty. The conclusion of international treaties between an eeu party and a third state is not prohibited, if it does not contradict the goals and principles of the eeu. 578 This Treaty is not included into the list of the agreements to be terminated after the entering into force of the eeu in accordance to Art. 113 and Annex 33 to the eeu Treaty. 579 Art. 6(3) of eeu Treaty postulates that the Treaty prevails over other international agreements concluded under the framework of the eeu.

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members at the time, Kazakhstan and Belarus) and the wto regime. According to the coexistence rules, the provisions of the wto law as set out in the Accession Protocol of an eeu state shall become an integral part of the eeu legal framework as of the date of the member’s wto accession.580 That should mean that wto rules will prevail in the case of a conflict with eeu provisions. It is also required that agreements concluded within the eeu, and acts of the eeu authorities, conform to the wto commitments of each eeu member.581 Where the former ecu incorporated basic wto norms with a view to harmonise intra-rta policies, the expanded eeu Treaty spells out own common policies, including an attempt to harmonise the rules on agricultural subsidies.582 3.2.2.4(d) Plurilateral fta within the cis In October 2011, eight out of eleven cis signed a new cis fta. The treaty ­entered into force in September 2012, when the first three states – Belarus, Russia and Ukraine – finalised the ratification procedures. Thereby, the earlier agreements concluded between the parties, i.a. cis fta 1994, were suspended and the process for termination of the bilateral ftas was launched.583 As of May 2017, the cis fta 2011 operates between eight cis, both wto and nonwto parties.584 Since 1 January 2016, the cis fta 2011 has not been applied between Russia and Ukraine on a reciprocal basis. Although the provisions of the cis fta 2011 are more elaborate in comparison to the cis fta 1994, certain features of the latter still persist in the ­incumbent instrument. Similarly to the bilateral ftas, the cis fta 2011 is ­focused on trade in goods and does not cover trade in services, as well as pays a very limited attention to other trade-related questions. The agreement retains a large part of the previously existing trade exemptions related to import and export ­duties.585 The parties agreed on the non-application 580 Art. 1.1. of Treaty on the Functioning of the Customs Union in the Multilateral System. 581 Art. 2.2. and 2.4. of Treaty on the Functioning of the Customs Union in the Multilateral System. 582 See Chapter 4.6. 583 Art. 23 and Annex 5 to the cis fta 2011. 584 The cis fta 2011 is ratified by Armenia, Kazakhstan, Kyrgyzstan, Moldova, Russian Federation, Tajikistan and Ukraine which are wto members. The other participating states – Belarus and Uzbekistan – are not wto members. 585 Art. 2.1. in conjunction with Annex i and ii to the cis fta 2011. In respect to agricultural goods, only the sugar sector remains protected by duties. Annex i to the cis fta 2011. Russian Federation, Ukraine and Kazakhstan maintain, among others, export duties on sunflower seed (Russian Federation and Kazakhstan are entitled for duties on other oilseed). Annex ii to the cis fta 2011.

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(“neprimenenie”) of customs duties, but not on their abolishment.586 The obvious achievements include the commitment not to increase trade duties in the future,587 along with the incorporation of the mfn approach for export duties reductions unless required by other rtas.588 The export duty rate on sunflower seeds fixed by Ukraine is identical with the wto accession commitments.589 Differently, the Russian Federation negotiated the oilseed export duties at a level higher than the wto commitments taken later.590 It should mean that Russia shall adjust the level of export duties agreed to within the cis fta 2011. On the other hand, the elimination of export duties between the ecu/eeu members, and the reduction of Ukraine’s export duties for the eu within the dcfta, should not have any impact on the cis fta 2011 regulation on export duties. Another cis fta 1994 “defect” rectified by the successive instrument is nonapplication of the reciprocity principle for exemptions. Since reservations are not authorised by the cis fta 2011,591 the earlier trap of reciprocal and ­unilateral duty increase seems to be eliminated. Instead, the contracting parties shifted to the wto rules, notably, to Art. iv, xi, xix, xvi, xx of the gatt, wto Agreement on Safeguard Measures and the scma.592 By the same token, the wto sps Agreement and other international treaties ­concerning sps m ­ easures signed by the cis fta 2011 parties shall be applied to the trade within the cis fta 2011.593 The reference to the multilateral disciplines should allow for resolving possible conflicts in bilateral trade relations between wto m ­ embers and non-members. Still, some issues may arise. In particular, the  ecu/eeu ­legal framework prevails over the cis fta 2011 provisions for the ecu/eeu members. ­Nevertheless, the latter remain bound by the obligations taken ­under the 586 Art. 2.1. of the cis fta 2011. cis fta 1994 foresaw even a vaguer construct of “interaction in solving specific tasks with a view of elimination of custom duties and quantitative restrictions.” 587 Art. 2.2. of the cis fta 2011. 588 Art. 2.3. and 18 of the cis fta 2011. 589 A gradual reduction from 16 per cent to 10 per cent is agreed on. See Annex 1(II) to the cis fta 2011; WT/ACC/UKR/152, Table 20(b), p. 213. 590 Annex 1(II) to the cis fta 2011 provides that the Russian Federation may impose export duty of 20 per cent (but not less than 35 EUR/t) on sunflower, soya and rapeseed. Upon the wto accession, Russian Federation fixed the export duties on rapeseed at 15 per cent, whilst the duties on sunflower seed remained at the level of 20 per cent. The minimum rate was reduced to 30 EUR/t for all oilseed. Table 32 of WT/ACC/RUS/70, p. 558. 591 Art. 21 of the cis fta 2011. 592 Art. 3.1., 8, 9, 15 of the cis fta 2011. 593 Art. 12 of the cis fta 2011.

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cis fta 2011 before the signatories who are not ecu/eeu members.594 The same rule is applicable mutatis mutandis between wto members and nonmembers for the multilateral disciplines that are not applicable within the cis fta 2011.595 Hence, the conflict rule does not release participating states from responsibility in case of a clash between different sets of rules. Despite several positive aspects, the cis fta 2011 is subject to certain concerns. Thus, Annex 6 thereto grants the right to the eeu/ecu partners to activate import protection (impose import duties in the amount of the ­corresponding mfn tariff rates) in case there is an import increase from a cis fta 2011 partner as a result of the latter’s participation in another rta.596 This safeguard mechanism should theoretically not be necessary, since the cis fta 2011 refers to the cis Rules of Origin. Furthermore, the wto Agreement on Safeguards also governs the bilateral trade between fta parties who are also wto members. Arguably, application of the wto norms would be more ­favourable due to a lacking procedural mechanism for enforcement of ­Annex 6 in the cis fta 2011. The subsidy disciplines within this fta are also subordinated to the wto norms, albeit without the distinction between the industrial and agricultural track. Given that the agreement does not directly reference the AoA,597 and the contracting parties reiterated the prohibition of subsidies in the sense of Art. 3 of the scma, together with the commitment to avoid specific subsidies in the sense of Art. 2 and 6 of the scma, it should follow that the signatories do not intend to include disciplines on agricultural subsidies into the fta scope, unless they are willing to establish stricter disciplines than those of the wto (i.e. full exclusion of export subsidies and specific subsidies). This hypothesis appears to be highly unrealistic. The dispute settlement procedure within the cis fta 2011 is d­ elegated to the cis Economic Court (if both disputing parties accept the court jurisdiction),598 or to the expert commission, which is to deliver a final report 594 Art. 18.2. of cis fta 2011. This provision is, in fact, incorporation of Art. 30(3)-(4) of the vclt. 595 It is directly indicated that a wto membership shall not restrict the rights and shall not release a wto member from his obligations under the cis fta 2011 before the other contracting parties that are not wto members. Art. 18.3. of cis fta 2011. 596 The cis fta 2011 does not prevent parties’ participation in other rtas concluded in ­accordance to the wto rules. Art. 18.1. of cis fta 2011. 597 Subsidies are to be granted in compliance with Art. vi, xvi of the gatt and with scma. Art. 10 of cis fta 2011. 598 Ukraine is not a signatory of the Agreement on the Status of the cis Economic Court of 6.7.1992.

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with a ­recommendation.599 The dispute resolution mechanism seems to be generally inspired by the dsb procedure,600 although it has no appellate body. Yet, it could be recommended that Ukraine use wto dispute settlement mechanisms with the fta parties who are also wto members because it is more efficient and has a higher degree of legal certainty. Since the cis fta 2011 does not establish any external protection for participating states, incorporates a large part of the gatt norms, and liberalises almost all trade in goods, the compliance of this rta with the fta definition in  Art.  XXIV:5(b) of the gatt should be attained. The notification required ­under Art. XXIV:7(a) of the gatt was also submitted by the parties, albeit late.601 The provisions of Annex 6 to the cis fta 2011 seem to be questionable in their compliance with the fundamental criterion of Art. XXIV:4 of the gatt, which requires that rta parties not raise barriers to trade with other wto members. 3.2.2.4(e) Implications of the dcfta on Ukraine’s Relationship with the cis Since 2009, the Ukrainian government has been “sandwiched between two customs unions.”602 Seeing as a limited fta area already exists between Ukraine and the ecu/eeu states, the economic union has a major interest in Ukraine’s accession. The eu, on the other hand, could propose that Ukraine has only an ambitious fta. In turn, Russia, as the main player in the ecu/eeu, does not support Ukraine’s economic integration with the eu and heavily uses political and economic pressure against Ukraine at different levels to oppose the ­country’s integration strategy,603 e.g. through gas price policy, imposition of 599 Art. 19.2. and Annex 4 to the cis fta 2011. 600 In case of non-compliance with the expert commission’s report, the parties may proceed to consultations on a compensation measure. If no compromise could be found within a set period of time, the aggravated party may suspend any of its obligations under the cis fta, where the effect of this measure must be equivalent to the damage incurred as a consequence of the disputed measure. Possible disputes about such trade-offs are to be examined by the arbitration commission (the same expert commission body) whose decision is now obligatory. 601 The Russian Federation and Moldova submitted the notification on the cis fta 2011 only in June 2013, almost a year after the agreement went into force. WT/REG343/N/1. See www.rtais.wto.org. 602 Movchan V.; Shportyuk V. Between Two Unions: Optimal Regional Integration Strategy for Ukraine, the Thirteenth Annual Conference of the European Trade Study Group (etsg), 2011. See also Gnedina E.; Sleptsova E. Eschewing Choice: Ukraine’s Strategy on Russia and the eu, ceps Working Paper N 360, 2012. 603 See for details Van der Loo, pp. 131 seq.; Aslund A. Ukraine’s Choice: European Association Agreement or Eurasian Union? Peterson Institute for International Economics, 2013, pp. 8–10.

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sps measures against Ukrainian products, direct diplomatic and military pressure and suspension of the free trade regime. Before 2014, Ukrainian exports in agricultural products and food to the ecu/eeu member states were growing604 in spite of harsh sps measures t­ aken by Russia against some Ukrainian products in the recent years. Regardless of the competitiveness of most Ukrainian products in Russia’s market, their ­competitive position has proven fragile. Under these circumstances, market entry expansion for Ukrainian goods into European markets should be more profitable due to a larger market size and substantial consumer purchase capacity in the eu. Nonetheless, most Ukrainian goods may not be competitive enough with the eu products. ­Arguably, this obstacle may be overcome in sectors with high export potential, i.a. agriculture, as diverse dcfta investment and assistance instruments may support them. Before the Crimean crisis in 2014, the eu and Russia were Ukraine’s most important trade partners.605 The level of exports to both nations was comparable.606 In respect to agricultural trade, Ukraine has been climbing up in the rank of the eu importers, and reached eighth place in 2015.607 While the Ukraine’s trade exchange with the eu generally has a strong tendency toward

604 The statistics on trade with Russia as the largest part of the ecu market is taken as ­representative for the entire ecu. See e.g. Movchan V.; Guicci R. Changes in Russian Trade Regime and Their Implications for Ukraine German Advisory Group, Institute for ­Economic Research and Policy Consulting, 2012, para. 2.1.; Kobuta I. Impact Assessment of Ukraine’s wto Membership on the Agricultural Sector, Presentation for the Round Table “Four Years of Ukraine’s Membership in the wto: Preliminary Evaluation of Economic Impact,” 2012 (in Ukrainian) (further Kobuta 2012), p. 4. At the same time, agricultural imports from the ecu states to Ukraine are negligible. Levkovych, Hockmann, p. 99. 605 In 2008, the EU-27 was Ukraine’s most important import partner (40.9 per cent in ­total imports). Russia occupied the second place with 27.4 per cent (a substantial part of imports fell on fuels). The trade with Belarus and Kazakhstan (respectively, 3.1 per cent and 0.3 per cent) was rather low in spite of the ftas in force. In 2010 the share of transactions with Russia in Ukraine’s external trade increased up to 36.2 per cent, while the ­exchange with the eu was 31.3 per cent. Information issued by dg Trade on 22.9.2009 and on 21.3.2012. 606 The EU-27 was the major export partner of Ukraine in 2008, receiving 28.6 per cent of Ukraine’s exports (compared to 23.4 per cent destined for Russia, 5.9 per cent to Belarus, and 1.7 per cent to Kazakhstan). In 2010, Ukraine’s exports to Russia made up 26.2 per cent of the total exports, and to the EU-27 correspondingly 25.5 per cent. Information issued by dg Trade on 22.9.2009 and on 21.3.2012. 607 dg agri. Agri-food Trade Statistical Factsheet eu–Ukraine, 16.2.2017.

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negative balance of payments, agriculture is among the few sectors where the balance of trade is positive.608 The Ukraine’s agricultural exports to the eu increased predominantly for unprocessed cereals and oilseed intermediate products.609 In that regard, the suspension of import duties as a result of launching the free trade area would be the only possibility for Ukrainian food to get at least limited access to the  European markets. Therefore, while certain agricultural goods from Ukraine are already competitive on the European market, eliminating import duties by implementing the dcfta, along with the expected cohesion of standards with legal approximation, the penetration of Ukrainian products into the eu will increase. Ukraine’s agricultural trade exchange with the cis used to be significant and focused on processed food with a high added-value (cheese, confectionary, meat products, juice etc.).610 Nevertheless, the share of the agricultural exports from Ukraine in the region has been decreasing since before 2014.611 The reduction of the export share within the cis fta(s) for a major agricultural producer like Ukraine may be explained by two factors: export expansion by the country to more lucrative markets and (or) fta(s) non-efficiency for agricultural trade. Both grounds may be relevant in the present case. A similar reduction may be found only for Moldova, while the other states – even Georgia, which had left the cis – had stable shares of the cis agricultural exports, and Russia even managed to double them.612 Additional growth of Russian agricultural exports in the cis may be expected due to a steep rise in 608 The eu negative balance of trade in agricultural goods with Ukraine made up 0.995 billion eur in 2008 and 0.934 billion eur in 2011, and since 2013 over 1 billion eur annually. Information issued by dg Trade on 22.9.2009, on 21.3.2012, on 3.5.2017. 609 The export increase was documented for cereals, mostly wheat, vegetable oils, and oilseed cake. Trade in cereals shows a high degree of volatility, a rise in oilseed exports is stable (except for 2008 for sunflower oil). Information of eurostat/comext of October 2010. 610 Institute for Economic Research and Policy Consulting. AGRICISTRADE Country Report: Ukraine, Kiev, 2015 (further AGRICISTRADE), p. 45. 611 The agricultural exports within the cis made up around 33 per cent of total agricultural exports of the participating states in 2000–2009, where the share of cis exports in the total agricultural exports of Ukraine decreased from 48 to 27 per cent for the same period. Although the value of Ukrainian agri-food export to the cis and Georgia more than doubled in 2004–2013, the share of these countries in the total agri-food exports of Ukraine fell from 49.4 per cent to 21.6 per cent. World Trade Report 2011, pp. 208–213; ­AGRICISTRADE, p. 45. 612 Ibid.

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agricultural support in the country613 and deeper economic integration within the ecu/eeu. Since Ukraine is currently engaged in the fta with the ecu/eeu states, the question is whether further economic integration with them would be ­possible or desirable for Ukraine. The dcfta does not preclude the maintenance or establishment of cus and ftas by the contracting parties, insofar as they are not in conflict with trade arrangements under the dcfta.614 This provision may be interpreted to mean that a dcfta party is not entitled to enter into an economic integration agreement that imposes obligations that would make it impossible to comply with the dcfta. Therefore, Ukraine’s accession to the ecu/eeu would not be possible because adherence to the ecu/eeu common external tariff would interfere with the compliance to the dcfta free trade ­regime (the application of the common external tariff would be in conflict with the Art. XXIV:8(a) of the gatt definition of the fta which is to cover substantially all trade). Therefore, after the signing of the dcfta between the eu and Ukraine in June 2014, Ukraine’s accession to the ecu/eeu is not, in principle, an option. It is still worth assessing here the potential consequences of that accession.615 First of all, the status of Ukraine’s wto commitments within the ecu/eeu must be analysed. As already mentioned in Sub-chapter 3.2.2.4(d), wto regulation and the wto commitments of each party were partially integrated into the ecu regime and are to prevail over the ecu/eeu law. Differently, the eeu Treaty requires compliance of international agreements concluded by eeu member states with third parties to the eeu principles and goals.616 Yet, the member states’ wto commitments also become an integral part of the eeu legislation.617 If Ukraine had acceded to the ecu/eeu, the difficulties should be e­ xpected in the market access pillar, as the ecu/eeu parties maintain a common ­external tariff which would have been implemented by Ukraine in case of the accession. The ecu/eeu customs duties are, on average, higher than those of Ukraine.618 It would mean that Ukraine would have been required 613 Kiselev S.; Romashkin R. Possible Effects of Russia’s wto Accession on Agricultural Trade and Production, ictd Issue Paper 40, 2012 (further Kiselev, Romashkin), pp. 6–7. 614 Art. 39.1. of eu–Ukraine aa, similarly Art. 1.3.2. of efta-Ukraine fta. 615 Art. 108 of the eeu Treaty provides that membership in the organisation is open to any state sharing the eeu principles and goals on the conditions agreed on by the member states. 616 Art. 6(2) of eeu Treaty. 617 Art. 1.1. of Treaty on the Functioning of the Customs Union in the Multilateral System; Art. 6(1) of eeu Treaty. 618 The mfn tariffs of Russia equalled to 7.8 per cent in average in 2012, and 11.2 per cent for agricultural goods (the applied tariffs were higher, since Russia acceded the wto in

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to ­re-negotiate its wto schedules in accordance to Art. XXIV:5(a) and XXIV:9 of the gatt. And in response, the nation would have had to compensate its aggravated trade partners for the increase in mfn tariffs. This additional economic burden would have outweighed or completely eliminated any possible advantages of advancing economic integration with the ecu/eeu. Specifically for the agricultural segment, the tariff adjustment should not be dramatic. The difference in the level of import protection for grain and oilseed is not substantial, but still may have had a certain impact on Ukrainian agriculture and processing.619 Firstly, the ecu/eeu levies import duty on grain seeds and oilseed, while they are bound to zero in Ukraine. The increased duty may have contributed to price hikes of imported seed for sowing in Ukraine. The imposition of import tax on oilseed would have increased costs for ­vegetable oil producers in Ukraine and may have lead to export restrictions to ensure ­domestic processing capacities were met. A similar situation may have o­ ccurred due to increased import duties on crude vegetable oils.620 The two ftas – the dcfta and the cis fta 2011 – could also technically coexist in the future. Both agreements contain “conflict clauses.”621 The cis fta is “softer” than the dcfta on this matter and does not preclude participation of its signatories in any rta compatible with the provisions of Art. xxiv of the gatt. As it was concluded in Sub-chapter 3.2.2.3(e), the eu–Ukraine aa is expected to be compatible with the respective wto disciplines. Hence, the cis fta 2011 does not preclude Ukraine’s participation in the dcfta. Since the eu– Ukraine aa explicitly requires consistency of other rtas with its p ­ rovisions, the dcfta provisions should prevail for Ukraine in case of any contradictions with the its obligations under the cis fta 2011. On the other hand, Art. 18.2. of cis fta 2011 does not authorise contracting states to ­restrict their rights under the cis fta 2011, and does not authorise releasing them from the obligations under the cis fta in case of participation in a rta compatible with Art. xxiv

­ ugust 2012). The Ukraine’s average mfn tariffs reached 5.8 per cent (applied t­ariffs – A 4.5 per cent) and 11 per cent for agriculture (applied tariffs – 9.5 per cent). www.wto.org. 619 mfn tariffs for cereals committed by Ukraine correspond to 0 per cent for seeds and 10 per cent for other positions, where the ecu mfn tariffs for cereals (including those for sowing) make up 5 per cent and for flour, 10 per cent. www.wto.org. 620 mfn tariffs of Ukraine for oilseed are fixed at 0 per cent, 0 per cent for vegetable oils, 5 per cent for palm oil, 5 per cent for rapeseed oil, 8 per cent for sunflower crude oil, and 20 per cent for sunflower oil for human consumption. The ecu mfn tariffs for oilseed constitute 5 per cent; for palm oil, 0 per cent; for rapeseed and sunflower oil, 15 per cent (for some types the bottom rate of 0.1 eur/kg is applied). www.wto.org. 621 Art. 39 of eu–Ukraine aa and Art. 18 of cis fta 2011.

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of the gatt. However, due to the absence of clear e­ xternal restrictions on the ftas in question, the chance of a conflict, ­especially a real conflict, appears to be low. Nevertheless, it should be kept in mind that competing rtas with ­incompatible rules might “lock in” their members and s­ uspend incentives for further multilateral negotiations.622 In that situation, external restrictions in the sense of Art. XXIV:5 of the gatt may be imposed. That may be, for i­ nstance, the case of harmonisation of sps standards in the course of the dcfta implementation. The possibility of a regulatory conflict with the ecu/eeu should, in theory, be low due to the declared harmonisation of the ecu/eeu legal acts on sps measures with international standards, in ­accordance with the list in Annex 1 of the wto sps Agreement.623 The situation would be different if Ukraine also chooses to transpose eu rules for protection above the standards. The ecu/eeu declared concerns about an expected surge of ­re-exportation of European agricultural goods and food through Ukraine. It is likely that this fear is overestimated due to the fact that the eu–Ukraine aa spells out the rules of origin.624 Therefore, the flow of primary products should not be ­anticipated, but the importing of food produced in Ukraine from p ­ rimary products originating in the eu may not be excluded.625 Notwithstanding this potential loophole, the economic surveys suggest the dcfta is unlikely to have any significant impact on Russia in terms of the impeded trade flows with Ukraine, negatively affecting the Russian economy.626 Even if it could have some ­detrimental impact, a possible reduction of Ukraine’s trade with the cis after the dcfta implementation should not be, economically speaking, necessarily evaluated in a negative way.627 Trade diversion for agricultural goods, i.e. ­reduction of imports from more efficient non-rta countries, could hardly ­happen, as both the eu and Ukraine may be identified as Russia’s ­natural trade partners.628 622 World Trade Report 2011, p. 14. 623 Decision of the ecu Commission of 23.9.2011 on Single Procedure on Examination of ecu legal acts in the area of sps measures; Chapter xi of the eeu Treaty. 624 Art. 26 and Protocol 1 to the eu-Ukraine aa. 625 Art. 2.2. (a) of Protocol 1 to the eu-Ukraine aa. 626 See Dragneva, Wolczuk, pp. 10–11. 627 Reduction of trade not based on cost advantages should not, in fact, mean a loss of ­efficiency, since resources freed by such a reduction may be used in a more efficient way. Bleuel, p. 57. 628 See the phenomenon of trade diversion World Trade Report 2011, p. 9.

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Conclusion of Chapter 3

The vertical system of international trade regulation comprises three main layers of legal norms: multilateral (the wto/gatt system), regional (rtas of different integration stages) and national. The danger of possible conflicts ­between the identified levels is primarily associated with legalisation and constitutionalisation of the wto, as well as with proliferation of rtas (i.e. both geographical expansion and extension of their policy coverage). Agricultural policies are mostly targeted at the national and multilateral ­level, while most rtas are reluctant to liberalise agricultural trade and establish an expanded regulation in this area. After the analysis of two blocks of Ukraine’s rtas, several observations can be made. First, ftas within the cis do not foresee a separate agricultural track and liberalise the largest part of agricultural trade on the general conditions. At the same time, Ukraine’s ftas with developed countries impose restrictions for agricultural market access, mostly in the form of trqs or gradual ­elimination of import tariffs, where Ukraine tends to reduce the level of import protection at a quicker pace than its partners. Second, the ftas within the cis do not envisage legal approximation or harmonisation which is considered only an advanced integration stage within the ecu/eeu, where harmonisation aims to escape regulatory conflicts that may arise due to missing wto membership of certain signatory states. In a different way, Ukraine’s cooperation with the eu already promoted harmonisation in the form of legal and regulatory approximation to the “best option” (which was agreed to be eu law) at the pre-integration stage (pca). The dcfta requires an extensive legal adaptation, also for non-tariff agricultural measures. The ­accession to the ecu/eeu, although practically impossible after the ratification of the dcfta, would also require harmonisation of agricultural policies with the wto regime as a reference mark. Thereby, Ukraine’s accession to the eeu should not have led to any additional harmonisation work for Ukraine in this track. It may be argued that eu-Ukraine economic integration is concentrated on the market entry aspects, i.e. factual possibility of winning the market ­segments, as opposed to “shallow” integration with the cis and efta States. On the other side, due to regulatory similarities within the cis, the “shallow” liberalisation could be sufficient enough to ensure market entry for ­agricultural goods of the participating states.

chapter 4

Subsidy Definition: International Approaches in Regulation

Scope of the Chapter

This chapter will establish regulatory reference points for the definition of agricultural subsidies in Ukraine. To do that, the subsidy approaches within the wto/gatt system and within the eu will be studied. A thorough analysis of the subsidy definitions within these sets of rules will provide a basis for the classification of agricultural policy measures in Ukraine in the successive chapters. The examples of subsidy concepts will also illustrate possible issues of rta compliance with the wto rules (on the example of eu law), and with national legal provisions in the context of mandatory rta rules (based on the fta ­between the eu and Ukraine). 4.1

Definition of Subsidy under wto/gatt Law

4.1.1 Overview of Criteria The gatt subsidy disciplines are extremely laconic which is an understandable consequence of the lax disciplines in force before the Uruguay Round.1 The general regulatory framework on subsidies was set only by the Agreement on Subsidies and Countervailing Measures (scma) after the formation of the wto.2 Art. 1 of the scma identifies three elements of a subsidy: – objective element: “a financial contribution” (Art. 1.1. (a)(1) of the scma) or “any form of income or price support in the sense of Article xvi of the gatt” (Art. 1.1. (a)(2) of the scma); 1 Art. xvi of the gatt prohibits subsidies that cause increase in imports and exports of goods, but does not provide the legal definition of “subsidy.” 2 In spite of the fact that the Agreement on Agriculture (AoA) provides its own regulation on subsidies and operates with the notions of “domestic support” and “export subsidies,” it was found by the dsb that the definition of subsidy under Art. 1 of the scma may be also used for agricultural subsidies. Art. 1 of the scma was characterised by the dsb as a “highly relevant context for the interpretation” of the term “subsidy” within the meaning of the AoA, “unless the contrary is to be inferred from the AoA.” Panel Report us-fsc, para. 7.150. That is why, for the purpose of this work the general definition of subsidy under scma must be studied. © koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004353695_006

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– subjective element: provision “by a government or any public body within the territory of a Member” (Art. 1.1. (a)(1) of the scma); – comparative element: a benefit conferred by a financial contribution (Art. 1.1. (b) of the scma in conjunction with Art. 14 of the scma). Art. 1.2. and 2 of the scma add the fourth element of “specificity” (the other side of the subjective element) which may arguably be offset for agricultural subsidies as they are specific in nature because they are always provided to a group of enterprises. Moreover, the element of specificity is not necessary for the identification of subsidies per se, but solely for the identification of actionable subsidies. 4.1.2 The Element of “financial contribution” (Art. 1.1. (a)(1) of the scma) The list of possible types of “financial contribution” provided by the scma is exhaustive and limited to the three instruments analysed below. Form 1

Practice of direct transfer of funds, i.a. potential, bestowed by the government (Art. 1.1. (a)(1)(i) of the scma)3 The dsb interpretation of the term “fund” in this context covers not only ­money, but also other financial resources and other financial claims.4 The factual transfer of funds is not mandatory to constitute a subsidy. It would be sufficient to establish that “government practice” thereof exists.5 This may confirm the argument provided in the Sub-chapter 3.1.1. that a member’s ­non-compliance with scma provisions (at least for this particular provision) may be challenged “as such.” The transfer of funding may be both unconditional or involve reciprocal rights and obligations on the beneficiary’s side.6 The question of the transfer terms goes beyond the existence of a financial contribution and would instead concern the element of benefit.7 All in all, the covered measures will not necessarily impose a cost on the government (in fact, the government may even receive benefits, as in case of loan repayments), but a charge on the public account (e.g. in case of loans, those are 3 The legal text provides grants, loans, loan guarantees etc. as examples. 4 Appellate Body Report Japan-DRAMs WT/DS336/AB/R, para. 250. Transfer of funds, for instance, encompasses interest rate reductions and extension of loan maturity. Ibid., para. 251. 5 See Panel Report Brazil-Aircraft WT/DS46/R, para. 7.13. and its interpretation by Van den Bossche P.; Zdouc W. The Law and Policy of the World Trade Organisation: Text Cases and Materials, 3rd ed., Cambridge, 2013 (further Van den Bossche, Zdouc), p. 752. 6 Appellate Body Report US-Large Civil Aircraft WT/DS353/AB/R, para. 617. 7 Panel Report US-Export Restraints WT/DS194/R, footnote 135.

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registered as government expenditures in budget laws).8 Thus, due obligations (i.a. non-repaid loans) may also be regarded as transfer of funds. Form 2

Government revenue “otherwise due” foregone (Art. 1.1. (a)(1)(ii) of the scma)9 In 2000, the dsb ruled that the basis for the establishment of revenue “otherwise due”10 had to be the national law of the wto member in question, and the reference mark was determined as taxes collected “but for” the government measure.11 The latest jurisprudence seems to limit the mark of general tax regulation to treatment of activities in the same branch.12 Some tax measures are exempt from the category “revenue foregone,” in particular, reimbursement of vat paid prior to exportation and vat exemption for exported goods.13 Conversely, import duty exemption for specific goods from certain countries was found to constitute a revenue foregone for the purpose of the scma.14 Thus, any type of tax measures, except those directly excluded by the agreement could potentially fall within the scope of Art. 1.1. (a)(ii) of the scma. Form 3

Provision or purchase of goods and services by the government (Art. 1.1. (a)(1)(iii) of the scma) Governmental actions encompassed by this provision are those that have the “potential to lower artificially the cost of producing a product by providing inputs having financial value” or have “potential to increase artificially ­revenues gained from selling the products.”15 Providing access to facilities and 8

Luengo, p. 108. Rubini came to the same conclusion after the interpretation of Art. 1.1. (a) (1) of the scma . Rubini, pp. 143–148. 9 This criterion concerns predominantly various kinds of tax measures. 10 The dsb tends to interpret the term “revenue,” among others, as an annual income of a government “from all sources, out of which public expenses are met” while “otherwise” stands i.a. for “in other circumstances” and the word “due” means “owing or payable as an obligation or debt.” Panel Report Canada-Autos WT/DS139/R, WT/DS142/R, para. 10.159. 11 Appellate Body Report us-fsc WT/DS108/AB/R, paras. 90–92. 12 The Appellate Body opined that application of a too broad base of general taxation or historical tax rates may be misleading. Appellate Body Report US-Large Civil Aircraft, paras. 823–824. 13 Footnote 1 to scma: “Taxes borne by the like product when destined for domestic consumption.” 14 Panel Report Canada-Autos, paras. 10.157–10.172. 15 Appellate Body Report US-Softwood Lumber iv WT/DS257/AB/R, para. 53. Canadian stumpage programme which allowed cutting trees was found to result in supply by the

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­equipment16 should also fall within the ambit of Art. 1.1. (a)(1)(iii) of the ­s cma.17 Nonetheless, provision of general infrastructure is explicitly excluded from the scope of this kind of financial contribution. Within the meaning of the ­analysed provision, the word “general” would point to the infrastructural ­capacities “not provided for the advantage of a single entity or a group of e­ ntities,” but rather “available to all or nearly all entities.”18 Infrastructure could be classified as general after a thorough examination of not just de jure, but also de facto access limitations.19 4.1.3 The Element of “government or any public body” The explicit extension of granting subsidies to “any public body” (allegedly with a view to cover state-owned entities in transition states20) may put the definition of this term in focus, as that could be crucial for identification of a subsidy. The most extended interpretation of this notion was given by the Panel in us-ad&cvd (China) and was later modified by the Appellate Body.21 It was found that the key characteristic linking public bodies to the government should be “performance of governmental functions, or the fact of being vested with, and ­exercising the authority to perform such functions.”22 This approach is criticised for creating a loophole between the definitions of private and public bodies that may entrap entities under state control not vested with governmental functions.23 However, it seems that the Appellate Body created some flexibility for filling this possible gap by ruling that due to the impossibility government of a particular good (wood). Panel Report US-Softwood Lumber iv WT/ DS257/R, paras. 7.28.–7.30. 16 The word “provided” in the context of this norm could mean “making available” or “putting at the disposal of,” i.e. creating “reasonable proximate relationship” between the government’s action and the use or enjoyment of the provided goods or services by the recipient is required. Appellate Body Report US-Softwood Lumber iv, para. 71. 17 Appellate Body Report US-Large Civil Aircraft, para. 624. 18 Panel Report US-Large Civil Aircraft WT/DS316/R, para. 7.1037. 19 Ibid. 20 Relying on the history of negotiations, Ding made the suggestion that the term “public body” might have been drafted for non-market economies in transition. But the text of the negotiation documents seems to be too ambiguous to make any conclusions. Ding R. “Public Body” or Not: Chinese State-Owned Enterprise. In: Journal of World Trade, 48(1), 2014, pp. 167–190, p. 173. 21 Appellate Body Report us-ad & cvd (China) WT/DS379/AB/R11, para. 285 seq. 22 Ibid, para. 290. It is determinant whether an entity is vested with authority to exercise governmental functions, rather than how that is achieved. Ibid, para. 318. 23 Cartland M.; Depayre G.; Woznowski J. Is Something Going Wrong in the wto Dispute Settlement? In: Journal of World Trade, 46, 2012, pp. 979–1016, p. 1001.

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of e­ stablishing an overall definition of the term, the identification of a public body must proceed on a case-by-case basis.24 “Financial contribution” in any form previewed in Art. 1.1. (a)(1)(i)–(iii) of the scma also falls within the scope of the scma when provided by a private body, under the condition that the latter is “entrusted or directed to carry out” this ­measure by the government, or if payments are not made directly by the ­government, the government finances them (Art. 1.1. (a)(1)(iv) of the scma ). Apparently, the interpretation of the verbs “entrust” and “direct” is crucial to qualifying for financial contribution in this form. After the strict dsb interpretation of these notions limited them to delegation in US-Export Restraints,25 further decisions extended the meaning of “entrustment” to passing along ­responsibility to carry out a function which is not limited to delegation, while “direction” was determined as exercising governmental authority over a p ­ rivate body.26 At the same time, the Appellate Body in us-drams explicitly m ­ entioned that this interpretation should not cover measures where the ­government merely ­exercised its general regulatory powers.27 Thus, the scope of this provision remains rather blurred, though scholars seem to have found the solution. Rubini opined that the second part of Art. 1.1. (a)(1)(iv) of the scma should be interpreted so that entrustment or direction could be implemented only to those functions under Art. 1.1. (a)(1)(i)–(iii) of the scma that “would normally be vested in the government,” and “the practice in no sense differs from practices normally followed by governments.” Given the fact that a “normal practice” ­(carrying out the “function” of the government) is understood by the dsb in a way that excludes complex regulatory mechanisms and links to taxation and public expenditure (i.a. loans),28 Rubini concluded that the purpose of the last

24 25 26

27

28

Appellate Body Report us-ad & cvd (China), para. 317. Panel Report US-Export Restraints, paras. 8.29–8.32. Appellate Body Report US-DRAMS WT/DS296/AB/R, paras. 110–111, 116. After having interpreted textually the expression “direct someone to do something,” Rubini came to the conclusion that the verb “direct” covers “explicit or implicit, formal or informal,” “well defined, and rather marked degree of direction and compulsion in the governmental action.” See Rubini, p. 111 seq., especially p. 114. This interpretation is compatible with the findings of the Appellate Body in Canada-Dairy. Appellate Body Report Canada-Dairy (21.5 New Zealand) WT/DS103/AB/RW2, WT/DS113/AB/RW2, para. 128. Appellate Body Report us-drams, para. 115. At the same time the Appellate Body extended the “entrustment” and “delegation” to the scope potentially capable of “catching” general regulatory powers in para. 118 of this Report. Rubini, pp. 118–120; Panel Report Korea-Commercial Vessels WT/DS273, para. 7.30. Similar Panel Report US-Export Restraints, para. 8.72.

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part of Art. 1.1. (a)(1)(iv) of the scma was to avoid extension of the scope of financial contribution to any third party conduct.29 Taking into account the above arguments, it may be concluded that the ­definition of “financial contribution” under Art. 1.1. (a)(1) of the scma was most probably designed to exclude governments’ regulatory measures from the wto subsidy framework. Correspondingly, the existence of a financial contribution by a government is supposed to be proven by reference to government’s action, not to its effects.30 Another dimension of the subject-related subsidy element is the issue of territoriality. The fact that the scma explicitly says subsidies provided by the “government or public body within the territory of a Member” fall within the scope of the regulation could signify that a government financial contribution provided by one wto member to private entities of another wto member, will be also covered by Art. 1.1. (a)(1) of the scma. Therefore, extraterritoriality of subsidies may be affirmed.31 Alternatives to the Requirement of “financial contribution by government”: Granting of Income or Price Support (Art. 1.1. (a)(1) of the scma) Where no financial contribution under Art. 1.1. (a)(1) of the scma is transferred, a subsidy may be still provided, if any form of income or price support in the sense of Art. xvi of the gatt is conferred (Art. 1.1. (a)(2) of the scma). ­However, Art. xvi of the gatt is silent on any interpretation of these forms of support. A hint may be given by the Recommendation of the Panel on Subsidies 196032 illustrating that price support was understood in the gatt at the time as a system maintained by a government which supported fixed domestic prices to producers above world price levels by using direct or indirect methods of purchase and re-sale at a loss, even if only a part of the production involved 4.1.4

29 30

31 32

Rubini, pp. 116–117. The criterion of financial contribution was introduced into the scope of Art. 1 of the scma to prevent the possibility of any government action that resulted in a benefit to be treated as a subsidy within the scma. Panel Report US-Export Restraints, paras. 8.34., 8.38. The Panel provided an example of high import duties shifting processors to domestic inputs as a regulatory measure that would fall under the extended “entrustment” concept (paras. 8.37., 8.42.). The wto regime has specific instruments to combat these practices. Similarly Luengo, pp. 103–106. This instrument provides a non-binding interpretation of Art. ix of the wto Agreement.

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a subsidy.33 This approach could be interpreted in a way that, for instance, ­public stockholding or even export restrictions could have been under conditions caught by Art. 1.1. (a)(2) of the scma. However, the dsb recently shut this gap. In China-goes, in spite of taking a broad meaning of the expression “any form of price support,” panellists found in the context of the dispute that only setting or targeting prices would be covered by the concept of price support under Art. xvi of the gatt. Consequently, measures that have incidental or random effects, tariffs, and quantitative restrictions would not constitute price support. At the same time, direct state intervention aimed at fixing prices at a particular level is included in the notion of “price support.”34 Hence, public interventions should normally be covered by this element. The Element of “benefit” (Art. 1.1. (b) of the scma in Conjunction with Art. 14 of the scma) Since financial contribution is, in essence, a prerequisite for the benefit ­conferred according to the wto subsidy definition, such a benefit, although there is no direct reference in Art.1.1. (b) of the scma, is supposed to be economically quantifiable.35 Then the question emerges as to how the benefit must be calculated. The usual dsb practice is to take the market place as a reference mark,36 i.e. the benefit will be conferred if a recipient has more favourable conditions for obtaining financial contribution than those available on the market.37 The wto judicial practice rejects the argument that cost to a government automatically confers a benefit and requires the presence of a recipient of the benefit.38 Regarding when the benefit should be granted, the current dsb 4.1.5

33

The same approach was followed by the early gatt dispute bisd 9S/191, para. 11. By determining loss on resale, storage costs must be considered. 34 The importance of the governmental action, but not the effect, is underlined. Panel Report China-GOES 2012 WT/DS414/R, paras. 7.84.–7.85. 35 Luengo, p. 123. 36 See Appellate Body Report Canada-Aircraft WT/DS70/AB/R, paras. 155–157 (application of Art. 14 of the scma which is based on market price principle) followed by Panel Report ec-drams WT/DS299/R, para. 7.176. and Panel Report Japan-DRAMs WT/DS336/R, para. 7.256. 37 This conclusion is derivative from Art. 14 of the scma. This basic rule has had only two exceptions up to now, both concerning agricultural export subsidies where total production costs were taken as a reference mark. Appellate Body Report Canada-Dairy, paras. 87–96 and Panel Report ec–Export Subsidies on Sugar WT/DS265/R, para. 7.264. 38 See e.g. Appellate Body Report Canada-Aircraft, para. 154; Appellate Body Report us– Large Civil Aircraft, para. 662.

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­practice does not connect the actual time of a subsidy receipt to the appearance of a benefit. A benefit is supposed to be bestowed, “when unconditional legal right to receive a subsidy arises,”39 thus, when all legal prerequisites are met by the recipient. These three criteria (to be specific, financial contribution by government resulted in a benefit) determine, separately and together, whether the subsidy exists.40 Assuming the concept of financial contribution by the government, not every government measure capable of providing benefits would automatically fall within the subsidy scope.41 4.1.6 The Element of “specificity” (Art. 1.2. of the scma) Specificity is not regarded as a subsidy element, but rather a prerequisite for its actionability. The specificity test of Art. 2.1. of the scma would be positive if the government explicitly limits access to a subsidy to certain enterprises or industry. Hence, specificity is to be established at enterprise or industry level, but not at product level. At first glance, it may seem that agricultural subsidies in general are ­specific per se, as they are granted to a single sector of the economy.42 On the other hand, it may be argued that the agricultural sector may fall within the escape clause of Art. 2.1. (b) of the scma, since the limitation of subsidies for agricultural enterprises (all or specific groups) may be justified by objective criteria or conditions that are economic in nature and horizontal in application.43 The question of applying Art. 2 of the scma to subsidies for the agricultural sector as a whole has yet be studied by the dsb.44 39 40 41

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Panel Report Brazil-Aircraft, para. 7.71. Appellate Body Report Brazil-Aircraft WT/DS46/AB/R, para. 157 and Appellate Body ­Report Canada-Aircraft, para. 156. If it were like this, the criterion of financial contribution would be abundant, since “all government measures conferring benefits, per se, would be subsidies.” Appellate Body Report us-drams, para. 114; Appellate Body Report US-Softwood Lumber iv, para. 52. See also Rubini, p. 110. The issue of specificity of agricultural subsidies was rarely dealt with by the dsb, since most subsidy cases concern export subsidies, which are specific per se under Art. 2.3. of the scma. Provided that the eligibility is automatic and that such criteria and conditions are strictly adhered to. Footnote 2 to the scma. The specificity of subsidies is to be examined case-by-case. The subsidies granted to certain us agricultural products were found specific by the Panel. Due to this fact, the Panel did not analyse the issue of specificity of subsidies if granted for the whole agricultural sector. Panel Report US-Upland Cotton WT/DS267/R, paras. 7.1136. seq.

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4.1.7 Incorporation of Agricultural Subsidies into General Disciplines Where economic theory may prefer the approach of sectoral subsidy disciplines rather than common regulation,45 from a legal perspective, long-term separation of agricultural domestic support from the general subsidy track seems to be in contradiction with the objectives of the Punta del Este declaration. Moreover, the maintenance of this separation would be in contrast to the long-term AoA goals. In this context, the incorporation of agricultural trade into the “normal” gatt patterns would not be an obstacle for market access or export competition rules, but could be stalled due to the lack of political will to restrict domestic support programmes46 because the provisional ­non-­actionability for “green” subsidies authorised under Art. 8 of the scma officially expired in 2000.47 At the same time, as previously noted, the differences between the ­domestic support concept and the subsidies disciplines under scma are not ­substantial.48 The real challenge seems to be incorporation of the agricultural “green box” measures into the wto general subsidy track. The scma would make a distinction between “green” and actionable (“amber”) subsidies by their specificity. The majority of agricultural “green” subsidies, as already established in the Sub-chapter 4.1.6., are specific by their nature and, hence, they are actionable under the scma, unless justified by Art. 8.2. scma. However, this escape clause may catch only some R&D and environmental subsidies, as well as aids for disadvantageous regions. Thus, most measures covered by Annex 2 of the AoA would not be justified by this provision. Due to the described pitfalls, a leading legal opinion favours anti-­ generalisation of the agricultural subsidies regime, as it would likely cause new exceptions (i.a. waivers and safeguards) and multiply a­ griculture-related disputes.49 Moreover, the consideration of non-trade concerns by reforming agricultural disciplines required by Art. 20 of the AoA, together with the fact

45 46 47

48

49

Sykes, p. 634. Tangermann 2001, p. 14. Art. 31 of the scma. The fortune of this provisional period is unclear. Art. 31 of the scma indirectly authorises a prolongation of the provisionary regime. The Doha process did not contribute to any decision on this matter. One could agree with Tangermann that both regimes are governed by the same principles, with the exceptions that some prohibited subsidies under the scma are eligible under conditions for the agricultural sector. Tangermann 2001, pp. 5, 12, 14. O’Connor, p. 416.

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that the scma does not deal with non-trade concerns at all, further supports arguments for the inevitable distinction between the regimes.50 “Peace Clause” Expiry and the Interplay between the scma and the AoA Even in the absence of full integration of agriculture trade into the scma, ­further convergence is inevitable due to the expiry of the provisional exemption of agricultural subsidies from the responsibility under the scma on 1 J­ anuary 200351 (Art. 13 of the AoA, the so-called “due restraint” or “peace clause”).52 Since the “peace clause” has never been extended, agricultural subsidies (including those falling within the scope of Annex 2 of the AoA, which are not to be reduced pursuant to the AoA commitments) were relegated to the general subsidies disciplines after 2003.53 This point of view is strengthened by the fact that renewal of the “due restraint” clause was not included in the agenda of the running wto negotiations, and disputes filed before the dsb after 2003 pointed to a clear understanding among members that agricultural subsidies ceased being non-actionable (e.g. US-Upland Cotton, C ­ hina-Agricultural Grants, E­ C-Export Subsidies on Sugar). The provision of Art. 20 of the AoA requiring the start of agricultural ­negotiations in 2000 seems to support the idea that the new agreement was supposed to have been agreed on by the date of the “peace clause” expiry. Nonetheless, the expiry of Art.13 of the AoA exemption in the absence of stricter disciplines on domestic support, does not seem to change the game rules.54 Under current circumstances, the AoA and the scma have been coexisting for more than a decade. This sub-chapter will attempt to clarify the rules of this relationship. To start with, it should be clarified that in the dsb’s view the wto Agreement is a “single undertaking,” and therefore, all wto obligations are ­generally 4.1.8

50

51 52

53 54

Chamboney D. How the Expiry of the Peace Clause (Art. 13 of the wto Agreement on Agriculture) Might Alter Disciplines on Agricultural Subsidies in the wto Framework. In: Journal of World Trade, 36(2), 2002, pp. 305–352 (further Chamboney), p. 311. The question of the precise expiry date is questionable; it lays within 2003 and 2004. See Petersmann 2005, p. 136. After a stream of agricultural disputes under the gatt in the 1980s the peace clause was obviously a political deal of the Uruguay Round which was necessary to reach the final consensus in the negotiations. See Chamboney, p. 306. The whole scope of “peace clause” expiry implications is still unclear, as there are no official wto documents on this issue. Initially, the expiry of Art. 13 of the AoA provision was to contribute to unification of the subsidy regimes that is still not achievable. See Chamboney, p. 307.

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cumulative and members must comply with all of them simultaneously.55 Given the fact that both the AoA and the scma are integral parts of the wto Agreement,56 they shall be applied cumulatively.57 In cases where the ­provisions of these agreements regulate the same subject matter, they must be read as “an inseparable package of rights and disciplines which have to be considered in conjunction.”58 The differences in the text of these agreements are expected to be addressed by the dsb in light of the public international law presumption against conflicts of norms by applying the norms cumulatively.59 At the same time, Art. 21.1. of the AoA sets up the prevalence of the AoA norms over the gatt provisions and other multilateral trade agreements. Therefore, the latter are to apply only subject to the provisions of the AoA.60 Logically, the scma and the gatt will be applicable to trade in agriculture only in cases where no AoA “specific provisions” are present. Hence, since the AoA provides special regulation on agricultural subsidies (namely, rules for domestic support and export competition) these norms should prevail over the scma disciplines.61 Up to that, based on the text of Art. 31(2)(a) of the vclt, Chamboney deduces that the AoA provisions will prevail over those of other multilateral trade agreements in cases when the application of the latter will not “enable a AoA provision to have appropriate effect.”62 Still, this prevalence is by no means absolute. In the dsb interpretation, one provision will prevail over another only where they cannot be read “as complementing each other.”63 Moreover, when the AoA provisions do not clash with the gatt provisions, compliance to the AoA cannot be a justification against a claim for violation 55 56 57

Panel Report Korea-Dairy Safeguards WT/DS98/R, para. 7.38. Pursuant Art. II:2 of the wto Agreement. See analogy in Panel Report Brazil-Coconut WT/DS22/R, para. 227; Appellate Body Report Argentina-Footwear WT/DS121/AB/R, paras. 79–81. 58 Appellate Body Report Argentina-Footwear, para. 81. 59 See e.g. Appellate Body Report Canada-Periodicals WT/DS31/AB/R, p. 19 or Appellate Body Report EC-Bananas WT/DS27/AB/R, paras. 219–222. See also Sub-chapter 3.1.1. 60 The wording “subject to the provisions of the AoA” was interpreted by the Appellate Body in EC-Bananas iii as meaning “(subject to) specific provisions (of the AoA) dealing ­specifically with the same matter.” Appellate Body Report EC-Bananas iii WT/DS27/AB/R, para. 155. 61 Nevertheless, as already established, some scma definitions must be used in interpretation of agricultural measures, i.a. “subsidy” and its elements, and “export contingency.” 62 This approach would, however, lead to the situation when some agricultural subsidies would be subject of tighter disciplines than industrial subsidies. Chamboney, pp. 313, 316. 63 Appellate Body Report Guatemala-Cement WT/DS60/AB/R, para. 65. See also ­Sub-chapter 3.1.1.

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of the gatt,64 and, consequently, for violation of other Annex 1 multilateral agreements. Owing to the fact that the “due restraint” provision remains a part of the AoA (the termination of the regime does not extinguish the norm as such), one could support the position of Wouters and Coppens that Art. 21 of the AoA should be read together with the “peace clause” provision.65 On this ground, it may be followed that inasmuch as the AoA does not provide for ­remedies against subsidies, the termination of Art. 13 of the AoA “escape clause” makes the scma lex specialis to the rules on recourse against subsidies. However, given the trifurcation of the “due restraint” exclusions (separate tracks for “green box,” “amber box” and export subsidies), the consequence of the expiry must be scrutinised for each domestic support category. Starting with export subsidies, there are basically two approaches to the post-“due restraint” disciplines. The first one is based on the presumption that after the implementation period finished, agricultural export subsidies became actionable. Thus, the explicit exception for agricultural export s­ upport given in Art. 3 of the scma is supposed to be terminated together with the peace clause.66 The opposite point of view refers to Art. 8 of the AoA67 that empowers wto members to provide export subsidies in conformity with the AoA and with their commitments. Since this provision did not expire with the “peace clause,” the internal conflict of norms in one agreement could be observed (Art. 13 of the AoA in conjunction with Art. 3 of the scma v. Art. 8 of the AoA). Apparently, these provisions may still be read as being compatable with each other. Art. 3.1. of the scma clearly states that export subsidies are banned “except as provided” in the AoA. Accordingly, agricultural export subsidies in compliance with Art. 8 of the AoA remain eligible under the scma, but become actionable as the scma provisions on adverse effects,68 serious prejudice69 and remedies70 keep agricultural subsidies out of their scope only to the extent “as provided in” Art. 13 of the AoA (not in the entire AoA), and Art. xvi of the gatt does not make any exclusion for agricultural subsidies at all. 64 65 66

67 68 69 70

Appellate Body Report EC-Bananas iii, para. 157. Wouters, Coppens, p. 73. This position was taken, i.a. by the Panel in Canada-Dairy “(…) by virtue of Article 13(c)(ii) of the Agreement on Agriculture, export subsidies that conform fully to Part v of the Agreement on Agriculture are exempt from actions based on Article 3 of the scma for the duration of the implementation period.” Panel Report Canada-Dairy, para. 7.21. This opinion was expressed by the ec. See Wouters, Coppens, p. 75. Art. 5 of the scma. Art. 6.9. of the scma. Art. 7.1. of the scma.

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The identical model of the scma interpretation and application could be proposed for ams measures (including de minimis and “blue box”).71 In that way, even the Total Current ams granted within the levels of the bound commitment may be potentially challenged. This conclusion could be made on the ground of the Appellate Body’s findings in the us-Upland Cotton dispute. It ruled that there was no automatic exclusion of the AoA-conform measures from other wto obligations.72 So theoretically, “amber box” support granted within the levels of a member’s bound commitments may be successfully disputed, provided that the measures in concern satisfy the scma actionability requirements.73 Supposedly, product-specific support is much more likely to be found actionable than non-product specific measures due to the greater specificity of the former.74 The “green box” support may be the most complicated. Its actionability should be examined in light of the provisions of Part iii of the scma, on a caseby-case basis.75 In this context, the relationship between trade-­distorting ­effect minimisation required under para. 1 of Annex 2 of the AoA and the scma concept of “adverse effects” stays in focus.76 Chamboney makes a conclusion that “green” agricultural measures should not cause adverse effects in the sense of Art. 5 of the scma, given their non-distorting nature as required under para. 1 of Annex 2 of the AoA.77 His arguments on the ­practical ­complications of implementing the scma remedies to green measures78 allow for the ­conclusion 71 72

73 74 75 76

77 78

Art. 13(b) of the AoA. Art. 6.3. of the AoA “does not provide that compliance with such ‘domestic support reduction commitments’ shall necessarily be considered to be in compliance with other applicable wto obligations. Nor does it contain an explicit textual indication that otherwise prohibited measures are necessarily justified by virtue of compliance with the domestic support reduction commitments.” Panel Report US-Upland Cotton, para. 7.1058., quoted and upheld in the Appellate Body Report US-Upland Cotton, para. 545. Similarly, the dsb in Mexico-Olive Oil found that a measure which was in full conformity with Art. 6 of the AoA could be challengeable by application of Art. 13(b) of the AoA. Panel Report Mexico-Olive Oil WT/ DS341/R, paras.7.59. seq. “Amber box” measures could not be challenged as prohibited subsidies, inasmuch that the scope of Art. 3.1. of the scma excludes the subsidies eligible under the AoA. See similar by Chamboney, p. 345. Chamboney, pp. 317–318. This relationship should be observed as the one between ex ante “design criteria” of A ­ nnex 2 of the AoA and ex post spelled out “performance criteria” of the scma. ­Chamboney, p. 318. Chamboney, pp. 331–332. In particular, Chamboney underlines the problem of subsidy amount calculation as per Art. 19.4. of the scma due to the decoupled character of green measures; complications

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that the scma actionability approach could not be ­successfully ­applicable to exempted agricultural domestic support measures. A partial ­solution for this would be the verification of some categories of Annex 2 m ­ easures as ­non-­actionable subsidies under Art. 8.2. of the scma.79 Therefore, while “green box” subsidies theoretically ceased being a “safe haven” and may now be actionable after the “due restraint” clause expiry, the pitfalls of the qualification and quantification of Annex 2 measures are an expected target of the current negotiation round with the goal of reducing trade distortion.80 For now, the only successful challenge of notified “green box” measures has been their re-qualification by the dsb as amber domestic ­support (US-Upland Cotton case). Besides violation claims, all types of domestic support may also be challenged with claims of non-violation nullification or impairment of benefits of tariff concessions as authorised by Art. XXIII:1(b) of the gatt, that does not demand violation of multilateral obligations.81 In dealing with these kinds of claims, the dsb normally requires that a measure could not be reasonably anticipated at the time when a concession was negotiated.82 The introduction of “green” measures would usually be anticipated, because the AoA requires the reduction of other domestic support.83 In conclusion, “amber box” subsidies and agricultural export subsidies have the potential to be challenged under the scma if the corresponding requirements are met. In respect to “green box” measures that fully satisfy the criteria of Annex 2 of the AoA, there is a little chance for recognition of actionability due to their de jure non-trade-distorting nature. Despite that,

with determination of injury under Art. 15.1. of the scma, since the volume of subsidised imports and their impact on domestic prices and producers are unknown, as well as similar problems with evidence on adverse effects under Art. 5 of the scma. Chamboney, pp. 319–324. 79 The position of some wto members, e.g. us, on the non-automatic specificity of agricultural subsidies may also allow exempting green subsidies from actionability under Art. 8.1. of the scma. See Chamboney, p. 319. 80 See e.g. de Gorter, Ingco, p. 8. 81 The cause for action may be, for example, frustration of national treatment and tariff concession expectation. Panel Report EC-Oilseeds bisd 37S/86, para. 144. At the same time, it was found that the benefits to wto members from the concessions depend on activity of individual economic operators and thereby are not guaranteed as such. Panel Report US-Section 301, para. 7.73. 82 Panel Report EC-Oilseed i, paras. 149–150. 83 Chamboney, p. 334.

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there are some ongoing attempts to dispute certain “green” measures under the scma rules.84 Intermediary Summary While the market access provisions are generally integrated into the normal gatt patterns, the disciplines for agricultural export subsidies and domestic support were entirely excluded from the scma framework during the AoA implementation period (1995–2001). Basically, only the second and the third AoA pillars fall within the wto definition of a subsidy. The effect of subsidisation resulting from market access instruments (border protection) and from other regulatory measures is not covered by the subsidy definition under Art. 1 of the scma.85 The wto suggests that this exclusion is logical, since the gatt and other multilateral agreements handle both border protection and regulatory measures.86 Nevertheless, market access disciplines are partially included in the scope of this research in order to identify governmental measures with a certain effect of agricultural support. 4.2 The eu Approach to Subsidies 4.2.1 Introduction The eu is a member of the wto87 and, consequently, has to comply with the obligations taken.88 There is a general presumption that the treaties concluded by the eu with third countries and international organisations can have a direct effect

84 85

86 87 88

Request for Consultations by Canada WT/DS357/1 joined by the eu, Australia, Brazil, ­ rgentina and Guatemala. A As it was described in the Sub-chapter 4.1.2., there is no financial contribution by government in sense of Art. 1.1. (a)(1) of the scma in this case. Nonetheless, particular market access measures if provided in a discriminatory manner may inherent the element of financial contribution. See Panel Report Canada-Autos WT/DS139/R, WT/DS142/R, para. 10.159. World Trade Report 2006, p. 185. Before 2009 the European Community used to be a wto member. This obligation is implemented in Art. 216(2) of the tfeu and the preamble of Council Regulation No. 3286/1994 laying down Community procedures in the field of the common commercial policy of 22.12.1994 (oj L 349, 31.12.1994, p. 71) with amendments by Council Regulation No. 356/1995 of 20.2.1995 (oj L 41 23.2.1995 p. 3) and Council Regulation No. 125/2008 of 12.2.2008 (oj L 40 14.2.2008 p. 1).

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on the eu Member States.89 At the same time, the wto law is by now one of the only examples of international legal norms that do not have a direct effect within the eu due to the role of the ecj and the executive at the Union (Community) level.90 Although there is no direct effect of wto law in the eu, the definition of a subsidy under Art. 1 of the scma was implemented into the European legal framework for the purpose of extra-Union trade.91 In respect to this, the “external” implementation of the term “subsidy,” unless otherwise provided by bilateral treaties (lex specialis), presupposes the use of the scma definition.92 Alternatively, the “internal” European law does not operate with the notion of a “subsidy,” but introduced the concept of “state aid.” There is, however, no direct binding legal definition of the term. That is why the legal interpretation of the state aid definition given by the ecj plays a significant role.93 Art. 107(1) of the tfeu generally prohibits the provision of state aid by eu Member States, and Art. 107(2)–(3) of the tfeu has exceptions to the general rule94 which implicitly declares that Member States have an

89

If an international agreement does not give indications about direct effect of its norms, the ecj shall decide whether the doctrine of direct effect is to be applied for this specific agreement. C-104/81 Kupferberg 1982 ecr 3641, paras. 15–18; Joined Cases 21 and 24/72 International Fruit Company nv and others 1972 ecr 1219. 90 See C-149/96 Portugal v. Council 1999 ecr I-8395, paras. 49 seq.; C-307/99 Fruchthandelsgesellschaft 2001 ecr I-3159, paras. 24 seq.; C-149/96 Portugal Textiles 1999 ecr I-8395, paras. 42–46; Council Decision 94/800/EC of 22.12.1994 concerning the conclusion on behalf of the European Community, as regards matters within its competence, of the agreements reached in the Uruguay Round multilateral negotiations (oj L 336 23.12.1994 p. 1). 91 Art. 3 of Council Regulation No. 597/2009 on protection against subsidised imports from countries not members of the European Community of 11.6.2009 (codified version) (oj L 188 18.7.2009 p. 93). 92 Kupferberg decision: “the meaning of provisions identical or similar to internal ec law in the international agreement should be established by reference to its own objectives, and not those of ec law.” 93 The ecj competence on this matter is grounded on the text of Art. 19(1) of the teu and Art. 267 of the tfeu. See also Commission Notice on the notion of State aid pursuant to Art. 107(1) tfeu (2016/C 262/01) (oj C 262 19.7.2016 p. 1) (further Commission Notice). 94 This legal construct is referred to as a prohibition with “automatically and discretionary exceptions.” See Basedow J.; Hopt K.; Zimmermann R.; Stier A. (eds.) Max-Planck Encyclopedia of European Private Law, Oxford, 2012 (further Max-Planck Encyclopedia of ­European Private Law), p. 1583.

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obligation to notify the Commission on all kinds of state aid before granting it.95 Similarly to the wto regime, state aid in the eu shall satisfy three criteria, which are: originating from state resources (like the elements under Art. 1.1. (a)(1) of the scma), aid (comparable to Art. 1.1. (b) of the scma), and selectivity of specific enterprises or products (similar to specificity under Art. 2 of the scma).96 Two further components (comparable with the provisions of Part iii of the scma for actionable subsidies), namely the (threat of) distortion of competition97 and the effect on intra-Union trade,98 are negative conclusions about conformity with the internal market. It may be argued that in a narrow sense they do not constitute state aid elements,99 since they do not impose any restrictions on the definition of state aid, but rather on the effect of a m ­ easure. Given the fact that selectivity in this approach refers to the distortion of competition,100 it will not be determinant either. Therefore, for the purpose of this work, the criteria of selectivity, distortion of competition and effect on inter-state trade are not seen as defining state aid so much as determining state aid, which must be authorised by the Commission. By the same token, the exemptions under Art. 107(2)–(3) of the tfeu consider seriously their authorisation by the Commission, but not their qualification as subsidies under the gatt/wto regime.

95

See also Art. 108 of the tfeu. Some categories of exempted state aid may be provided without a pre-notification when they are conform to specific criteria elaborated by the Commission. 96 Commission Notice extends the definition to the existence of an undertaking (para. 5, paras. 7 seq.) and excludes public bodies from the scope of beneficiaries. Thereby, the control of state aid is expected to be pinned to the general track of competition disciplines. 97 Distortion of competition is a factual or potential change in competition and is to be examined on a case-by-case basis. See Joint cases C-15/98 and C-105/99 Sardegna Lines v Commission 2000 ecr I-8855. 98 Aid will have an effect on trade if it strengthens financial power of an enterprise as a ­result of the receipt of this aid, while neither a relative negligible amount of state aid nor a relative negligible number of beneficiaries may preclude the affecting of trade (C-730/79 Philip Morris Holland bv v Commission 1980 ecr 2671). 99 Belger G. Das Agrarbeihilfenrecht, Baden-Baden, 2011, p. 26 (further Belger). Other a­ uthors include all three additional elements in the scope of state aid definition, e.g. Luengo, p. 338. 100 Art. 107(1) of the tfeu: “Aid … which distorts or threatens to distort competition by favouring certain undertakings.”

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4.2.2 The Element of Benefit (“aid in any form”) The essence of aid in the sense of Art. 107(1) of the tfeu is the granting of an advantage to a recipient.101 By calculating the benefit and examining the distortions caused by state aid, any support granted to competing undertakings in their own jurisdictions must not be taken into account.102 Alternatively, in order to shrink the scope of the covered governmental action, the Commission and the ecj use market ­conditions (benchmarking) as a reference point to identify an advantage.103 For this purpose, a “market operator test”104 was developed. It postulates that a state must act in the same manner a private entity would in the same situation,105 i.e. searching for “maximum reasonable return” as opposed to limited profits, and profitability, at least from a long-term perspective.106 For instance, a special bankruptcy procedure would fall under this benefit criterion.107

101 C-173/73 Italy v. Commission 1974 ecr 709, para. 26. 102 Joined cases 6/69 and 11/69 Commission v. France, paras. 20–21. European state aid regulation does not deal with strategic differences of Member States’ regulations, but aims to even out asymmetric regulation within a single Member State. As a result, it is claimed to concern fair competition (i.e. protection of competitors) as opposed to effective competition (i.e. protection of competition). de Cecco F. State Aid and the European Economic Constitution, Oxford, 2013 (further de Cecco), pp. 35, 41. 103 Benchmarking may not be an appropriate method to establish market prices, if the available benchmarks have not been defined with regard to market considerations or the ­existing prices are significantly distorted by public interventions. Commission Notice, para. 102. 104 C-39/94 sfei and Others 1996 ecr I-3547, para. 60; C-342/96 Spain v Commission 1999 ecr I-2459, para. 49. See de Cecco, p. 63; Max-Planck Encyclopedia of European Private Law, p. 1583. On the basic principles of “private investment test” see Heidenhain M. (ed.) European State Aid Law, Munich, 2009 (further Heidenhain), pp. 73–77, as well as Karavanagh J.; Niels G.; Pilsbury S. The Market Economy Investor: An Economic Role Model for Assessing State Aid. In: Szyszczak E. (ed.) Research Handbook on European State Aid Law, Cheltenham, 2011, pp. 90–105; Commission Notice, paras. 76 seq. 105 This concept is criticised, as it is supposed to contradict the eu neutrality to the Member States’ right to mixed economy models authorised by Art. 345 of the tfeu. See de Cecco, p. 67. 106 Joined cases T-228/99 and T-233/99 Westdeutsche Landesbank Girozentrale v. Commission 2003 ecr II-435, para. 314; C-305/89 Italian Republic v. Commission 1991 ecr I-1603, para. 20. 107 C-200/97 Ecotrade 1998 ecr I-7909; Sanchez Rydelski M. Handbuch eu Beihilferecht, Baden-Baden, 2003, pp. 81 seq.

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The practice normally makes a distinction between state market participation and regulation.108 However, the Ryanair ruling assumed that the market operator test could be applied in some circumstances, even if a state did not behave as a market actor.109 Opposite to the wto approach, eu state aid regulation concentrates on state aid effects, not on a government’s intentions.110 Correspondingly, the mere fact that a government did not intend to provide a benefit for private entities does not automatically lead to the exemption of a measure from the scope of state aid.111 That is due to the presumption that a private entity, when expecting state support, may change its behaviour.112 Furthermore, it could be assumed that the beneficiaries and the recipients of the aid may be different persons. 4.2.3 The Element of “public costs” The origin of the resources criterion (“granted by a member state or through state resources”) is interpreted within eu law in a way that aid is only considered to be conferred if it was paid out of state resources.113 However, there may be concerns regarding hidden aid in other forms. Similar to the wto discussion on public bodies and private bodies entrusted or directed by government, it is argued within the eu legal community that indirect subsidy costs could be even higher than the state resources transferred, and that states may simply use private entities for payment provision.114 This situation was examined by the ecj in the Preussen Elektra case, where fixed price purchases were unsuccessfully questioned. Although no state resources were directly used, the measure decreased revenues of the companies involved

108 The market operator test was not considered for regulatory actions. De Cecco, pp. 88 seq. 109 The Ryanair case related to tax and other incentives for an enterprise in return to reciprocal obligations. See T-196/04 2008 ecr II-3643, paras. 87–101. Similarly, T-156/04 Electricité de France v. Commission 2009 ecr II-4503, appeal C-124/10 European Commission v. Électricité de France and Others (oj C 161 16), paras. 75–106. 110 Deufil (C-310/85 1987 ecr 901, paras. 8 seq.) followed by the other cases. See Commission Notice, paras. 68, 129. 111 See Luengo, p. 314. 112 De Cecco, p. 82. 113 Joined cases C-52/97, C-55/97 and C-54/97 Ente Poste Italiane 1998 ecr I-2629. See de ­Cecco, pp. 110 seq. 114 Responding to this concern, AG Maduro proposed to use a selectivity test. AG Maduro in case C-237/04 Enirisorse v. Satocarbo 2006 ecr I-2843, paras. 48–50.

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and, consequently, provoked reduction of fiscal payments to the state.115 The second precedent was the Sloman Neptun case concerning legislation aiming to change the regulatory framework rather than provide benefits, but instead resulted in an effect on public costs. While examining this dispute, the ecj developed the so-called “remoteness test” that was created to analyse the link between the intention of the legislation and its consequences for transfer of state resources .116 At the end of the day, it seems that the common interpretation of the passage “through state resources” would be a charge on the public account.117 In this regard, selling prices that are fixed under the market level would not result in state aid, because the advantages do not originate with state resources,118 as opposed to when prices are set above market level.119 According to Art. 107(1) of the tfeu, state resources are supposed to be controlled by the state.120 If there is any concern that a resource, although not formally originating in public funds, may be of a public nature, the issue of state attribution must be examined.121 For this purpose, a broad interpretation of a “state,” which may be extended to the case of indirect control, is used.122 The evidence of indirect control over assets (resources) should be supported by “a set of indicators arising from the circumstances of the case and the context in which that measure was taken.”123 The non-exhaustive list of indicators was developed 115 Where in Germany v. Commission (C-156/98 2000 ecr I-6857) the link between tax concessions and the advantage was established (despite independent investor decisions), no similar direct connection was found in the Preussen Elektra case (C-379/98 2001 ecr I-2099). 116 Joined cases C-72/91 and C-73/91 Sloman Neptun 1993 ecr I-887. 117 Luengo, p. 324. See i.a. Sloman Neptun, Preussen Elektra, C-189/91 Kirsammer-Hack 1994 ecr I-6185. The mere announcement of measures was also found to constitute a state aid in the light of Art. 107(1) of the tfeu in the Commission decision 2006/621/EC in the France Telecom case (oj L 257 20.9.2006 p. 11). Nevertheless, this decision was later annulled by the General Court (T-425/04, T-444/04, T-450/04 and T/456/04 2010 ecr II-2099), as no evidence was provided that state resources had been allocated. 118 C-82/77 Van Tiggele 1998 ecr 25, para. 41. 119 xxth Report on Competition Policy 1990, para. 291, see also Luengo, p. 320. 120 For instance, decrease in social charges, even if the latter are managed by private institutions, would constitute state aid, since they are imposed and managed in accordance with state legislation. C-173/73 Italy v. Commission, para. 16. See also Commission Notice, paras. 21, 42, 59. 121 De Cecco, pp. 59 seq. 122 The most prominent case on this matter was Stardust Marine (C-482/99). Commission Notice, paras. 41 seq. 123 Stardust Marine, paras. 52–54.

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and embraced and included the nature of the activities and their relevance to market conditions, the legal status of the entity (public or company law), the state’s involvement in management control, and other indicators proving participation of public authorities in the adoption of the measure.124 Likewise, indirect aid through third parties may also fall within the definition of state aid,125 as well as measures determined by a body controlled by public authorities and acting in accordance with their guidelines.126 At the same time, legislation exclusively regulating the relationship between private bodies is normally not included into state aid regulation.127 4.2.4 The Element of “selectivity” The selectivity128 criterion seems to have been introduced by the European legislature in order to distinguish state aid from measures of general economic promotion regulated by Art. 120–121 of the tfeu. Hence, state aid would fall under the scope of Art. 107(1) of the tfeu only if it favours “certain undertakings or the production of certain goods,” i.e. the measure excludes a group of actors from the general treatment.129 In opposition to the wto approach, the production of goods is included into the concept of selectivity.130 Identification of selectivity seems to acquire a certain degree of closeness to the benefit criterion. In respect to this, the question of the sensibility131 of state aid emerges. To delimit state aid providing negligible benefits that are deemed unable to distort inter-state competition, the eu manages direct support w ­ ithin de minimis thresholds where specific groups of state aid schemes are declared 124 Stardust Marine, para. 57. This approach is in line with Art. 2(b) of Directive 2006/111/ EC of 16.11.2006 on the transparency of financial relations between Member States and public undertakings as well as on financial transparency within certain undertakings (oj L 318 17.11.2006 p. 17). 125 Tax incentives granted for banks to provide funding to enterprises in difficulties were found to be state aid bestowed to those enterprises. Xth Commission’s Report on Competition Policy 1980, para. 220. See also C-382/99 Netherlands v. Commission 2002 ecr I-5163, paras. 62–69. See Luengo, p. 315. 126 See Joined cases C-67, 68 and 70/85 Van der Kooy 1986 ecr 219. Commission Notice, paras. 59–60. 127 See Preussen Elektra. 128 Selectivity may be geographical and material. See Bartosch A. The Concept of Selectivity? In: Szyszczak E. (ed.) Research Handbook on European State Aid Law, Cheltenham, 2011, pp. 176–192. 129 C-173/73 Italy v. Commission. 130 Moreover, the ecj practice also handles specific activities, such as promotion of exports, as subject to selectivity. C-6 and 11/69 Commission v. France 1969 ecr 523. 131 Grühn J. Beihilfekontrolle unter Transformationsbedingungen: Das Beispiel Polen, BadenBaden, 2006, pp. 41–58.

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compatible with the internal (common) market,132 and are not notified to the Commission. This is supposed to be a modification of the earlier, stricter approach to impact the measurement of the aid on intra-­Community trade. 4.2.5 State Aid v. Subsidy: ecj Interpretation The relationship between the notions “state aid” and “subsidy” in European law was already demonstrated by the ecj in the early 1960s. The Steenkolenmijnen decision made two key distinctions between the concepts: (1) State aid is more targeted than a subsidy, i.e. state aid is a means to attain objectives, while a subsidy is simply a non-refundable provision of money or assets for an enterprise in order to support its activities. (2) State aid covers not just positive measures, but also a reduction of burdens.133 Therefore, the concept of state aid was set more broadly than the concept of a subsidy.134 Nevertheless, the approach to a subsidy taken by the ecj in the 1960s seems to be rather outdated nowadays, since both economic theory and international economic law include reduction of burden, e.g. tax incentives, into the scope of subsidies. 4.2.6 Agricultural Subsidies in the eu State Aid System 4.2.6.1 The Function of Objectives of the Common Agricultural Policy (cap) The agricultural sector has had a very special treatment in the eu because the cap was supposed to be one of the means by which the primary ec/eu goals were achieved (Art. 3(1)(e) of tec).135 Nowadays, the Union and Member States share the competence over agricultural policies (Art. 4(2)(d) of the tfeu). According to the principle of subsidiarity, the eu shall intervene only if the policy objectives may not be “sufficiently achieved” by Member 132 E.g. Council Regulation No. 994/1998 of 7.5.1998 on the application of Articles 92 and 93 of the tec to certain categories of horizontal State aid (oj L 142 14.5.1998 p. 1) and Commission Regulation No. 69/2001 of 12.1.2001 on the application of Articles 87 and 88 of the ec Treaty to de minimis aid (oj L 10 13.1.2001, p. 30). 133 C-30/59 Steenkolenmijnen 1961 ecr 48, p. 7. 134 Commission decision 71/295/EEC (oj Special Ed. vi Competition p.56); Belger, p. 33. 135 See for the opinion that the cap is “special ‘glue’ strengthening integrity of the eu.” Wilkin J. Agriculture in New Member States – Expectations and Lessons Learned. In: Csáki C.; Forgács C. (eds.) Agricultural Economics and Transition: What Was Expected, What We Observed, the Lessons Learned, Volume ii, Budapest, 2007, pp. 475–487, p. 478.

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States.136 On the other hand, competition rules together with state aid rules remain in the exclusive Union competence pursuant to Art. 3(1)(b) of the tfeu. The specificity of eu agricultural regulation is reflected in five objectives of the cap contained in Art. 39(1) of the tfeu (earlier Art. 33 of the tec). Two objectives are directed at producer support, (Art. 39(1)(a) and (b) of the tfeu), another two towards food security, (Art. 39(1)(d) and (e) of the tfeu), and the fifth, the market stabilisation objective, (Art. 39(1)(c) of the tfeu), constitutes a link for reconciling the above two groups. Apparently, by taking measures to attain Art. 39 objectives, the threat of reciprocal exclusion of actions may emerge. Thus, it has been recognised that all priorities cannot be attained simultaneously,137 and the regulator must find a balance between them.138 For instance, the objectives of Art. 39(1)(b), (d), and (e) of the tfeu, designed as strong obligations (“ensure” or “assure”), may turn out to be mutually non-achievable (increasing producers’ income while also ensuring reasonable prices and supplies is a tough task). The mission of the European regulator is getting even more complicated due to the fact that they are not allowed to prioritize any of the objectives over the others, if this would make the realisation of other objectives is impossible.139 That is why the Union’s guarantee for priorities is unthinkable without any state intervention, i.e. border measures, subsidies, regulation. In respect to the cap goals, two types of agricultural state aid may be differentiated: – agricultural market state aid, i.e. direct influence on market development140 to attain the objectives of Art. 39(1)(c) to (e) of the tfeu (regulation of the common market and external trade), and 136 Art. 5(3) of the teu and Protocol 2 to the tfeu. 137 C-5/67 Beus 1968 ecr 83 and C-5/73 Balkan-Import-Export 1973 ecr 1091, paras. 24–30. 138 The need for balance between competing cap objectives was formulated in the Balkan ecj case. That being said competent authorities are still free to set priorities within the objectives. Balkan case, para. 24; C-280/93 Germany v. Commission 1994 ecr I-4973, para. 47. In this regard, interests of agricultural producers were set higher than those of ­consumers’ (producers’ interests may have priority, even if that may increase consumers’ prices). See C-280/93 Germany v. Council, para. 51. 139 Joined Cases 197 to 200, 243, 245 and 247/80 Ludwigshafener Walzmühle 1981 ecr 3211, para. 41. See also Danielsen J.H. eu Agricultural Law, Alphen aan den Rijn, 2013 (further Danielsen), p. 18. 140 Thus, agricultural subsidies are not governed by one of the general principles for structural aid, the principle of necessity, which provides that aids that do not aim long-term

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– structural agricultural state aid directed to achieve the goals of Art. 39(1)(a) and (b) of the tfeu.141 If observing from primarily a legal standpoint, both categories of measures must be prioritized equally. This conclusion is based on the direct indication of a lack of hierarchy among the objectives in Art. 39(1) of the tfeu.142 Nevertheless, the text of the provision directly subordinates the objective of a fair standard of living (Art. 39(1)(b) of the tfeu) to the goal of increased productivity (Art. 39(1)(a) of the tfeu), hence, the former is supposed to be the primary result of the latter.143 This submission may be interpreted either in a market-oriented dimension or as a carte blanche for short-term governmental income support measures. The second assumption is not without good ground inasmuch as the ecj gave discretion to European institutions to decide between short-term and structural measures.144 Nonetheless, it is also clear that application of the cap objectives without regard to the market mechanism could be highly distorting and harmful. In order to tackle this issue, the European Commission has recently declared a strong focus on the market.145 By the same token, the judicial practice elaborated some restrictions with the aim of ensuring the cap measures had less distortive effects.146 Notwithstanding this restructuring and search simply postponing reforms are inadmissible. This principle was developed to target a distortive character of sectoral aid and led to a continuous decline of its amount in the eu. See Heidenhain, p. 318. 141 Belger, pp. 65–68. 142 Nevertheless, in the early Töpfer case the social objective of fair standard of living was found to prevail over the other prerogatives. Joined Cases 106 and 107/63 Töpfer v. Commission 1965 ecr 405. 143 The Treaty seeks “to increase agricultural productivity” (Art. 39 (1)(a) of the tfeu) and “thus to ensure fair standard of living” (the subsequent Art. 39(1)(b) of the tfeu), although no guarantee prices are justified under the second objective. See C-297/82 Danske Landboforeninger 1983 ecr 3299, para. 8; C-281/84 Zuckerfabrik Bedburg 1987 ecr 49, para. 23. See Danielsen, p. 21. 144 C-114/76 Bela Mühle Josef Bergmann kkg v. Grows-Farm GmbH and Co. kg 1977 ecr 1211, para. 6 and C-49/83 Luxembourg v. Commission 1984 ecr 2931. 145 Communication from the Commission to the European Parliament, the Council, the ­European Economic and Social Committee and the Committee of the Regions “The cap towards 2020: Meeting the food, natural resources and territorial challenges of the future” com(2010)672 final of 18.11.2010, p. 9; Commission Staff Working Paper “Impact Assessment: Common Agricultural Policy towards 2020” sec(2011)1153 final/2 of 20.10.2011, p. 27. 146 For instance, the ecj ruled that market stabilisation measures taken under Art. 39(1)(c) of the tfeu should not mean the maintenance at all costs of positions established under previous market conditions (Joined Cases C-63 to 69/72 Werhahn Hansamühle 1973 ecr 1229, para. 12 and C-106/81 Kind 1982 ecr 2885, para. 25). By the same token, “reasonable

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development, full incorporation of the cap into market mechanisms is not a short-term endeavor, since that would make the cap in its present form unnecessary. All in all, the eu replicates the attitude of most developed countries, already intimated in Chapter 2, that the agricultural sector may not function efficiently without public support. Although Art. 39(2) of the tfeu contains a vague restriction for designing the cap measures by taking into consideration other sectors of the economy, the eu authorities have at their disposal a wide range of eligible actions to attain the cap objectives, that may be annulled or declared void only if they manifestly exceed the limits of Art. 39 of the tfeu, or are incompatible with fundamental rights.147 Yet Art. 39 of the tfeu does not constitute a source of individual or collective rights, such as a right to a certain income level, to ­unlimited production, to unrestricted imports, or to protection of existing commercial positions or trade patterns.148 The principle of legitimate expectation may not be generally used as a remedy against modifications of European agricultural policies either,149 but allegedly against the anticipated duration of a single measure.150 The equality principle151 is also not applicable to the cap. Thus, differing treatments of operators is practically allowed,152 provided that different treatment is objectively justified.153 Confirming this inequality, the prices” as per Art. 39(1)(d) of the tfeu should not be the lowest prices possible (C-34/62 Germany v. Commission 1963 ecr 131). 147 However, there were indeed cases when restrictions of fundamental rights caused by the cap were justified under eu law, e.g. Joined cases C-143/88 and C-92/89 Zuckerfabrik Süderdithmarschen ag 1991 ecr I-415, para. 54. It was also established that individuals were not entitled to claim violation of fundamental rights to property, trade or profession caused by cap measures. Barents R. Recent Developments in the Community Law in the Field of Agriculture. In: Common Market Law Review, 4, 1997, pp. 811–843 (further Barents), pp. 835, 843. 148 Joined cases C-133/93, C-300/93 and C-362/93 Donatab 1994 ecr I-4863, paras. 61, 73. See Barents, p. 816. 149 C-203/86 Spain v. Council 1988 ecr 4563. 150 This was established in regard of subsidies. C-177/90 Kühn 1992 ecr I-35, paras. 14–15; C-63/93 Duff and others v. Ministry for Agriculture of Ireland 1996 ecr I-569, paras. 18–24. See Norer R. Rechtsfragen der EU-Agrarreform: Einheitliche Betriebsprämie und Cross Compliance in europa-, verfasssungs-, verwaltungs- und zivilrechtlicher Analyse, Vienna, 2007, p. 19. 151 C-280/93 Germany v. Council, para. 68. 152 Joined cases C-133/93, C-300/93 and C-362/93 Donatab, para. 52, C-56/94 scac 1995 ecr I-1769, para. 28, C-353/92 Greece v. Council 1994 ecr I-3411, para. 25. 153 C-120/92 Schulz 1993 ecr I-6885, para. 18.

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ecj in an early case found the import levy system compatible with the cap ­objectives and, therefore, gave a preference to internal production over external trade.154 At the same time, market regulation that may promote third countries’ economic development was ruled to not be in compliance with Art. 39(1) (c), (d) and (e) of the tfeu.155 This leads to the very important issue of the external impact of the cap objectives. This cannot be overestimated because although the eu does not recognise the direct effect of the wto norms, it remains bound by the obligations taken within the gatt/wto system. On that ground, pursuant to Art. 27 of the vclt, possible non-compliance of the cap with the wto norms may not be justified by the objectives of Art. 39 of the tfeu. Yet, the ecj principle of consistent interpretation for international agreements that do not produce a direct effect on the European legal system may somehow soften possible legal conflicts,156 as this requires that secondary legislation be interpreted as consistently as possible with international agreements.157 Another issue arising from the cap objectives and their external impact is the question of the legitimacy of Member States’ representation by the eu within the wto agricultural policies. On the one hand, 28 eu Member States are represented in the wto by the supranational economic organisation.158 At the same time, it may be contended that the scope of the wto agreements may be broader than European common commercial policy. To settle possible concerns, the Commission argued for the exclusive Community competence within the wto due to the fact that all wto agreements had clear trade policy objectives.159 Although succeeding in this effort, the Commission’s approach may not be strong enough to overrule changes in the recent treaty reform, which proclaimed the shared competence for agricultural policies. S­ pecifically, the AoA covers policies that now lay partially in the shared competence. Supposedly, the problem of external competence in the shared competence area may be resolved by sustaining the obligation to cooperate, based on the 154 Joined Cases 9 and 11/71 Grands Moulins de Paris 1972 ecr 391, para. 42. 155 C-280/93 Germany v. Council, paras. 53–57. 156 E.g. C-53/96 Hermès 1998 ecr I-3637, para. 28. 157 C-61/94 Commission v. Germany 1996 ecr I-3989, para. 10. See also See Eeckhout P. eu External Relations Law, Oxford, 2011, pp. 355–357. 158 The voting is, however, executed by every single Member State separately pursuant to Art. ix of the wto Agreement. 159 Opinion 1/94 of the Court of 15.11.1994 1994 ecr I-5267. See Eeckhout P. eu External Relations Law, Oxford, 2011, pp. 27–29.

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­requirement for unity in international representations of the eu.160 Moreover, the doctrine of parallelism (implied power), accepted after the Lisbon treaty reform, postulates that the Union external competence follows its internal competence.161 Thereby, the Union has the exclusive competence to conclude international agreements when it is necessary to achieve the eu’s objectives, when it is provided for in a binding eu act, or “is likely to affect common rules or alter their scope.”162 The reach of this instrument seems broad enough to include trade in agriculture based on the extended interpretation of Art. 39 of the tfeu (the AoA may be deemed necessary to achieve cap objectives), as well as the potential of the gatt/wto system to affect domestic policies, and thus, also the cap. Furthermore, the realm of domestic support may potentially fall within the exclusive Union competence, if covered by the common competition rules. The application of these rules on agriculture must be scrutinised to determine if this is the case. This issue is also of particular interest in regard to the internal state aid treatment and the external domestic support regime. 4.2.6.2 cap as a Two-Pillar Structure The cap was divided into two pillars in the 2003 reform. Presently, Pillar i is composed of the Single cmo163 and direct payments to farmers,164 while Pillar ii covers rural development measures.165 160 Opinion of the Court 1/78 of 4.10 1979 1979 ecr 2871, paras. 34–36 and Opinion of the Court 2/91 of 19.03.1993 1993 ecr I-1061, para. 36. See Egelund Olsen B.; Steinicke M.; ­Sorensen K. (eds.) wto Law from a European Perspective, Alphen aan den Rijn, 2012, p. 89. 161 Ibid., p. 87; C-22/70 aetr 1971 ecr 263, paras. 17–19. 162 Art. 3(2) of the tfeu and Art. 216 of the tfeu. 163 Council and Parliament Regulation No. 1308/2013 of 17.12.2013 establishing a common organisation of the markets in agricultural products and repealing Council Regulations (eec) No. 922/72, (eec) No. 234/79, (ec) No. 1037/2001 and (ec) No. 1234/2007 (oj L 347 20.12.2013 p. 671) (further Single cmo Regulation 2013), before 2014 Council Regulation No. 1234/2007 of 22.10.2007 establishing a common organisation of agricultural markets and on specific provisions for certain agricultural products (oj L 299 16.11.2007 p. 1) (further Single cmo Regulation 2007). 164 Council and Parliament Regulation No. 1307/2013 of the European Parliament and the Council of 17.12.2013 establishing rules for direct payments to farmers under support schemes within the framework of the common agricultural policy and repealing Council Regulation (ec) No. 637/2008 and Council Regulation (ec) No. 73/2009 (start of application on 1.1.2015) (oj L 347 20.12.2013 p. 608), before 2014 Council Regulation No. 73/2009. 165 Council and Parliament Regulation No. 1305/2013 of the European Parliament and the Council of 17.12.2013 on support for rural development by the European Agricultural Fund for Rural Development (eafrd) and repealing Council Regulation (ec) No. 1698/2005

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Starting with the elements of the first Pillar i, the Art. 40(1) of the tfeu requires establishment of a common organisation of agricultural markets to attain the priorities of Art. 39 of the tfeu. That may be pursued in three forms.166 The European legislature chose the most integrated structure of these options – European market organisation.167 Since the beginning of 2014, all agricultural products have been covered by the Single cmo,168 and thus, cannot be regulated at the national level, even with a goal to protect the cap.169 The Single cmo is the only legal framework for regulation of the common market, external trade, and competition rules for agricultural products. The economic goal of the Single cmo measures is to achieve a balance of supply and demand by restricting or expanding economic parameters, thereby ­directly or indirectly influencing price stability.170 In that way, the Single cmo operates a differentiated system of price support aimed at fulfilling the ­priorities of Art. 39(1)(b) and (c) of the tfeu,171 and is backed by direct aid to ­producers. The price support measures may vary from one sector to another, owing to a divergence of sector needs and interdependences between them.172 Pillar i measures are regulated by the Union, while Member States maintain some narrow regulatory space and are financed through the European Agricultural Guarantee Fund (eagf).173 Interpreted in the context of the wto disciplines, the Single cmo instruments mostly constitute measures falling within (start of application is 1.1.2014 with some transitional provisions for 2014 (oj L 347 20.12.2013 p. 487), before 2014 Council Regulation No. 1698/2005 of 20.9.2005 on support for rural development by the European Agricultural Fund for Rural Development (eafrd) (oj L 277 21.10.2005 p. 1). 166 Also referred to as three stages of integration. See Dombert, Witt, pp. 970–971. 167 Art. 40(1)(c) of the tfeu. 168 Art. 1(1) of Single cmo Regulation 2013. Before 2014 some products, in particular, all vegetable oils except olive oil were not included into the Single cmo. 169 E.g. C-274/87 Commission v. Germany 1989 ecr 229, paras. 21–22; Danielsen, p. 54. 170 Dombert, Witt, pp. 973–974. 171 Price regulation, which was previously foreseen only for a couple of sectors, i.a. for cereals, is currently extended to the whole scope of the Single cmo. Rec. 10 of Single cmo Regulation 2013 (identical in Rec. 10 of Single cmo Regulation 2007). 172 Ibid. 173 See Art. 3–4 of Council and Parliament Regulation No. 1306/2013 of 17.12.2013 on the financing of the common agricultural policy (oj L 347 20.12.2013 p. 549) (earlier Council Regulation No. 1290/2005 of 21.6.2005 (oj L 209 11.8.2005 p. 1)).

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the ams calculation, while direct payments in their post-Health Check model could be classified as measures exempted from the calculation under Annex 2 of the AoA.174 In contrast, Pillar ii rural development instruments are customized by the Member States (based on their national strategies) and financed by them through the European Agricultural Fund for Rural Development (eafrd).175 It could be assumed that Pillar ii policies would be predominantly classified as AoA “green box” measures. In 2010, the proportion of the payments released under Pillar i and Pillar ii was nearly four to one, where most of the Pillar i transfers were through direct payments.176 In spite of the lower share of Pillar ii expenditures, this type of support was demonstrating a significant degree of growth.177 While the eu agricultural expenditures have only progressed slightly in constant terms since 2000,178 the agricultural aid notified by the Member States still constitutes a large share of the total amount of national aid.179 The latest reform may contribute to some restructuring of the support lines, since the Member States acquired certain flexibility to transfer agricultural expenditures between the Pillars,180 but the total support amount in both Pillars shall not be increased.181 174 They may be defined as decoupled support under para. 6 of Annex 2 of the AoA or other direct payments under para. 5 of Annex 2 of the AoA. 175 See Art. 3 and 5 of Council Regulation No. 1306/2013. Both funds are operated under the single management and control system. 176 Notwithstanding clear disproportions between the Pillars, there is a trend to more horizontal aid (Pillar ii) comparing to the situation in 1990 when more than 80 per cent of the budget was spent on market support (Pillar i). Butault, Bureau and others, p. 86. 177 The Pillar ii support grew in five times during the period between 1990–2010. Ibid. 178 Butault, Bureau and others, p. 86. 179 The share of national agricultural state aid is substantial: 20 per cent of all state aid granted across the Member States in 2007 flew to agriculture, while some member states, e.g. Finland, Latvia, Romania, had up to 90 per cent of agricultural aid in the general state aid structure. European Commission. State Aid Scoreboard 2008 com(2008)751, p. 28. 180 Rec. 15, 17 and Art. 14 of Council and Parliament Regulation No. 1307/2013. 181 Commission proposal on the eu budget 2014–2020 “A budget for Europe 2020” com(2011) 500 final of 22.6.2011, Part ii. On budget discussions see Henke R.; Crescenzi R.; Chambon N.; Salvatici L. The cap in the eu Budget: New Objectives and Financial Principles for the Review of the Agricultural Budget after 2013, Study ordered by the European Parliament IP/B/AGRI/IC/2010–113, 2011; dg Internal policies of the European Parliament. The cap in the Multiannual Financial Framework 2014/2020 IP/B/AGRI/NT/2011_12, 2011; url: http://ec.europa.eu/agriculture/cap-funding/budget/mff-2014-2020/mff-figures-and -cap_en.pdf.

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4.2.6.3 Rules on Competition and the cap The European idea of supranationality aims to weaken national state interventions, i.a. through common competition law as one of the core elements of the European economic constitution concept.182 However, the theoretical ground of economic constitutionalism remains too vague to achieve this goal (i.a. due to trade-offs of political integration and introduction of nonmarket values).183 Furthermore, the outcome of the latest treaty reform may make the integration of the original economic concept into the eu order less profound.184 One component of the eu economic constitution is state aid discipline focusing on the prevention of intra-Union trade distortions. It constitutes part of the common market regulation185 and the common competition rules,186 while also 182 Competition law lays in the centre of the ordoliberal model that gave the origin to the ­European economic constitution. The common understanding of the role of the ­economic constitution within the ordoliberalism concept concentrates on conflict resolution between a state and a market, i.e. between politics and economics. De Cecco, pp. 11–13. See also Jones A.; Sufrin B. eu Competition Law, 4th edition, Oxford, 2011 (further Jones, Sufrin), pp. 35–36. 183 De Cecco, pp. 11–13. 184 In 2009 the term “undistorted competition” was excluded from the primary legislation (Art. 26(2) of the tfeu refers to the internal market as “an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties” in comparison to Art. 13 of tec; similarly for Art. 3(3) of the teu), and transferred to Protocol 27 on the internal market and competition (“internal market includes a system ensuring that competition is not distorted”). However, this modification does not seem to reduce the role of competition in the internal market, for reason that Art. 51 of the tfeu postulates that protocols constitute an integrated part of the Treaty. See de Cecco, p. 15; Jones, Sufrin, pp. 39–41. 185 Where (E)ec state aid law used to have soft law features until the beginning of the 1990s (allegedly owing to a sensitive nature of this regulatory field), the launch of the internal market stimulated emergence of hard law instruments. On other distinctiveness of eu state aid policy see Cini M. From Soft Law to Hard Law: Discretion and Rule-Making in the Commission’s State Aid Regime, eui Working Papers, rsc 2000/35, pp. 4–9. See also Rubini, p. 40. 186 Competition law is divided into restrictions on anti-competitive behaviour of private actors and state aid law. Being theoretically a part of competition law, application of state aid provisions in the European judicial practice raises concerns about the common concept of antitrust and state aid law and gives birth to the opinions that state aid shares more in common with free movement than with antitrust rules. Alike free movement, state aid rules fall within the scope of negative integration and contribute to deregulation, but also contain “re-regulation” (in the form of supranational objectives and institutional

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influencing certain areas of limited eu competence (e.g. tax law).187 As already underlined in the Sub-chapter 4.2.1., state aid in the eu is generally prohibited as per Art. 107(1) of the tfeu. However, non-application of general state aid rules to agricultural subsidies within the eu may be justified by three factors: (1) specific objectives of Art. 39 of the tfeu as a recognition of the priority given to agricultural policy over the objectives of the Treaty in the competition area (legal justification);188 (2) special competence of the Council and the European Parliament under Art. 42 of the tfeu in the competition area (institutional justification), and (3) agricultural market structure with a high number of small undertakings (economic justification).189 In this context, there is no unified understanding for the application of competition rules to agricultural subsidies. Many scholars advocate nonapplication of Art. 107–109 of the tfeu to the cap on the ground of Art. 42 of the tfeu.190 Alternatively, the Max-Planck-Institute for Private Law supports the concept of general application of Art. 107–109 of the tfeu to agricultural state aid in conjunction with (“supplemented by”) Art. 42 of the tfeu.191 On the other hand, due to the fact that a large share of agricultural aid is granted through the common European funds, they infer that this category of aid is not paid from state recourse and, thus, is not subject to state aid control at all.192 One could, however, disagree with this opinion given the state origin of resources allocated to the agricultural funds, and to the European budget and the tendency for a growing share of national agricultural aid.193 Beyond that, even if the common state aid disciplines control mechanism), i.e. may lead to positive integration. De Cecco, pp. 34, 38–39; MaxPlanck Encyclopedia of European Private Law, pp. 1582–1583. 187 Max-Planck Encyclopedia of European Private Law, p. 1583. 188 See C-280/93 Germany v. Council. 189 Small size of enterprises tends to increase distortion risk even by small state aid amounts provided. Heidenhain, pp. 399–402. 190 E.g. Heidenhain, pp. 399–401. 191 Art. 42 of the tfeu foresees application of competition rules to agriculture “to the extent determined by the European Parliament and the Council” (before the Lisbon reform – ­solely by the Council). Max-Planck Encyclopedia of European Private Law, p. 1586. 192 Ibid. 193 In that vein, para. 3 of Community Guidelines for State Aid in the Agriculture and Forestry Sector 2007 to 2013 (2006/C 319/01) (oj L C 319 27.12.2006) (extended until 30 June 2014 by Commission communication 2013/C 339/01) (further Guidelines 2007) recognised

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are not applicable to aid provided by the eu, this should not be relevant to their classification as subsidies under the wto norms,194 since the cost to the public account is indisputably present. Similarly, in spite of the fact that state aid granted from the European funds does not fall within the scope of eu state aid control, the Commission is obliged to ensure its compliance with the state aid rules of primary legislation.195 The eu judicial practice could not provide a univocal answer on the applicability of state aid rules to the agricultural sector, either. Initially, in the early years of economic integration, state aid provisions were not recognised as capable to “receive priority over the provisions” of the cap.196 Later on, the ecj ruled by interpreting the provisions of what is today Art. 42(1) of the tfeu, that the legislator was free to make a positive decision on the application of competition rules to the agricultural sector.197 In order to identify special provisions for applying competition rules to agricultural policies, the text of Council and Parliament Regulation No 1305/2013 concerning rural development measures, Single cmo Regulation 2013, and Council and P ­ arliament Regulation No 1307/2013 on direct payments should be examined. Art. 81 of Council and Parliament Regulation No 1305/2013 declares general application of Art. 107–108 of the tfeu to rural development measures, excluding payments executed by Member States that are eligible under the Regulation.198 The idea is that the eligibility criteria for particular rural development measures, established by Regulation No 1305/2008, have already been reviewed

unchanged economic effects of aids provided by the eu and Member States and called merely for “consistency and coherence” between Commission’s state aid control policy, the cap and rural development policy. This approach was confirmed by para. 62 of Notice on the notion of state aid (document for consultations in 2014). 194 E.g. Panel Report EC-Commercial Vessels WT/DS301/R, para. 7.53.; Panel Report EC-Aircraft WT/DS316/R. See Bacon K. European Union Law of State Aid, 2nd ed., Oxford, 2013, p. 151. 195 Joint Declaration for aid granted through the ec structural Funds or other financial instruments for eea Agreement 1994. 196 C-177/78 Pigs and Bacon Commission 1979 ecr 2161, para. 11. 197 C-131/86 United Kingdom v. Council 1988 ecr 905, paras. 10–12. See Danielsen, pp. 163 seq. 198 Earlier Art. 5 of Council Regulation No. 1698/2005 foresaw general application of eu state aid rules to rural development measures with exception of support established by Art. 88(1) of Council Regulation No. 1698/2005. Similarly, paras. 2, 5 of Guidelines 2007 ­extended their scope to “any aid measure, in whatever form, including aid measures financed by parafiscal taxes, which falls within the definition of State aid” given by Art. 107(1) of the tfeu.

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over the course of the legislative process for their possible trade distortion and effect on cross-border trade.199 Art. 211 of the Single cmo Regulation 2013 also confirms application of general state aid rules under Art. 107–109 of the tfeu to agricultural production and trade.200 Certain exclusions are reserved for specific country/ sector cases and some measures partly or wholly financed by the Union.201 Hence, the reach of state aid law is very restricted. The pre-2014 Single cmo rules left more room for penetration of state aid regulation into the cmo structure. Council Regulation No 1184/2006202 on competition rules for products not covered by the Single cmo (since the beginning of 2014, in force only for ­fishery and aquaculture products), provides that Member States shall inform the Commission about any aid granted for those products.203 The Commission is to review such aid and to make policy proposals, if necessary.204 Since Art. 42(1) of the tfeu requires a decision of the Council and the Parliament on applying state aid law to agricultural goods, it may be concluded that products 199 Commission Regulation No. 702/2014 of 25.6.2014 declaring certain categories of aid in the agricultural and forestry sectors and in rural areas as compatible with the internal market in application of Articles 107 and 108 of the Treaty on the Functioning of the European Union (oj L 193 1.7.2014 p. 1); European Union Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014 to 2020 (2014/C 204/01) (oj C 204 1.7.2014 p. 1) (further Guidelines 2014). Under the preceding Regulation, the procedural rules for the state aid identification analysis was included into the legal text. The de facto exemption under Art. 88 of Council Regulation No. 1698/2005 sought to include mostly “green box” measures, where certain distortive aids could potentially be authorised through discretionary exemptions. At the same time, Council Regulation No. 1698/2005 directly ­prohibited some categories of rural development aid, if they exceeded the maximal levels set or were granted not in compliance with the developed criteria. 200 According to Art. 108 of Single cmo Regulation 2007, state aid disciplines were applicable to most products covered by the Regulation, i.a. cereals and seeds, including oilseeds (Part v of Annex 1 of Single cmo Regulation 2007). 201 Art. 211(2)(a), (b) and rec. 176 of Single cmo Regulation 2013. The exceptions under the previous Regulation covered specific sensitive products in certain countries. Rec. 87, Art. 47–48 (for grain and rice), Art. 180 seq. and of Single cmo Regulation 2007. 202 Council Regulation No. 1184/2006 of 24.7.2006 applying certain rules of competition to the production of and trade in certain agricultural products (oj L 214 4.8.2006 p. 7). 203 Art. 3 of Regulation No. 1184/2006 in conjunction with Art. 108(3) of the tfeu. 204 The Commission still cannot oppose the granting of such aids by means of a final negative decision. Art. 108(1) of the tfeu, para. 21 of Guidelines 2007, Art. 3 of Council Regulation No. 1184/2006.

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not covered by the Single cmo (earlier also vegetable oils, excluding olive oil) are exempt from the general disciplines under Art. 107 of the tfeu, which prohibits state aid, but they are partially integrated into the general system of eu state aid control. Before the implementation of the 2013 cap reform, the question about the application of Art. 107–109 of the tfeu on direct payments to agricultural producers was not specifically addressed in secondary legislation. Pursuant to Art. 139 of Council Regulation No 73/2009, direct payments to producers, if executed in compliance with the respective rules, were beyond the scope of state aid regulation.205 This exclusion is likely not explained by the fact that direct payments were distributed by the eu, but rather that the Council approved the mode of their distribution as not being harmful to the internal market. Rec. 51 of Council Regulation No 73/2009 previewed that Member States were free to provide additional direct payments to producers from their national budgets. In this situation, the concerned transfers were to be subordinated to the disciplines of Art. 107–109 of the tfeu, unless distributed on the ground of objective conditions. This restriction obviously sought to tackle the selectivity concern. The incumbent rules on direct payments explicitly exempt them from the eu state aid disciplines as a derogation from Art. 211(1) of Single cmo Regulation 2013.206 This category of aid may also be justified with the presumption that it will not affect intra-Union trade, as it is required that the disbursements be distributed proportionately within the Member States and among farmers. At the end of the day, the control systems for industrial and agricultural aid remain separated207 due to the large share of agricultural transfers from the Union’s level. In spite of the regulatory and institutional division, agricultural state aid may be easily integrated into the overall European state aid approach. Granting aid to agricultural producers could also be warranted under the “normal” state aid rules, seeing that the application of Art. 107 of the tfeu would provide the following possibilities for state aid approval:

205 Heidenhain, pp. 402–408. 206 Rec. 16 and Art. 13 of Council and Parliament Regulation No. 1307/2013. 207 Being charged with state aid control, dg Competition does not deal with agricultural subsidies. It is the task of dg agri, where dg Competition may support the latter with consultations. See Heidenhain, pp. 400–401.

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(1) de jure approval under Art. 107(2) of the tfeu208 would include all social agricultural aid, as well as deficiency payments (Pillar ii); (2) discretionary approval under Art. 107(3) of the tfeu209 may cover most environmental programmes, as well as regional and income support ­(Pillar i and Pillar ii); (3) special automatic exemptions developed on the basis of Art. 107(3)(c) of the tfeu,210 in particular horizontal and sectoral e­ xemptions211 together with de minimis aid,212 may excuse other agricultural subsidies. Agricultural aid is already integrated into the special automatic exceptions mechanism, however it is subject to sector-specific provisions. Exclusion from the general track may be in response to a higher degree of potential distortions due to the specific structure of agricultural markets.213 In that way, de minimis state aid exemptions are focused on segregation of ­non-specific and non-distortive state aid,214 i.e. elimination of selectivity, 208 The grounds of justifications under Art. 107(2) of the tfeu include social character of aid, compensation for natural disasters and other exceptional occurrences not including normal operating risks. 209 The grounds for justifications under Art. 107(3) of the tfeu are extended to support for economic development, for execution of projects of common European interests, rectification of serious disturbances in the economy, development of certain economic areas, conservation of national and European heritage and promotion of culture. 210 E.g. Art. 3 of Commission Regulation No. 1857/2006 of 15.12.2006 on the application of ­Articles 87 and 88 of the Treaty to State aid to small and medium-sized enterprises active in the production of agricultural products and amending Regulation (ec) No. 70/2001 (oj L 358 16.12.2006 p. 3) (repealed by Commission Regulation No. 702/2014), earlier Art. 3 of Commission Regulation No. 1/2004 of 23.12.2003 on the application of Articles 87 and 88 of the ec Treaty to State aid to small and medium-sized enterprises active in the production, processing and marketing of agricultural products (oj L 1 3.1.2004 p. 1). Block exceptions search to replace the previous practice of case-by-case approvals that were associated with high administrative costs and could be allegedly contagious to discretionary decisions. 211 So-called General block exemption Regulation – Commission Regulation No. 651/2014 (earlier Commission Regulation No. 800/2008). 212 De minimis aids basically constitute verified exceptions from the common eu approach postulating that even a negligible amount of aid may distort competition on very competitive markets. 213 Rec. 3 of Commission Regulation No. 1998/2006 of 15.12.2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid (oj L 379 28.12.2006 p. 5). 214 See rec. 1 and 2 of Commission Regulation No. 1407/2013 of 18.12.2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid (oj L 352 23.12.2013 p. 1).

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distortion of competition, and effect on trade. The specific de minimis regulation for agricultural production215 has a limited scope of application and is not pertinent to export subsidies, subsidies based on outputs, aid contingent upon the use of domestic over imported goods (thereby, harmonisation with Art. 3.1. of the scma and restriction of the most distortive ams is achieved); as well as aid dependent on the price of produced goods (incorporation of decoupling element).216 On the other hand, granting operating aid is not explicitly precluded by the text of the de minimis regulation, which is in opposition to the preceding rules.217 Being incompatible with the internal market and interfering with the cmo mechanisms,218 operating aid shall not be not admitted under the de minimis regulation. All in all, the ostensible removal of distortive support and a low level of eligible aid219 should allow de minimis aid to be reported as “green” measures ­under the AoA disciplines.220 State aid amounts granted above the de minimis authorisation may still be exempted under the general block exemption.221 By the same token, some other aid categories, for example, individual aid, are also eligible ­under

215 Commission Regulation No. 1408/2013 of 18.12.2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid in the agriculture sector (oj L 352 23.12.2013 p. 9) (earlier Commission Regulation No. 1535/2007 of 20.12.2007 on the application of Articles 87 and 88 of the ec Treaty to de minimis aid in the sector of agricultural production (oj L 337 p. 35). Processing and marketing of agricultural goods are partially covered by the general regulation, while earlier they were entirely included into the general regulation. Art. 1(1)(c) of Commission Regulation No. 1407/2013 (Art. 1(2)(b) of Commission Regulation No. 1998/2006). 216 Art. 1.1. of Commission Regulation No. 1408/2013 (Art. 1 of Commission Regulation No. 1535/2007). 217 Ibid. 218 This conclusion is made by the Commission in the context of agriculture on the ground of Art. 107(3)(c) of the tfeu, paras. 15 and 18 of Guidelines 2007, para. 26 of Guidelines 2014. See rec. 17 of Commission Regulation No. 1857/2006. 219 Agricultural de minimis aid is capped at a level over 25 times lower than that of the industrial sector. The aid is limited to 15 000 eur per farm over the period of three fiscal years (Art. 3(2) of Commission Regulation No. 1408/2013), before 2014 – to 500 eur (Art. 3 of Regulation No. 1535/2007), and more earlier – to 3 000 eur (Art. 3 of Commission Regulation No. 1860/2004) in comparison to the general rule of 200 000 eur (Art. 3(2) of Commission Regulation No. 1407/2013; Art. 2(2) of Commission Regulation No. 1998/2006. 220 The major pitfall in this respect may be a concern regarding parent-subsidiary relationship, where cumulation at the parent level is possible. Luja, p. 76. 221 Commission Regulation No. 651/2014.

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­conditions for smes222 in the agricultural sector (both production and processing activities are covered).223 Advantageous treatment for agricultural smes is supposed to be justified by their important role in rural development and assumed capital constraints on the market.224 State aid exemptions for smes in the agricultural sector cover a large field of rural development investment,225 i.a. deficiency payments,226 insurance premiums,227 and support for production of quality agricultural products.228 To avoid distortions, the block exemption ­regulation restricts the scope of eligible aid, namely, it excludes subsidies ­falling within the scope of Art. 3.1. of the scma229 and aid exceeding the fixed cap amounts,230 while also imposing transparency and monitoring obligations.231 The prior aid regulation explicitly warned about possible conflicts between aid granted for agricultural smes under the block exemption and under the cmo regime, where the latter set of rules had to prevail.232 In a different way, Commission Regulation No 1857/2006 simply advocated for compliance with the cmo provisions on limitation and restriction of production.233 It could mean that this block exemption regulation may ease the authority of the cmo regime on rights and obligations other than reduction of production. But since the incumbent regulation refers exclusively to Pillar ii instruments, any conflict should be excluded. 222 Art. 2(2) and Annex i to Commission Regulation 702/2014 (Art. 2(5) of Commission Regulation No. 1857/2006). 223 Art. 1(a) of Commission Regulation No. 702/2014 and Art 1(1)(b) in conjunction with Art. 1(3)(c) of Commission Regulation No. 651/2014. 224 Rec. 5 of Commission Regulation No. 1857/2006. 225 Art. 14 seq. of Commission Regulation No. 702/2014 (Art. 4 seq. of Commission Regulation No. 1857/2006). 226 Art. 25 seq. of Commission Regulation No. 702/2014 (Art. 11 of Commission Regulation No. 1857/2006). 227 Art. 28 of Commission Regulation No. 702/2014 (Art. 12 of Commission Regulation No. 1857/2006). 228 Art. 20 of Commission Regulation No. 702/2014 (Art. 14 of Commission Regulation No. 1857/2006). 229 Art. 1(4)(c), (d) of Commission Regulation No. 702/2014 (earlier Art. 1(2) in conjunction with Art. 16(1)(a) of Commission Regulation No. 1857/2006). 230 Art. 1(4)(a) of Commission Regulation No. 702/2014 (earlier Art. 4 seq. of Commission Regulation No. 1857/2006). 231 Art. 5 of Commission Regulation No. 702/2014 (Art. 20 of Commission Regulation No. 1857/2006). 232 Art. 4(7) and rec. 18 of Commission Regulation No. 1/2004. 233 Rec. 17 of Commission Regulation No. 1857/2006.

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In opposition to the de minimis regulation, the block exemption calls to avoid operating aid.234 Earlier there was a case authorising operating aid in the form investment credit interest payments. This permission was conditional on granting aid in a non-discriminatory manner, irrespective of the agricultural activity,235 and only when such aid was limited to what was strictly necessary to compensate the gap between the interest rate paid by a typical agricultural producer and by an operator not linked with the ­investment (thus, ­quantification of disadvantages was required).236 Nowadays, this approach could be hardly reconcilable with the general requirement for an incentive effect in all compensatory measures, i.e. aid cannot be granted retrospectively.237 Intermediary Summary State aid rules under Art. 107–109 of the tfeu used to be partially applicable to agricultural support for most farm products, although with large exemptions established by eu secondary legislation, especially for Pillar i measures.238 From 2014 onwards, the only remaining agricultural support types directly addressed by the state aid provisions are some Pillar i measures financed by the Member States, and rural development measures not directly included into the current Rural Development Regulation. eu agricultural support has its own particularities. First of all, the basis for the farm sector exemption from the general eu state aid disciplines shall be Art. 39 and 42 of the tfeu, not Art. 107(3)(c) of the tfeu, which is applicable in a general case. This distinction does not seem to be defined clearly enough, seeing as how agricultural exemption regulation is also (partially) based on Art. 107(3)(c) of the tfeu.239 Thus, while the general justification for subsidies (non-actionability) under the wto regime is provided by the adverse effects standard of Art. 5 seq. of the scma, the eu prefers the compensatory justification standard of Art. 107(3) of the tfeu, requiring that promotion of a community interest must be proportional to the objective pursued.240 Apparently, certain state aid, although legitimately accepted under the eu standard, 234 235 236 237 238 239

Ibid., rec. 38 of Commission Regulation No. 702/2014. Commission Notice 96/C 44/02 on State aids, Section B. Notice 96/C 44/02, Section C. Para. 16 of Guidelines 2007; rec. 23 of Commission Regulation No. 702/2014. This conclusion finds its confirmation in para. 10 of Guidelines 2007. Art. 3 of Commission Regulation No. 1857/2006, Art. 14 seq. of Commission Regulation No. 702/2014. 240 Luengo, p. 442.

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may still have an adverse effect on wto partners. However, the eu approach towards de minimis and block exemptions in the agricultural sector should preclude cross-border distortions and decouple the support from production. Therefore, it should constitute a justifiable exemption from the wto ams disciplines. Nonetheless, considering agricultural aid in the eu today is mostly excluded from the general regulation track, the current role of agricultural de minimis support is somehow blurred. 4.3

Interplay of the wto and eu Subsidy Concepts

From an economic point of view, every government intervention with the potential to distort trade falls within the definition of a subsidy, but both the wto and the eu restrict this broad concept by imposing criteria that may be considered subsidy/state aid (respectively, in Art. 1 of the scma and Art. 107 of the tfeu). Both definitions are more political than economic in nature and serve to delimit the economic definition of a subsidy from those measures (a definition that would extend subsidy disciplines to basically all governmental measures), the regulation of which is compromised by participating countries due to their mutual undesirability. The general point of view is that the eu state aid law essentially follows the  wto “traffic light” approach within the scma241 and mainly conforms to the wto regime.242 Notwithstanding this common feature, the overall ideas of the state aid/subsidies regimes are not identical. The key difference is the manner of anchoring the prohibition rule. While the eu explicitly forbids state aid in Art. 107 of the tfeu, unless there is a direct exception in the primary legislation or the Commission’s authorisation, the scma disciplines do not outlaw all kinds of subsidisation as such, but provide conditions under which subsidies may become actionable. The two elements, “financial contribution by government” (wto) and “originating from state resources” (eu), seem very similar since the wto judicial 241 If a measure meets the requirements of Art. 107(1) of the tfeu, it falls into the scma red category. The exceptions under 107(2) of the tfeu should constitute wto green category, and the state aid covered by Art. 107(3) of the tfeu may be equal to actionable subsidies under the scma. See Luengo, p. 430. 242 This was true before the expiry of the “green” subsidies authorisation pursuant to Art. 31 of the scma. See e.g. Wishlade F. Subsidies and State Aids: The Definition of Acceptable Measures under the European Union and World Trade Organisation Rules, Regional and Industrial Research Paper of Glasgow European Policy Research Center, 1996, p. 25; Luja, p. 192.

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bodies tend to interpret financial contribution by government as a charge on the public account.243 The approach taken by the wto dispute settlement bodies may be more extensive than that of the ecj given the fact that the former has ruled subsidies may be provided by private persons (Canada-Dairy v. Preussen Elektra).244 At the same time, the ecj remoteness test and its rather positive attitude towards the provision of aid by third parties (e.g. Germany v. Commission, Van den Kooy), may be viewed as a broader stance on the transfer of state aid through private parties than the scma’s strict interpretation of entrustment and direction under Art. 1.1. (a)(iv). The reading of the words “government”/“state” is somehow different too. The wto takes the subject-based approach (governmental action), where the eu accentuates the origin of resources (the source-based approach). As a result, the decisive nature of a state intention under the wto rules is modified by the ecj so that it is based on an analysis of the effect of a measure (Deufil). This approach is explicitly rejected by the dsb (US-Export Restraint). In this respect, the eu concept may be broader, since some regulatory measures may also fall within the subsidy definition, provided there is a charge on the public account. At the same time, the scope of Art. 1 of the scma in the European dimension is wider than that of Art. 107 of the tfeu, since the term “state” under Art. 107 of the tfeu refers only to the eu Member States and not to state aid granted by the Union.245 At first sight, the concepts of “benefit” (wto) and “aid” (eu) are very much the same. Nonetheless, some substantial conceptual differences may be observed. First of all, the eu method of state aid identification seems to partially merge the wto elements of “benefit” and “financial contribution by the government.” This conclusion is based on the fact that contrary to the dsb, which tends to take an objective reference mark for calculating a benefit (market conditions), thus, the beneficiary’s position, the ecj has picked a subjective mark (market operator test), thus, the state’s position. Consequently, the issue of possibly classifying a regulatory measure as a subsidy must be examined under the European law, as opposed to the scma approach, within the “aid” component, and not as a “financial contribution.”

243 The alternative scma element of “price support” should also be covered by the eu interpretation of “charge on the public account.” 244 This discrepancy could be visible only for agricultural export subsidies which are not required to be qualified as “subsidy” under Art. 1 of the scma. See Appellate Body Report Canada-Dairy, para. 128. 245 See similar by Luengo, p. 442.

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The notions of specificity and selectivity are interpreted in the wto and the eu in a similar way. The only discrepancy is the extension of the selectivity criterion to the product-base in the eu. Hence, while the scma is oriented only to the subject-based specificity of subsidies, the eu also includes the ­object-based approach rejected by the wto. The demonstrated divergence in interpreting the subsidy elements may lead to situations where the qualification outcome of the exact same measure as a subsidy/state aid could be opposing in the two jurisdictions, primarily for regulatory measures.246 However, this can be explained. From an institutional point of view, the eu state aid system is much more developed compared to the younger wto regime. Designed to ­promote an internal market, eu regulation focuses on competition while the wto concentrates on trade effects of subsidies247 and thereby, on adverse effects on producers.248 For that reason, the subsidy control within the wto is determined to protect market access commitments,249 and that is why the challenge of subsidies only exists in the member-to-member dimension. The deep degree of integration within the eu provides the decisive role to a supranational body, and the control is executed to the greatest extent in the Union-Member State dimension. Consequently, the standards for proof of injury in both jurisdictions may not be comparable, since it is much more difficult to reach the wto standard of adverse effect (a calculated effect on another state’s producers is required), than to find effect on intra-Union trade under the European law (evidence of change in the domestic competitive situation needed).250 4.4

Regulation of Subsidies in Ukraine

Ukraine follows the model of legislative ad-hoc incorporation of international law into the national legal order251 and has made a clear choice for the m ­ onistic 246 The possible classification of regulatory measures as subsidies within the eu should be a consequence of major interdependence of eu Member States’ policies and markets, where even least regulatory imbalances could have potential to affect the internal market. 247 Luengo, p. 473. 248 Rubini, pp. 57–58. 249 See also Rubini, pp. 38–40. 250 See Bacon K. European Union Law of State Aid, 2nd ed., Oxford, 2013, p. 150. 251 The Law on International Treaties No. 1906-IV of 29.06.2004 requires as a general rule the incorporation of international law into national legal order through ratification of international treaties by Ukrainian Parliament (Art. 9) or their confirmation by the President or the Government (Art. 12).

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approach towards implementing international law.252 International norms incorporated into Ukrainian legal order by means of ratification directly effect and prevail over domestic legal norms.253 Therefore, Ukraine follows the internationalist approach through automatic ad-hoc incorporation by granting international law the higher rank in the domestic hierarchy of legal norms.254 On this ground, following Ukraine’s accession to the wto in 2008,255 the provisions of the world trade law, including the scma subsidy definition, have constituted the law of Ukraine. However, taking the eu approach, it may be argued that the incorporated norms of the wto legal texts may be applied only in the external dimension, where the domestic system may not be bound by them. The subsidy concept of 2003 made a successful attempt to harmonise the notion of subsidy in Ukraine with the wto track,256 but did not result in 252 Art. 9 of the Constitution of Ukraine declares that international treaties ratified by the Parliament constitute a part of Ukrainian legislation. If there is a conflict between treaty provisions and the constitutional norms, the conclusion of that international treaty is possible only after amendment of the Constitution. 253 Art. 19 of Law on International Treaties provides that international treaties in force whose binding character was confirmed by the Parliament constitute a part of Ukrainian legislation and are applied in the same way as national legislation. The provisions of those international treaties prevail over domestic legal norms. Art. 19.2. of the Law. See also Report of the Working Party on the Accession of Ukraine to the World Trade Organisation of 25.1.2008 WT/ACC/UKR/152, para. 91. 254 See on statist and internationalist approaches for implementation of international law into national legal orders Cassese A. International Law, 2nd ed., Oxford, 2005, p. 223. 255 The Ukrainian Parliament ratified the wto Accession Protocol by Law No. 250-VI of 10.4.2008. 256 Concept for Restructuring of the State Subsidy System adopted by cmu Order No. 182 of 31.3.2003 defined subsidy as “financial and other aid” provided by state organs (bodies) for production, processing, marketing, transportation, exports, and consumption of goods, when a subject of economic activity receives benefits (revenues) as a result of this aid. The exhaustive list of subsidies replicated the content of Art. 1.1. (a)(1) of the scma (but the exception under footnote 1 to scma was not included into the concept text). The benefit criterion was clearly spelled out in the text, while the criterion of “financial contribution by government” was not explicitly incorporated thereto: the aid was to be provided by state, but there was no clear requirement of charge on a public account. The failure to include the element of “charge on a public account” expanded the subsidy definition to transfers of private resources. Furthermore, the concept also divided subsidies as legitimate or non-legitimate on the basis of the specificity criterion similar to that under Art. 2 of the scma. Thus, some “green” subsidies were declared legitimate, where granting of certain subsidies was not allowed (in the sense of Art. 3.1. of the scma). The concept also set up a separate track for agricultural support which was harmonised with AoA.

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any binding legal act. The post-accession state aid concept of 2010257 did not provide any relevant definitions or classifications, but explicitly referred to Ukraine’s obligations under the wto and identified that Ukraine’s goal of ­European integration predisposed the need for state aid reform. The latest Law on State Aid to Economic Entities, which will enter into force on 2 August 2018, harmonises the state aid definition in Ukraine with Art. 107(1) of the tfeu and follows the prohibitive approach of the eu.258 According to Art. 3(2)(1) of Law on State Aid, agricultural production is excluded from the scope of the Law. For agricultural subsidies the Ukrainian legislation operates with the notion “state support” (“derzhavna pidtrymka”), which is an overall notion for all state measures aiming to increase agricultural production, to develop agricultural markets, and to ensure food security for the population.259 This definition seems to be incomparable to the subsidy components as per Art. 1 of the scma, as the criteria of “financial contribution by government” and “benefits” granted to producers are not clearly defined. Where basically “all state measures” may fall within the scope of Ukraine’s state support regulation, there is no provision that the objective of a measure must confer benefits for p ­ roducers. Moreover, it seems that the Ukrainian legislature perceives advantages for producers through the goals of production growth and development, but both objectives do not necessarily incur benefits on the producers’ side. The food security objective declared in the law should seek, by its nature, lower market prices. Therefore, the measures to attain this goal may even be disadvantageous for agricultural producers. To sum up, since the notion “state support” is blurred within the Ukrainian domestic law, it should be able to catch subsidies in the sense of the scma, but may also embrace negative price support reducing producers’ income. 4.5

Incorporation of State Aid Regulation into the Framework of EU-Ukraine Co-operation

Ukraine decided on the eu approach towards state aid to comply with its international obligations since granting state aid (in the sense of Art. 107(1) 257 Concept on Reform of State Aid System adopted by cmu Order No. 81 of 13.1.2010. 258 Art. 1(1) of Law on State Aid No. 1555–18 of 1.7.2014 defines state aid as a support in any form granted through state or local resources which distorts or threatens to distort competition by favouring the production of certain goods or certain economic activities. Art. 2 of Law on State Aid generally prohibits state aid in Ukraine. 259 Art. 1.1. of Law on State Support.

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tfeu) is generally forbidden under Art. 262 of eu-Ukraine aa.260 The legal reason for this prohibition is the incompatibility of specific state aid with the proper functioning of the prospective free trade zone, insofar as state aid may affect bilateral trade.261 There are to two blocks of exhaustive exemptions for this prohibition: “non-questionable” (Art. 262(2) of eu-Ukraine aa) and “­questionable” (Art. 262(3) of eu-Ukraine aa). They are, in fact, nothing else but extended provisions of Art. 107(2) and (3) of the tfeu. The additional exemptions authorised cover aid to achieve objectives allowed under the eu horizontal block exemption regulations, as well as aid for investment to comply with the mandatory standards of the eu environment directives (listed in Annex xxix to the eu-Ukraine aa). In addition, during the course of the implementation of the eu-Ukraine Association Agreement, Ukraine is bound to incorporate not only the eu state aid legal disciplines into national legislation, but also to establish a system of state aid authorisation and control.262 The implementation of the provisions of Art. 262 seq. of eu-Ukraine aa should basically incorporate the eu legal, ­judicial, and administrative approach to state aid qualification263 into the Ukrainian domestic system. Some topics related to state aid taxation may also be covered by the approximation process given that the Tax Code of Ukraine264 shall be brought into conformity with the eu direct taxation rules for smes,265 and with a bunch of Council vat Directives issued in the 1960–1980s.266 It may be suggested that the implementation of these arrangements into Ukraine’s national legal order might create a discrepancy between the domestic (­e u-based) and the wto approaches for qualification of subsidies.267 260 The approximation to Art. 107 of the tfeu (prior Art. 87 of tec) was mandatory already under Art. 49 of pca. 261 Art. 262(1) of eu-Ukraine aa. State aid elements under Ukrainian law would be then identical with the European approach with exception of the element of intra-Union trade distortion. 262 Art. 262–264, 267 of eu-Ukraine aa. 263 The parties agree on interpretation of state aid disciplines under the aa in the light of European legislation, ecj practice, as well as secondary legislation and administrative acts of the eu. Art. 264 of eu-Ukraine aa. 264 Chapter ii, Parts 1–2 of Law No. 1629-IV. 265 Chapter iii, Part 2, of Law No. 1629-IV. eu secondary legislation indicated in the Programme was partially repealed. 266 Chapter iii, Part 1 of Law No. 1629-IV. 267 For instance, in course of the enforcement of Ukraine’s strategy of voluntary approximation with the eu acquis (based on the pca) Ukraine composed the list of the ecj cases to adapt its legislation to. Among those was the Deufil case, which outcome authorises state aid identification based on the effect, not the intention of a governmental action.

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Furthermore, it should be kept in mind that the National Adaptation Programme contains some outdated eu reference legislation in the state aid area,268 for instance, the general exemption regulation for smes,269 de minimis aid regulation,270 as well as obsolete eu criteria on state aid in the form of guarantees,271 land sales,272 tax measures,273 and risk management instruments.274 Turning to specific agricultural instruments, Ukraine’s harmonisation agenda includes state aid guidelines for advertising agricultural products and agricultural state aid guidelines in the edition for 2000–2007.275 eu competition rules for the agricultural sector are also envisaged for approximation to the eu law.276 To this extent, the eu (ec) rules on competition for the agricultural sector (both Council Regulations No 26/62 and No 1184/2006) do not generally exempt agricultural production from the state aid control disciplines.277 At the same time, agricultural goods will remain excluded from the EUUkraine state aid disciplines,278 although during the initial negotiation phase 268 Part 8 of the priority area list of Law No. 1629-IV. 269 Commission Regulation No. 70/2001 of 12.1.2001 on the application of Articles 87 and 88 of the ec Treaty to State aid to small and medium-size enterprises (oj L 10 13.1.2001 p. 33) (was in force until 31.12.2006); Commission Recommendation 96/280/EC of 3.4.1996 concerning the definition of small and medium-size enterprises (oj L 107 30.4.1996 p. 4) (was in force until 31.12.2004). 270 Commission Regulation No. 69/2001 of 12.1.2001 on the application of Articles 87 and 88 of the ec Treaty to de minimis aid (oj L 10 13.1.2001 p. 30) (was in force until 31.12.2006). 271 Commission Notice on the application of Articles 87 and 88 of the ec Treaty to State aid in the form of guarantees 2008/C 155/02 (oj C 155 20.6.2008 p. 10). 272 Commission Communication on State aid elements in sales of land and buildings by public authorities 97/C 209/03 (oj C 209 10.7.1997 p. 3). 273 Commission Notice on the application of the State aid rules to measures relating to direct business taxation 98/C 384/03. 274 Commission Communication on State aid and risk capital 2001/C 235/03 (oj C 235 21.8.2001 p. 3). Commission Communication to the Member States pursuant to Article 93 (1) of the ec Treaty applying Articles 92 and 93 of the Treaty to short-term export-credit insurance 97/C 281/03 (oj C 281 17.9.1997 p. 4) was in force until 31.12.2012. 275 Community guidelines for State aid for advertising of products listed in Annex i to the ec Treaty and of certain non-Annex i products 2001/C 252/03 (oj C 252 12.9.2001 p. 5); Community guidelines for State aid in the agriculture sector 2000/C/28/02 (oj C 28 1.2.2000 p. 2). 276 Council Regulation No. 26/62 applying certain rules of competition to production of and trade in agricultural products (Series i Volume 1959–1962 p. 129) mentioned is out of date and was repealed by Council Regulation No. 1184/2006. 277 Art. 4 of Council Regulation No. 26/62, Art. 6 of Regulation No. 1184/2006. 278 Art. 266 of eu-Ukraine aa.

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no exclusion for the agricultural sector from state aid control had been explicitly foreseen.279 The exclusion of agricultural aid from a fta scope is a rather widespread pattern in the eu practice. In general, inclusion of state aid prohibition clauses in the eu agreements with third countries is regarded as a normal practice that is justified as a prerequisite for accessing the internal market.280 At the fta stage however, the state aid provisions are mostly excluded.281 Alternatively, the recent Korea-eu fta contains a soft obligation to “use their best endeavours” to avoid subsidies distorting the competition.282 The Euro-Mediterranean Association Agreement between the eu and Egypt goes further and declares state aid affecting bilateral trade to be incompatible with the fta, and makes annual reporting obligatory. Agricultural state aid is, however, excluded from this commitment.283 Similarly, the ­European Agreements (ftas) with the ceecs of the early 1990s incorporated the “hard” obligation to adapt national legislation to the eu regulation only for industrial state aid,284 but that did not make the task much easier for the partners.285

279 eu-Ukraine Association Agenda to prepare and facilitate the implementation of the Association Agreement of 8.6.2009, p. 19; enpi. National Indicative Programme for Ukraine 2011–2013, pp. 14–16. 280 Max-Planck Encyclopedia of European Private Law, p. 1583. 281 Only around 30 per cent of all the rtas, e.g. between the eu and the efta states, Morocco (Art. 36 of the Agreement), Israel include disciplines on state aid. Estevadeordal A. Regional Rules in the Global Trading System, Cambridge, 2009, p. 476. 282 Art. 11.9. of the Free Trade Agreement between the European Union and its Member States, of the one part, and the Republic of Korea, of the other part (in force since 1.7.2011) (oj L 127 14.5.2011 p.1). This provision is comparable to Art. 49 of the eu-Ukraine pca. But contrary to the pca provision of specific operating aid is explicitly prohibited. Art. 11.11. of EU-Korea fta. 283 Art. 34 of the Euro-Mediterranean Agreement Establishing an Association between the European Communities and Their member States, of the one Part, and the Arab Republic of Egypt, of the Other Part (in force since 1.6.2004) (oj L 70 18.03.2000 p. 1). The separate Agreement on Agriculture (in force since 1.1.2010) did not include agricultural subsidies into the scope of the fta. 284 E.g. Art. 63(1)(iii) of Europe Agreement establishing an association between the European Communities and their Member States, of the one part, and the Republic of Poland, of the other part (oj L 81 30.3.1996 p. 280) set up prohibition of state aid at the example of Art. 87(1) of tec. Agricultural goods were not covered with the scope of Art. 63. 285 Competition rules, including state aid disciplines, remained the issue up to the accessions European Commission. Enlargement, Two Years After: An Economic Evaluation, Occasional Papers, 2006, p. 27.

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The rare example of support disciplines that offer no possibility to opt-out of agricultural support is the eu fta with South Africa.286 The distance between the markets, creating natural market access barriers, might explain this exception. Thus, approximation of agricultural support regulation is usually postponed to higher integration stages. However, there is no strict rule as to when this issue must be settled. For instance, the cu between the eu and Turkey, although including state aid disciplines through incorporation of eu state aid disciplines under the primary and secondary legislation,287 does not provide a hint of the parties’ intention to include agricultural subsidies in the scope of state aid provisions. Yet, there is no explicit opt-out either. The eu-Ukraine pca contained the “soft prohibition” of industrial state aid (the parties “shall refrain from granting” state aids) and incorporated state aid criteria of Art. 107(1) of the tfeu (Art. 87 of tec), whilst primary products as defined in the gatt were explicitly excluded from this commitment.288 Therefore, the parties initially did not include state aid for agriculture into the scope of the pca.289 The wto accession of Ukraine and the country’s d­ omestic ­support commitments subordinated subsidies in the eu-Ukraine bilateral trade to the wto disciplines.290 To sum up, the “pre-integration” pca was in line with the “normal” fta practice for incorporation of state aid disciplines, while the hard state aid prohibition clause in the eu-Ukraine aa is not unconventional for a fta, but is very advanced in comparison with many similar treaties. Thus, the 286 Art. 41 of Agreement on Trade, Development and Cooperation between the European Community and its Member States, of the one part, and the Republic of South Africa, of the other part (in force since 1.1.2000) (oj L311 04.12.1999 p. 3). The state aid notion under this agreement is based on the criteria of Art. 107(1) of the tfeu, although the policy space may be expanded to the same extent or even larger (support for a specific public policy objective) in comparison to the Art. 107(2)–(3) of the tfeu exceptions. 287 Art. 34–37 of Decision No. 1/95 of the EC-Turkey Association Council of 22.12.1995 on implementing the final phase of the Customs Union (oj L 35 13.2.1996, p. 1). 288 Art. 49(2.2) of pca. 289 The reference to primary products in Art. 49 of pca obviously concerns Art. xvi of the gatt which allows export subsidies for these products. Since the AoA was not in force in the time of pca negotiations, the parties operated with the gatt norms. Apparently, the absence of direct opt-in for AoA disciplines and general subsidies track made the bilateral commitments bound exclusively by the gatt norms prior to Ukraine’s accession to the wto in 2008. 290 As for industrial subsidies, the disciplines of Art. 49(2.2.) of pca were tightened by the scma provisions.

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scma definition of industrial subsidies will be substituted by the eu concept in the bilateral relationship. As for agricultural subsidies, there is no legal ground to apply the aa definition of state aid, and the wto provisions will be pertinent. The question to answer is whether this bifurcation is eligible under international law, i.e. whether rta parties may modify their bilateral obligations on subsidies within the wto system. Art. 41(1) of the vclt allows the modification of multilateral treaty provisions by its contracting parties if the possibility of such modification is provided for by the multilateral treaty, or is not prohibited by it (under further conditions). As already established earlier, Art. xxiv of the gatt explicitly authorises ftas between wto members if they foresee elimination of restrictive regulation of commerce to substantially all bilateral trade.291 It is not clear whether state aid disciplines would fall within the notion “restrictive regulation of commerce” under Art. XXIV:8(b) of the gatt. On one hand, this could be the case because of the fact that only state aid affecting bilateral trade would be limited by the rta rules. Although ftas usually do not incorporate state aid provisions,292 since it is presumed that this stage of integration may be achieved without harmonisation in this field, the extension of the fta scope to the state aid regime does not seem to affect agreement authorisation under Art. xxiv of the gatt, because the rta permission extends to “voluntary agreements, of closer integration,” where the upper limit of this integration is not signified, and therefore, could also include harmonised state aid provisions. By the same token, Art. XXIV:4 of the gatt recognises the desirability of facilitating bilateral trade through rtas without raising external barriers. It is evident that regional state aid disciplines should serve bilateral trade expansion and could hardly impose more restrictive external regulation of commerce due to exclusively reciprocal use of the regulation.293 Hence, incorporation of subsidy disciplines into a rta should generally be justified. In the case of the eu-Ukraine aa, the discrepancy between the wto subsidy definition and the bilateral state aid definition may turn out to be rather irrelevant. Art. 265 of the eu-Ukraine aa reserves the right for each party to have recourse to the wto mechanisms, i.a. dispute settlement regarding state aid. Since the dsb is not authorized to apply non-wto law, the definition of state aid under Art. 262 of the eu-Ukraine aa can only be taken into account

291 Art. XXIV:8(b) of the gatt. 292 See Sub-chapter 3.2.2. 293 This consideration has created some concerns within the wto members.

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for interpretation purposes.294 Nevertheless, it does not seem that it would be examined by the dsb in the event of a dispute, at least on the ground that the parties reiterated compliance with the wto regime in the preamble of the treaty.295 4.6 The eeu Approach to Domestic Support Regulation Agricultural goods only make up a noticeable share of the trade exchange between Russia and the two other eeu parties. Trade in agriculture between Belarus and Kazakhstan is reported to be negligible,296 presumably due to the remoteness of the markets. Nevertheless, the approximation of agricultural policies is envisaged within the ecu/eeu as an indispensable tool to ensure the functioning of the single market. In particular, it was declared that at the ecu stage, the parties envisaged coordination (cohesion) of their positions in agriculture-related issues by the wto accession, as well harmonisation and unification of domestic support regulations.297 The operation of the eeu requires a coordinated agricultural policy, i.a. domestic support policy.298 The ecu/eeu followed the wto approach for differential treatment of agricultural subsidies.299 The ecu/eeu rules on industrial subsidies are, on the whole, consistent with the scma disciplines, albeit leaving a broader national policy space.300 The definition of a subsidy is generally based on Art. 1 of the

294 As per Art. 3.2. of dsu, the dsb is to preserve rights and obligations of the parties under the wto agreements, but is to clarify the provisions of the wto agreements in accordance with interpretation rules of public international rules (in this case, Art. 31(3)(c) of the vclt). 295 Panel Report Chile-Price Band WT/DS207/R, paras. 7.85. 296 Van Berkum, Dvorstin, p. 7; http://eurasiancommission.org/. 297 Preamble and Art. 10 of ecu Agreement on Single Rules for Agricultural Domestic Support. 298 Art. 94–95 and Annex 29 to the eeu Treaty. 299 ecu Agreement on Single Rules for Industrial Subsidies and ecu Agreement on Single Rules for Agricultural Domestic Support of 9.12.2010. Rules on subsidies are not included into the scope of the Competition Chapter of the eeu Treaty (Chapter xxviii), but into the Industry Chapter (Chapter xxiv, in force after 2017 as established in Art. 105 of eeu Treaty) and the Chapter on Agroindustrial Complex (Chapter xxv). 300 See Parts iv, vii and Annex 28 to the eeu Treaty.

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scma,301 although it does not directly imply the requirement of charge on the public account.302 The question is whether the definition of a subsidy given within the industrial regulation was meant to also be applicable to the agricultural chapter (analogous to the wto approach). Due to the fact that the agricultural track operates with the notion “domestic agricultural support”303 – defined as financial support (“sodeistvie”) by a state (government, another state authority, a municipal body) to agricultural producers directly or through an agent – the application of the industrial subsidy definition for trade in ­agriculture appears to be impracticable. On the other hand, both definitions are based on the term “financial support” (contribution), while only the rules for industrial subsidies spell this out. Thereby, it could be presumed that the term “financial support” within the Agreement on Single Rules for Industrial Subsidies (after 2017, Annex 28 to the eeu Treaty) may be applicable for interpretation of the disciplines on agricultural subsidies. The ecu/eeu regime distinguishes three groups of domestic support: (1) Unrestricted non-trade-distortive measures,304 whose scope and conditions are harmonised with the provisions of Annex 2 of the AoA. (2) Prohibition of the most trade-distorting measures:305 (i) Export subsidies: The definition of agricultural export subsidies is generally in conformity with Art. 3.1. (a) of the scma since it is given through the “export contingency” requirement.306 However, the concept of “contingency in law or in fact” is not anchored within the ecu/eeu law. By the same token, the illustrative list of the most distortive subsidies307 is harmonised with Art. 9.1. of the AoA, but the ecu Agreement on Agricultural Support and the eeu Treaty do not give any clue as to whether a ­subsidy which is 301 Art. 93.3.-93.4. of eeu Treaty duplicating Art. 2.3. and 2.5. of ecu Agreement on Industrial Subsidies. 302 The expression “financial support by state’s authority” (sodeistvie) may be interpreted as a “financial contribution by government,” but it may be also understood in a broader way. 303 Art. 2 of ecu Agreement on Single Rules for Agricultural Domestic Support; para. 2 of Annex 29 to the eeu Treaty. 304 Art. 3.1.(1), 4 and Annex 3 of the ecu Agreement on Single Rules for Agricultural Domestic Support; paras. 4, 12–26 of Annex 29 to the eeu Treaty. 305 Art. 3.1.(2) and 5 of ecu Agreement on Single Rules for Agricultural Domestic Support; paras. 5–6, 27 of Annex 29 to the eeu Treaty. 306 See Sub-chapter 7.5. 307 Annex 4 to the ecu Agreement on Single Rules for Industrial Subsidies; para. 27 of Annex 29 to the eeu Treaty.

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contingent on export performance but not included into the illustrative list would be prohibited.308 Logically, it may be assumed that measures not mentioned in the illustrative list, but that constitute financial support contingent to exportation, should fall within the scope of export subsidies. Since the Russian Federation took the wto accession commitment to bind its export subsidies to zero,309 it may be argued that the government is not authorised to provide both listed and non-listed export subsidies to goods traded within the ecu/eeu either.310 The most reasonable explanation for the prohibition of agricultural export subsidies within the ecu/eeu must be the anticipation of ­inclusion of this obligation by the wto accessions of other ecu/eeu member states. But the lack of clarification on export criteria may threaten ­substantially the qualification of a measure as an export subsidy in compliance with the wto rules. (ii) Use of in-land produced primary agricultural goods as a prerequisite for support. The prohibition of this kind of subsidy for agricultural products goes further than Art. 3.1. (b) of the scma, which generally allows them to be granted within the limits of members’ ams commitments (chapeau to Art. 3.1. of the scma). (3) Other trade-distortive measures (not included in the previous category). The use of this support is limited to 10 per cent of the total agricultural production value in a member state,311 which corresponds to the de minimis ceilings for developing states established by Art. 6.2. of the AoA. It is expected that after the wto accession of each ecu/eeu member state, the eligibility of the other distortive domestic support will be limited to the level of the member’s ams commitments. Before that, the de minimis ceiling does not reflect the current tendency within wto accession commitments to hit the 5 per cent level, e.g. for Ukraine. However, according to the ecu report for 2011, the level of

308 It is supposed to be important in order to establish compatibility between the approaches to export subsidies in the ecu/eeu Agreement and under the wto legal framework. 309 WT/ACC/RUS/70, para. 1189; WT/MIN(11)/2. 310 Pursuant to Art. 6(1) of the eeu Treaty and Art. 1.1. of Treaty on the Functioning of the Customs Union in the Multilateral System. 311 Art. 3.1.(3) and 6 of the ecu Agreement on Single Rules for Agricultural Domestic Support; paras. 7–8 of Annex 29 to the eeu Treaty (with some flexibilities for Belarus pursuant to Art. 106 of the eeu Treaty).

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a­ gricultural support in the Russian Federation and Kazakhstan fell below the 5 per cent mark.312 The ecu/eeu identifies measures that fall in the same category as other trade-distortive measures, as well as those that fall under the rules on support calculation, which are essentially based on the market reference test.313 The calculation method depends on the type of financial support as provided in Art. 2.3. of the ecu Agreement on Industrial Subsidies (Art. 93.3. of the eeu Treaty). This approach is based on the classification laid down in Art. 1.1. of the scma, and is definitely more precise than the one taken in Annex 3 of the AoA. Due to the required tight linkage between financial support by a government and a trade-distortive measure, a possible loophole between a subsidy and a domestic support measure that may appear under the wto rules should be avoided within the ecu/eeu regulation. Unlike the multilateral aspirations of the common track on subsidies, the ecu/eeu advocates the permanent ­separation. Yet, the ecu/eeu disciplines on industrial subsidies are flexible enough to cover the differential treatment of agricultural subsidies. Control over implementation of domestic support disciplines is executed through a double procedure: prior notification and post-reports, while the peer review is also eligible.314 Art. 9 of the ecu Agreement on Domestic Support even laid out a separate dispute resolution procedure for conflicts concerning agricultural subsidies.315 In case of non-compliance with the ecu/eeu domestic support disciplines, a party in breach shall cease granting the support in concern and shall provide compensation to affected parties in the amount of the highly-distortive support (other trade-distortive support) granted in excess of the commitment level.316 This approach differs from the eu practice, where unlawful state aid must be returned to the public budget. 312 Only Belarus granted agricultural support on the level above 10 per cent in 2011. www .eurasiancommission.org. 313 The covered measures include direct support, state guarantees, public purchases, state revenue foregone (i.a. suspension of credit interest payments), beneficial or free of charge supply of inputs, and price support (i.e. measures aiming at price support). Annex 2 of the ecu Agreement on Single Rules for Agricultural Domestic Support; paras. 28–34 of Annex 29 to the eeu Treaty. 314 Art. 7 of ecu Agreement on Single Rules for Agricultural Domestic Support; paras. 35–38 of Annex 29 to the eeu Treaty. 315 The eeu Treaty is silent on this matter. It is assumed that the general dispute resolution procedure will be applicable to disputes concerning domestic support pursuant to Art. 112 of the eeu Treaty. 316 Art. 8 of ecu Agreement on Single Rules for Agricultural Domestic Support; para. 40 of Annex 29 to the eeu Treaty.

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In summary, it may be concluded that in comparison with the wto rules, the ecu/eeu order implements generally stronger disciplines on domestic support by partially incorporating the gatt general subsidy track into the agricultural regulation, and by establishing stricter procedural rules. If Ukraine had acceded to the ecu/eeu, it would have received a larger policy space for granting agricultural support than the country’s wto ams commitments, since the agricultural de minimis is capped at 10 per centin the eeu (as opposed to the 5 per cent de minimis, plus 3 billion uah covered by Ukraine’s Bound ams).317 However, the adjustment of Ukraine’s wto commitments seems highly questionable in the light of Art. XXIV:5(a) of the gatt and would be possible only if other restrictions resulting from the eeu accession led to an “on the whole” restrictive effect. In turn, the more restrictive rules of the ecu/eeu for export subsidies and subsidies for use of domestic over imported goods, versus the rules of the AoA regime, would not have had any significant impact on Ukraine since the first are not eligible under the country’s wto commitments, and the second are not granted by the Ukrainian government.

Conclusion of Chapter 4

All levels of trade regulation typically include certain general subsidy ­disciplines, i.a. definition, prohibitive clauses, and provisions on state aid control. By doing that, rule-makers restrict the scope of the economic subsidy definition to mutually undesirable measures. The wto approach to subsidies anchored in Art. 1 of the scma is based on four elements and covers financial contributions by governments intended to confer benefits. The eu state aid concept, also followed by Ukraine, is generally comparable to the wto approach, but is broader as it may also include unintended effects of regulatory measures. This extension could be easily explained by the deep degree of economic integration within the eu. Following the “peace clause” expiry, agricultural subsidies are partially ­incorporated into the wto general regulation and may be challenged under certain conditions. Yet, effectively disputing domestic support issues is not an easy task. The complex calculation scheme and the ambiguous definitions, makes the evaluation of agricultural policy compliance with the AoA very ­demanding. Major improvements are not expected in the near future, since an overall compromise for the agricultural track within the wto has not been 317 See Sub-chapter 6.1., especially footnote 3.

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found yet. Relatively infrequent judicial practice in the agricultural sector, ­especially for domestic support, allows only approximate interpretation of the AoA provisions. Despite these obstacles, the next two chapters will make an ­attempt to interpret agricultural subsidies granted in the eu and Ukraine in the light of the respective multilateral rules. After examining the eu rtas, it can be concluded that the inclusion of disciplines on agricultural subsidies into their scope is an extremely rare practice. Normally, the subsidy definition applicable for agricultural goods traded under the eu rtas provisions is governed by the wto rules, when the rta partners of the eu are also wto members. Even if agricultural subsidies were subject to the rta regulation, it could be argued that the rta definition of a subsidy (state aid) could not be referenced if the dispute arose within the wto system. Therefore, the non-inclusion of agricultural support in the scope of state aid disciplines under the eu-Ukraine aa may be considered as an opt-out from the right to modify the multilateral commitments of the parties in the bilateral dimension. The interpretation of agricultural subsidies provided by the eu and by Ukraine must be executed exclusively on the basis of the wto law. Supposedly, the non-inclusion of disciplines on agricultural subsidies in the body of the dcfta will lead to a diminished protection of competitiveness among Ukrainian producers and may push the government of Ukraine to re-design its system of domestic support, since the authorised means of border protection will be very limited.

chapter 5

The eu Practice on Agricultural Support

Scope of the Chapter

The aim of Chapter 5 is to examine the interaction between the AoA and eu grain support policies in order to to establish a reference point for the ­Ukrainian policy maker. First, before turning specifically to the grain sector, the historical development of the cap must be briefly examined (Sub-chapter 5.1) in order to identify the switch of the focus within the cap in the course of the last three decades. Turning to the product segment in focus, the grain-specific cap measures will be described and scrutinised for their wto compliance, starting with the Pillar i measures, the grain interventions (Sub-chapter 5.2.1.), and direct payment schemes (Sub-chapter 5.2.2.). Some Pillar ii measures will be taken scrutinized to illustrate the eu approach on the agricultural policy approximation towards the multilateral regulation (Sub-chapter 5.3.). 5.1

The Development of European Common Agricultural Policy (cap)

The cap was launched in 1962 and considered a necessary compromise between agricultural and competition policy interests for the foundation of the European Economic Community (eec).1 The first cap construct was based on common market organisations (cmos), market orders established for s­ pecific products, and the European Agricultural Guidance and Guarantee Fund charged with executing payments to producers. Although the cap was heavily criticised internationally,2 it was a significant domestic overproduction that triggered the first cap reform in 1968 (the socalled Mansholt Plan or the 1980 Agriculture Programme). A range of smaller revisions followed. However, the slight policy modifications were not able to resolve the core problem of market oversupply, as they did not target high price support or expanded export subsidies, which were used to combat the 1 The cap was a trade-off for French agricultural interests for the inevitable expansion of ­German industrial trade after the foundation of European Coal and Steel Community. 2 Initially, the eec variable levy system was in focus of critics. The eec ignored the Haberler Report recommendations of 1957 and found itself in the long-lasting conflict with the us. See McMahon 2007, pp. 235–237. © koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004353695_007

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consequences of overproduction. An increasing budgetary burden forced the European Communities to prepare a large cap reform in parallel to the wto Uruguay Round. This reform was aimed at curbing budget expenditures and re-designing the concept of support for agricultural producers in response to external pressure.3 Although the resulting 1992 McSharry reform could be characterised as “not a wholesome reform but merely an answer to internal and external problems,”4 it paved the path for further changes: support prices were cut and direct payments to farmers, albeit coupled, were introduced as a compensation for the reduced intervention prices. The highly trade-distortive regime of the cmo for cereals was most impacted by the reform.5 The AoA implementation and the challenge of the massive eu Eastern enlargement were demanding more cap adjustments. In 1997 the new ­reform concept was published. The policy makers set a goal to increase competitiveness of European agriculture in international and domestic markets.6 The Agenda 2000 process went on with price support reduction for products that were expected to be competitive, i.a. for cereals.7 There was also further ­development of the direct payment system, the integration of environmental elements into the cap,8 and the extension of rural development measures.9 Hence, the shift to the wto “green box” could be clearly observed. 3 In the decision on Oilseed case between the ec and the us the European subsidies to oilseed producers were found to impair the market access commitments. It became clear for the policy makers that the cap system, if not largely reviewed, would endanger future foreign trade in agricultural goods. As a result, the eec recognised “the existence of international interdependence” in the agricultural area and accepted its international responsibilities. See Commission’s Communication “The Development and Future of the cap” com(91) 100 11 of 1.2.1991. 4 McMahon 2007, p. 73. 5 E.g. Council Regulations No. 1766/92 (oj L 181 1.7.1992 p. 21), No. 1528/95 (oj L 148 30.6.1995 p. 3) and No. 3290/94 (oj L 349 31.12.1994 p. 105). 6 Chapter iii of Commission Document “Agenda 2000 – For s Stronger and Wider Union” of 15.7.1997; Commission’s Proposals for Council regulations concerning the reform of the common agricultural policy com(1998) 158 final of 18.3.1998. 7 Council Regulation No. 1253/1999 amending Regulation (eec) No. 1766/1992 of 17.5.1999 (oj L 160 26.6.1999 p. 18). 8 Art. 14(2) of Council Regulation No. 1257/1999 on support for rural development from the European Agricultural Guidance and Guarantee Fund (eaggf) and amending and repealing certain Regulations of 17.5.1999 (oj L 160 26.7.1999 p. 80) and Art. 29 of Council Regulation No. 445/2002 laying down detailed rules for the application of Council Regulation (ec) No. 1257/1999 on support for rural development from the European Agricultural Guidance and Guarantee Fund (eaggf) of 26.2.2002 (oj L 74 15.3.2002 p. 1). 9 Council Regulation No. 1257/1999.

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The “green box” share in the cap measures continued its growth in the course of the 2003 cap reform (also known as Fischler reform). The goal of this reform was actually to shorten sector dependence on public interventions and, as a consequence, keep reducing intervention prices. Despite that, direct payment schemes were officially re-baptised from compensation measures to ­income support (de facto these measures are nothing else but compensation for the cuts in market price support).10 After the implementation of the ­Fischler reform, decoupled direct payments became the main form of eu ­agricultural subsidies. Being aware that the policy measures could not be adopted for the longterm, a reconsideration of certain cap aspects was set up in advance for 2007/2008 (the so-called mid-term review).11 This scheduled revision was not planned with the expected implementation of the Doha Round results in mind, but was merely a response to uk pressure to modify the cap due to the budget constraint arguments.12 The review process, also known as the “Health Check,” was launched in 200713 as a “mini” cap reform whose results were far less ambitious than the Commission’s proposal. Namely, they were limited to a slight reform of direct support measures and an extension of rural development measures through the modulation process.14 At the same time, the 10

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Council Regulation No. 1782/2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers and amending Regulations (eec) No. 2019/93, (ec) No. 1452/2001, (ec) No. 1453/2001, (ec) No 1454/2001, (ec) 1868/94, (ec) No. 1251/1999, (ec) No. 1254/1999, (ec) No. 1673/2000, (eec) No.2358/71 and (ec) No. 2529/2001 of 29.9.2003(oj L 270 21.10.2003 p. 1). E.g. Art. 64(3) of Regulation No. 1782/2003. See Daugbjerg, Swinbank, p. 131. Ibid., p. 132. Communication from the Commission to the European Parliament and the Council “Preparing for the “Health Check” of the cap reform” com(2007) 722 final of 20.11.2007. Council Regulation No. 72/2009 on modifications to the Common Agricultural Policy by amending Regulations (ec) No. 247/2006, (ec) No. 320/2006, (ec) No. 1405/2006, (ec) No. 1234/2007, (ec) No 3/2008 and (ec) No. 479/2008 and repealing Regulations (eec) No. 1883/78, (eec) No. 1254/89, (eec) No. 2247/89, (eec) No. 2055/93, (ec) No. 1868/94, (ec) No. 2596/97, (ec) No. 1182/2005 and (ec) No.315/2007 of 19.1.2009 (oj L 30 31.1.2009 p. 1); Council Regulation No.73/2009 establishing common rules for direct support schemes for farmers under the common agricultural policy and establishing certain support schemes for farmers, amending Regulations (ec) No. 1290/2005, (ec) No. 247/2006, (ec) No. 378/2007 and repealing Regulation (ec) No. 1782/2003 of 19.1.2009 (oj L 30 31.1.2009 p. 16); Council Regulation No. 74/2009 amending Regulation (ec) No. 1698/2005 on support for rural development by the European Agricultural Fund for Rural Development (eafrd)

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­establishment of the Single cmo in 2007, which merged 21 product cmos was, as a matter of fact, not a part of any reform, but was foreseen in the Lisbon Strategy with a view to curtail administration costs.15 Reviewing the main reasons for agricultural reform as identified by Daugbjerg and Swinbank may be of use in evaluating the cap development in the 1990s–2000s.16 The reasons include budget constraints (political economy dimension), the pressure of the gatt/wto negotiations or commitments (globalisation dimension), and a paradigm shift emphasizing the provision of public goods by the farm sector (multifunctionality dimension).17 The scholars came to the conclusion that the state-assisted paradigm (first dimension) persisted in the eu and was not, in fact, replaced by the multifunctional paradigm.18 In the author’s view, the multifunctionality justification is largely used by the eu for the expansion of the multilaterally lax “green” measures. ­Therefore, the third dimension essentially serves to support the second one over the first.19 At the end of the last decade, the new internal state of play in the Union presented increasing political and social non-acceptance of agricultural policies in many Member States20 and a push for further reforms, since the cap is a typical example of a “restaurant bill” problem.21 Yet, there was not intense external pressure inasmuch as the AoA requirements were deemed to be implemented, the Doha reform process was stuck, and litigation activity in the agricultural sector was rather low. On the other hand, the arguments

15 16 17 18 19

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of 19.1.2009 (oj L 30 31.1.2009 p. 100) comparing to Commission’s legal proposal on the Regulations com(2008) 306 final of 20.5.2008. See also Daugbjerg, Swinbank, p. 133. Art. 3.2.3. of Communication to the Spring European Council “Working together for growth and jobs: a new start for the Lisbon Strategy” com(2005) 24 final of 2.2.2005. Further on the history of the cap before 2010 see Dombert, Witt, pp. 992–1000. Daugbjerg, Swinbank, p. 127. Ibid., p. 139. In course the 1990–2000s cap reforms the eu tripled its support in the “green box” category between 1995 and 2009, particularly as a result of decoupling process. In this time agricultural subsidies per family worker increased substantially (from 7 500 eur to 12 000 eur between 1995 and 2008). The subsidies went up from 47 per cent of the family income in 1995 to 60 per cent in 2008. Butault, Bureau and others, pp. 21, 81–83. The Netherlands, Sweden and the uk are promoting reduction of cap expenditures. On the other hand, in 2009 after the reduction of the budget outlays, 22 Member States submitted a joint petition against the cuts. For details see Martinez J. Zukunft der Agrarbeihilfen. In: Agrar- und Umweltrecht, 9, 2010, pp. 261–264, p. 264. Bilal, p. 6.

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on the multifunctional role of the agricultural sector were getting stronger.22 Under these circumstances, the very recent cap reform 2013 was planned as a contribution to the Europe 2020 strategy for growth, and was seeking to meet concerns of food security, climate change, and sustainable use of natural resources.23 In that way, the 2013 reform was expected to find a balance between society (public financial resources) and farmers (agricultural production, rural development and environmental concerns) by means of digressive support reduction, improvement of equitability in support distribution between farmers, regions and Member States; and the further “greening” of direct support24 and rural development.25 So at least on the conceptual level, the cap is currently directed towards a lesser degree of distortions. The final conclusion on this matter is not as easy as it seems. For this purpose, the de jure scope of the cap, as well as the manner of its application, must be examined. 5.2 Pillar i Measures Applicable to Cereals 5.2.1 Grain Interventions26 To start with, it is worthwhile to compare the current level of grain prices within the eu to prices before the 1992 cap reform. By the beginning of the 1990s, grain prices in the ec exceeded the world price by more than two times, while today internal and international grain prices are almost equal.27 The explanation of this imbalance is quite simple: the European grain sector used to be one

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See Sub-chapter 1.2.5. See Commission’s Proposal of Council Regulations determining measures on fixing certain aids and refunds related to the common organisation of the markets in agricultural products com(2011) 629 final of 12.10.2011; Commission Communication “The cap ­towards 2020” com(2010) 672 final of 18.10.2010. 24 Agricultural Council. Greening: Concept paper, 2012 url: http://ec.europa.eu/agriculture/ cap-post-2013/legal-proposals/concept-paper-on-greening_en.pdf. 25 Proposal for a Regulation of the European Parliament and of the Council on support for rural development by the European Agricultural Fund for Rural Development (eafrd) com(2011) 625 final/2 of 19.10.2011. 26 For the purpose of this sub-chapter the term “intervention” is used exclusively in the meaning of direct market intervention by the state, not state regulation. 27 See e.g. Committee for the Common Organisation of Agricultural Markets. Cereals ­Market Situation, 30.5.2017, url: https://ec.europa.eu/agriculture/sites/agriculture/files/cereals/ presentations/cereals-oilseeds/market-situation-cereals_en.pdf.

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of the most protected within the cap,28 predominantly through the system of guaranteed prices. The regulation for cereals was largely reformed during the McSharry reform and the Fischler reform, and was integrated into the Single cmo system in 2008.29 These gradual reforms, which partially liberalised the sector,30 did not eliminate the foundation of grain price support in the eu – the intervention system. The current public intervention procedure is not spelled out in the Single cmo Regulation 2013 and is “outsourced” to implementing acts (differently as under the prior regulation).31 The entire eu market (public) intervention system is based on two price support instruments: the introduction of reference prices and the fixing of intervention prices proportionately to the reference prices.32 The idea behind public intervention is to uphold internal market prices, namely, not to let the prices fall. Before the 1992 reform, various types of cereals used to be bought through public interventions at fixed prices and unlimited quantities.33 Under the incumbent rules only a few types of cereals – common wheat, barley, and maize harvested in the eu34 – are eligible for public interventions.35 Nowadays, interventions are opened automatically for common wheat, while they are ­discretionary for other eligible cereals.36 Intervention purchases of all agricultural goods are limited to certain time periods (for instance, cereals can be

28 See e.g. Council Regulation No. 19/62 on the progressive establishment of a common organisation of the market in cereals (oj 1962 30/933). 29 Art. 1(1)(a) and (e) of Single cmo Regulation 2007. 30 As partially discussed in the Sub-chapter 5.1., initially the McSharry reform reduced guaranteed prices and introduced a compulsory set-aside, while the following 2003 reform launched direct de-coupled payments schemes, i.a. for grain producers. 31 The Commission is delegated pursuant to Art. 277 of the tfeu to make regulations to ensure quality of products eligible for public interventions and uniform procedural application of interventions. Art. 19, 20 and rec. 6, 18–22 to Single cmo Regulation 2013. 32 Art. 7 and 15 of Single cmo Regulation 2013. These instruments were developed for public intervention, but were also used for special intervention measures and external trade measures under the former regulation. See rec. 11, Art. 8(1), 18 seq., 47, 136 and 166 of Single cmo Regulation 2007. 33 Public intervention stocks reached their highest level in 1992/1993. 34 Art. 9 of Single cmo Regulation 2013 (earlier Art. 6.2 in conjunction with Art. 7 of Single cmo Regulation 2007). 35 Art. 11(a) of Single cmo Regulation 2013. The list of eligible grain shrank in comparison to the previous regulation. See for comparison Art. 6(1)(a) and Art. 10(1)(a) of the Single cmo Regulation 2007. 36 Art. 13(1) of Single cmo Regulation 2013.

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bought in from 1 November to 31 May).37 Apparently, this time restraint should respond to the demand dynamics on the market. During the corresponding intervention period, sellers may submit offers for “homogeneous” cereals in volumes exceeding the fixed minimum38 ­accompanied by a security payment in favour of an intervention agency.39 Cereals offered for buying-in shall be in conformity with the extended quality requirements laid down by the regulator.40 Offerers carry transportation costs to the storage place, if the distance does not exceed 50 km (earlier 100 km). In other cases transportation is paid by the intervention agency.41 The reference threshold (earlier referred to as reference price) has been fixed for cereals at the permanent level of 101.31 EUR/t42 since 2001/2002. ­Under the Single cmo Regulation 2007, the reference price was to be increased by a monthly set amount,43 presumably to combat seasonal price fluctuations. Reference thresholds should not be confused with intervention prices, which are fixed purchase prices or maximal prices for tendering.44 ­Intervention 37 38

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40 41 42 43

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Art. 12(a) of Single cmo Regulation 2013. As for now, the minimum eligible quantity makes up 160 t for common wheat, barley and maize and 20 t for durum wheat. Art. 5(1)(a) and (b) of Commission Implementing Regulation (eu) 2016/1240 of 18.5.2016 laying down rules for the application of Regulation (eu) No 1308/2013 of the European Parliament and of the Council with regard to public intervention and aid for private storage (oj L 206 30.7.2016 p. 71) (further Commission Implementing Regulation (eu) 2016/1240). Before 1.10.2016, the minimum eligible quantity for common wheat constituted, barley, maize and sorghum 80 t and 10 t for durum wheat. Art. 8(1)(a) and (b) of Commission Regulation No. 1272/2009 of 11.12.2009 laying down common detailed rules for the implementation of Council Regulation (ec) No. 1234/2007 as regards buying-in and selling of agricultural products under public intervention (oj L 349 29.12.2009 p. 1) (further Commission Regulation No. 1272/2009). Art. 4 of Commission Delegated Regulation (eu) 2016/1238 of 18.5.2016 supplementing Regulation (eu) No 1308/2013 of the European Parliament and of the Council with regard to public intervention and aid for private storage (oj L 206 30.7.2016 p. 15); Art. 6 seq. of Commission Implementing Regulation (eu) 2016/1240 (further Commission Delegated Regulation (eu) 2016/1238). From 1.7.2017, Art. 3(1) and Part ii of Annex i of Commission Delegated Regulation (eu) 2016/1238 and Annex i of Commission Implementing Regulation (eu) 2016/1240. Art. 19(1) of Commission Implementing Regulation (eu) 2016/1240 (prior Art. 29(1) of Commission Regulation No. 1272/2009). Art. 7(a)(1) of Single cmo Regulation 2013. The highest increase in price was set for June (3.22 EUR/t), the lowest – for November (0.49 EUR/t), from July until November there were no increases. Art. 8(1)(a) of the Single cmo Regulation 2007. Art. 15 of Single cmo Regulation 2013.

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prices for specific products, as well as upper price limitations for buying-in are to be determined by the Council in accordance to Art. 43(3) of the tfeu, and are currently equal to the reference threshold.45 Cereals are the only product where this equality exists. For others, intervention prices are usually lower than reference prices. Since 2010/2011, common wheat has been the only cereal eligible for buying-in at the fixed reference price at the maximum quantity of 3 million t per marketing year.46 Depending on the market situation and, in particular, the market price development, the Commission is entitled to open public intervention through a tendering procedure.47 Before 2014, tendering prices had to be determined by a bidding procedure,48 but still the maximum buying-in prices could not exceed the reference price.49 Due to the fact that the reference price was more than two times lower than the world price in the years following the food price crisis, it may be assumed that the producers did not have incentive to sell. ­Under the Single cmo Regulation 2013, a tendering procedure for cereals is automatically eligible during the intervention periods, while the Council may set, “where applicable,” quantitative limitations for buying-in.50 Substantial price cuts51 and gradual restriction of eligible cereals products, together with purchase volume limits, make interventions far less attractive, particularly, for wheat producers.52 Therefore, the scope of intervention was largely narrowed. Basically, grain interventions in the eu must work according to the formula: if there are high prices on the markets, interventions are not launched; if there is oversupply, aprice support shall be triggered. In fact, given the price dynamics in the sector, the last significant interventions for 45

Art. 15(2) and 18 of the Single cmo Regulation; Art. 2 of Council Regulation (eu) No. 1370/2013 of 13.12.2013 determining measures on fixing certain aids and refunds related to the common organisation of the markets in agricultural products (oj L 346 20.12.2013 p. 12) (further Council Regulation No. 1370/2013). 46 Art. 11(1)(a) of Single cmo Regulation 2007; Art. 3(1)(a) of Council Regulation No. 1370/2013. 47 Art. 11 of Single cmo Regulation 2007; Art. 12 seq. of Commission Implementing Regulation (eu) 2016/1240. 48 Art. 18(2) of Single cmo Regulation 2007. 49 Art. 18(3) of Single cmo Regulation 2007. 50 Art. 14 of Single cmo Regulation 2013, see also Art. 12 of Commission Implementing Regulation (eu) 2016/1240. 51 Initially high intervention prices were lowered on 30 per cent as a result of the McSharry reform and on 15 per cent in course of the Agenda 2000 implementation. Dombert, Witt, p. 974. 52 Ibid.

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common wheat took place in 2004/2005 and 2005/2006.53 After 2007, public ­interventions were carried out only in 2008/2009 and 2009/2010, predominantly for barley.54 Nevertheless, the overall development is rather unstable. Where in 2007/2008, 2010/2011, and 2011/2012 there were no grain intervention purchases at all, in 2008/2009 those were resumed for wheat and barley, and in 2009/2010 their volumes multiplied55 (but still could not be compared to the intervention stocks of the 1990s). The volatility of intervention volumes is most certainly explained by the world price dynamics in the segment and the understandable wish of the eu to build up its own carry-over stocks in periods spiking food prices. The eu does not operate common stocks in the sense of para. 3 of Annex 2 of the AoA.56 Intervention stocks built in at fixed prices are notified to the wto within the “amber box,” since the intervention price is supposed to be an administrated price pursuant to Annex 3 of the AoA.57 After examining the domestic support notifications submitted to the wto by the eu, it is clear that the eu notifies eligible volumes of interventions, not factually executed purchases.58 Thus, the eu tends to overestimate its ams for common wheat. For that reason, price support for this product formally exceeds the de minimis ceiling and was responsible for almost ¼ of the eu Current ams in 2009/2010, and its share in 2010–2014 steadily increased.59

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lmc International, p. 25. Ibid. The wto tpr report on eu trade policy referred to far larger volumes of interventions in the period between 2007 and 2011. WT/TPR/S/284, p. 116. 55 The intervention purchases of wheat corresponded to around 80 000 t in 2008/2009 and 250 000 t in 2009/2010. Barley purchases reached around 0.9 million t in 2008/2009 and over 5.6 million t 2009/2010. The maize intervention stocks for maize increased to 0.5 million t in 2008/2009. WT/TPR/S/284, p. 116; lmc International, p. 25. 56 Only negligible amount of this aid (provided on national level) is notified to the wto. G /AG/N/EU/10, p. 2. 57 It is argued that only intervention prices but not the reference threshold fall within the scope of administered prices in the sense of para. 8 of Annex 3 of the AoA. Rec. 12 of Single cmo Regulation 2013. In 2009/2010 and 2010/2011 common wheat was mentioned as the only grain getting AoA price support (defined as a gap between administered price and external reference price). G/AG/N/EU/10, G/AG/N/EU/17. 58 Current ams for sugar. Ibid. 59 G/AG/N/EEC/68, G/AG/N/EU/17, G/AG/N/EU/26, G/AG/N/EU/34. For the period after 2014, the eu has not submitted a notification yet.

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The buying-in through the tendering procedure (executed for barley and maize in 2008/2009 and 2009/2010) was not notified to the wto. It may be presumed that, since the price is discovered by bidding, the tendering procedure should exclude subsidy provision. Moreover, the upper limitation of the reference price may even have negative support as a consequence. Besides the domestic support aspect, public interventions may be prone to promoting export subsidies, provided that distribution of stocks creates distortions. Cereals held in the eu intervention stores should mostly be disposed through sale by tender onto the domestic market.60 Stock sales take place every year in the eu and are dependent on the volume of preceding interventions. For that reason, sales of common wheat are usually below 0.1 million t and were relatively high only in 2010/2011 (around 0.2 million t) after the growth in purchase during the food price crisis.61 Unsteady sales generally repeat the patterns of buying-in changes for other eligible grain, too. For instance, large maize stock sales in 2007/2008 (over 2.2 million t) were followed by a steep fall in 2008/2009, and then by the new increase in 2009/2010 (presumably due to the large intervention purchase in 2008).62 The same tendency may be observed for barley: the years following large purchases were marked by massive stock distribution (e.g. 2009/2010 and 2010/2011).63 The Single cmo Regulation explicitly requires that public stock distribution be carried out in a way that avoids any disturbance of the market to ensure equal access to the goods and equal treatment of purchasers, as well as to ­comply with the eu obligations under international agreements.64 Thus, apparently the stocks can be sold only when the prices offered by traders do not depress market prices, and when the former are higher than or equal to the reference price. This precaution should exclude the presence of the element “financial contribution by a government” as per Art. 1.1. (a) of the scma and “aid originating in state resources” as defined in Art. 107(1) of the tfeu. However, certain cases should be considered more closely. First, under the Single cmo Regulation 2007, tendering procedures could be restricted to specific utilisation and/or destination, particularly for ­processing 60 Art. 28 seq. of Commission Implementing Regulation (eu) 2016/1240. 61 WT/TPR/S/284, p. 116. 62 Ibid. 63 Ibid. 64 Art. 16(1) of Single cmo Regulation 2013 (identical to Art. 25 of Single cmo Regulation 2007). According to the incumbent regulation, the Commission takes a commitment of annual reporting on distribution from the intervention stocks. Art. 16(3) of Single cmo Regulation 2013.

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cereals into ethyl alcohol (bioethanol).65 Apparently, making use of this permission may well, potentially confer a subsidy, in the sense of Art. 1 of the scma, for bioethanol producers in amounting to the difference between the tender price and the market wheat price (this difference in prices may constitute “financial contribution by a government” as laid down in Art. 1.1. (a)(iii) of the scma). In the light of the AoA disciplines, since this kind of support could be inclined to benefit agricultural producers, it might be claimed to be calculated into a product-specific ams.66 If a measure as implemented does not directly benefit primary producers, the subsidies have a rather industrial character and therefore must be subordinated to the scma disciplines. Secondly, grain stored in the intervention stocks can theoretically be exported through export tenders, but this option is rarely used as it is considered to involve export subsidies, although the Single cmo regime permits export refunds within the limits set by international commitments.67 In spite of the eu’s expanded policy space within the wto for granting export subsidies,68 export refunds have not been granted for cereals since 2006, and for any processed cereal products since 2007.69 This may be explained by the effect of gradually decreasing eu intervention prices to world price levels,70 and by the upward price dynamics dominating the world market until 2014. Nonetheless, the practical use of export refunds for cereals may be activated if the special intervention mechanism is triggered. In addition to the general public intervention procedures, if there are threats of market disturbance caused by significant changes in price on internal or external markets, or if other events and circumstances significantly disturb or threaten to disturb the market, the Commission must take any necessary measures to address the situation, i.a. to provide export refunds or suspend import duties. These actions are limited by the eu obligations taken under international agreements, and

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Art. 40(5) of Commission Regulation No. 1272/2009. Although there was no case of examination of the “pass through” phenomenon in the processors-producers dimension, this constellation is not impossible, if duly proved. Export refunds remain eligible for non-processed cereals, as well as for processed cereals under specific conditions. Art. 196 of Single cmo Regulation 2013. Similar provisions were in force before the 2013 reform. See rec. 77, Art. 162(1)(a)(i) and (b) of Single cmo Regulation 2007. Over 25 million t of export subsidies are annually permitted. G/AG/N/EU/14. All in all, the export refunds to all eu agricultural products shrank almost to zero, and were even negative in 2010. WT/TPR/S/284, p. 118. European Commission, Directorate-General for Agriculture and Rural Development. eu Cereals Regime, 2011.

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can be implemented only if available cmo measures would be not be sufficient enough to resolve the problem.71 In summary, it may be said that the eu model of public interventions for cereals has become less distortive due to non-automatic openings of interventions, and the switch from purchases at intervention prices to tendering procedures. 5.2.2 Direct Payment Schemes 5.2.2.1 Development of the Decoupled Income Support Concept in the eu As demonstrated in Chapter 1, agricultural producers face low and unstable income because of limited resources, as well as unfavourable rates of return on farm resources, which is a consequence of the conditions specific to agricultural (input) markets (the so-called “farm problem”). While market price support or production subsidies look to fix these market handicaps, direct payments simply provide farmers with the financial means to rectify these imbalances on the spot. In a nutshell, this transfer of money may be a compensation for the elimination of other support measures. The only way to combat this argument would be to find another rational justification for the direct payment concept. Correspondingly, the eu tends to defend direct support not by underlining its subsidy nature, but rather its goal of compensating farmers for taking care of countryside that they used to provide free of charge.72 Thereby, the eu makes use of the multifunctionality concept. From the legal point of view, however, the easiest way to defend direct payments under eu law would be to referrence the objective of Art. 39(1)(b) of the tfeu, which compels Member States “to ensure fair standard of living” for agricultural producers. eu direct farm support schemes in their present decoupled form were introduced during the Fischler reform, when the Council Regulation No 1782/2003 established the principle that Community agricultural subsidies had to normally be granted in the form of decoupled aid not linked to specific products or requirement of production.73 While indisputably a step ahead, this 71

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Art. 219 of Single cmo Regulation 2013. Special intervention measures by the Commission were authorised in the cereals sector before 2014, but the provision was hardly spelled out, namely, the prerequisite for the Commission’s action was the occurrence of the situation “where the market situation so dictates,” “in particular,” when market prices fall or threaten to fall in relation to the intervention price in one or more eu regions. Art. 47(1) of Single cmo Regulation 2007. See Beard N.; Swinbank A. Decoupled Payments to Facilitate cap Reform. In: Food Policy, 26, 2001, pp. 121–145, p. 141. Council Regulation No. 1782/2003.

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l­ egislative act left certain space for production-based direct support, although conditional on reduction of production. The topical example thereof was aid for energy crops, i.a. cereals and oilseed, notified as “blue box” to the wto.74 Evidently, this scheme was initially designed to provide incentives for biofuel production. However, the market and regulatory development pushed the eu to stop granting this aid in 2009.75 Another already extinct example of coupled income support was quality premiums and supplements to per-hectare compensatory payments for durum wheat production,76 which were also classified as “blue box” measures.77 By the same token, a rather low volume of coupled aid for seeds78 (discontinued after the adoption of the 2013 reform) was notified to the eu as the “blue box,”79 although it did not require reduction of production.80 On the contrary, the amount of aid granted within new Member States was permanently increasing.81 In this regard, it should be underlined that the eu advocates the approach that even a measure (payments) based on a fixed area or yield may be “production-limited.”82 All three abovementioned schemes were supposed to be highly distortive as they were nothing else but output subsidies.83 They would fall within the scope of the Current ams in the absence of a production reduction requirement. In contrast to these measures, eu direct support payments for farmers (Single Farm Payment and Single Area Payment) were meant to be exempted from the ams calculation under Annex 2 of the AoA. To establish whether and in what way the eu complies with the “green box” criteria, the latest Council

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Granting this coupled aid was conditional on contract between a farmer and processing industry except where processing was undertaken by the farmer on the holding. See Chapter 10 of Title iv of Council Regulation No. 1782/2003. In the last year of the scheme operation, in 2009, the per-hectare payments for cereals, oilseed and protein crops were executed in the amount of over 1.4 million eur. G/AG/N/EU/10, p. 9. 75 Rec. 42 of Council Regulation No. 73/2009. 76 Title iv, Chapters 1 and 10 of Council Regulation No. 1782/2003. 77 G/AG/N/EU/10, p. 9. 78 Title iv, Chapter 9 of Council Regulation No. 1782/2003 and Title iv, Chapter 1 of Council Regulation No. 73/2009. 79 G/AG/N/EU/10, p. 9. 80 See Art. 87 of Council Regulation No. 73/2009. 81 Annex xvi of Council Regulation No. 73/2009. 82 See the us question to the eu in the wto Committee on Agriculture on 24 September 2009. 83 Seed aid and energy crop compensation (compensation for bioethanol inputs) may also be potentially qualified as input subsidies.

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and Parliament Regulation No 1307/2013 and the preceding Council Regulation No 73/2009 on direct support schemes (expired on 1.1.2015), will be analysed briefly. 5.2.2.2 Single Farm Payment Council Regulation No 73/2009 labelled four main conditions for the eligibility of an individual for the Single Farm Payment: 1) 2) 3) 4)

being a farmer as defined in Art. 2(a) in conjunction with Art. 2(1)(c) and Art. 33(1) of Council Regulation No 73/2009; holding eligible land84 at one’s disposal,85 including leased land plots; activating payment entitlement obtained in the base period (2000–2002) or afterwards under special conditions,86 where the already mentioned eligibility requirements had to be prerequisites for activation;87 respecting cross-compliance requirement as laid down in Art. 4 of Council Regulation No 73/2009, that obliged eligible farmers to satisfy the specified statutory management requirements and the criteria of good agricultural and environmental condition of their land. This element was primarily a control function, but could also be a component of eligibility for land88 or for farmers,89 in cases where the arable land concerned was not used for crop production.

The regulator also set certain minimum thresholds to ensure efficiency of direct aid: – for the amount of direct payments: at least 100 eur of aid had to be claimed;90 84 85 86 87 88

89 90

In the general rule, eligible is any agricultural area that is (predominantly) used for agricultural activity. Art. 34(2)(a) of Council Regulation No. 73/2009. Art. 34 of Council Regulation No. 73/2009. Art. 33(1) and 34(1) of Council Regulation No. 73/2009. Payment entitlements were transferable, i.a. without transfer of land. Art. 43(2) of Council Regulation No. 73/2009. Art. 1(1)(a) of Commission Regulation No. 1120/2009 of 29.10.2009 laying down detailed rules for the implementation of the single payment scheme provided for in Title iii of Council Regulation (ec) No. 73/2009 establishing common rules for direct support schemes for farmers under the common agricultural policy and establishing certain support schemes for farmers (oj L 316 2.12.2009 p. 1) (further Commission Regulation No. 1120/2009). Art. 2(1)(a) of Council Regulation No. 73/2009. Art. 28(1)(a) of Council Regulation No. 73/2009.

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– for an agricultural area: the applicant had to possess at least one eligible hectare,91 – for eligible farmers: individuals whose agricultural activities formed an insignificant part of their overall economic activities or whose principal business was not linked to agricultural activity, were excluded from the scheme.92 The basic rules for single farm payments were developed at the European level, but the burden of administration was put on the national legislators.93 The Member States were also responsible for indication of payment amounts, while respecting the common reduction requirement for per-unit payments through the process of modulation, namely, gradual reduction of all direct payments higher than 5,000 eur by 2012.94 Member States were also entitled to grant specific support, i.a. for environmentally friendly farming,95 improvement of production quality,96 and contribution to risk management.97 Though this additional assistance was not to compensate farmers for respecting their mandatory obligations, particularly cross-compliance requirements.98 This category of aid may trigger application of state aid disciplines, as previewed in rec. 51 of Council Regulation No 73/2009. However, it may be argued that the rule authorizing the increase of direct payments to farmers who have invested exclusively in land parcels, if granted “in accordance with objective criteria and in such a way as to ensure equal treatment between farmers and to avoid market and competition distortion,”99 seems to address the exclusion of negative state aid criteria, namely, selectivity and distortion of competition. The subordination of the direct support measures to the “green box” is not automatic and should be decided on a case-by-case basis. 91 92 93

94 95 96 97 98

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Art. 28(1)(b) of Council Regulation No. 73/2009. Art. 28(2) of Council Regulation No. 73/2009. Member States are charged with administrative control over the aid applications and with transfer of payments. Art. 8, 20(1), 40, Annex iv and viii to Council Regulation No. 73/2009. Art. 7(1) of Council Regulation No. 73/2009. Art. 68(1)(a)(i) and (v) of Council Regulation No. 73/2009. Art. 68(1)(a)(ii) of Regulation No. 73/2009 and Art. 41 of Commission Regulation No. 1120/2009. Art. 68(1)(d) and (e) of Council Regulation No. 73/2009. These payments had to be generally compatible with the Rural Development Regulation No. 1698/2005 which also authorised this kind of support. Art. 39(1) of Commission Regulation No. 1120/2009. Art. 21 of Commission Regulation No. 1120/2009.

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5.2.2.3 Environmental Conditionality of the Single Farm Payment The Guidelines for state aid in agriculture 2007-2013 emphasized that in order to be compatible with the primary legislation, aid had to “contain some incentive element” or “require some counterpart on the part of the beneficiary.”100 Since that incentive effect of direct agricultural payments is highly undesired, inasmuch as it may endanger compliance with para. 6(e) of Annex 2 of the AoA that prohibits requiring any production against support, the provision of some counterpart by a beneficiary seems to have no alternatives. So, the eu used the concept of multifunctionality as the basis for establishing a counterobligation for direct agricultural aid. This step was not unexpected given the fact that the impact of the common environmental policy on the cap has been increasing over the last years, and was found by the ecj to constitute a part of the cap.101 Moreover, Art. 11 of the tfeu102 explicitly demands implementation of environmental protection requirements into eu policies and activities. All these developments are strengthening the idea of environmental crosscompliance of direct decoupled income support103 that was introduced into practice in 2005.104 Cross-compliance requirements are, in fact, a form of guaranteed legal certainty of the state aid granted.105 For that reason, non-­compliance with the cross-compliance requirements, whether due to ­negligence or an intentional act, must lead to reduction of payments.106 In the same vein, prevention of control measures (on-the-spot checks) by a beneficiary shall result in the rejection of an application for aid.107 Council Regulation No 73/2009 identified two cross-compliance components: 100 Para. 15 of Guidelines. 101 C-428/07 Horvath 2009 ecr I-6355. 102 Before 2009 Art. 6 of tec. 103 Rec. 4, Art. 4(1), 6(1) and Annex ii of Council Regulation No. 73/2009. 104 The first experience in application of cross-compliance requirements was rather disappointing, since the Mid-term cap Review reported that national envelopes had been primary spent on direct payments rather than on environmental measures. Danielsen, pp. 143 seq.; McMahon 2007, p. 255. 105 Danielsen, p. 146. See also Art. 4(2) of Council Regulation No. 73/2009. 106 Art. 23–24 of Council Regulation No. 73/2009; C-11/12 Maatschap L.A. en D.A.B. Langestraat 2012 C 98 17. The European legislation does not make a distinction between negligence and intentional acts. See Art. 27–29 Commission Regulation No. 1122/2009 of 30.11.2009 laying down detailed rules for the implementation of Council Regulation (ec) No. 73/2009 (oj L 316 2.12.2009 p. 65). 107 Art. 22(1) of Council Regulation No. 73/2009; C-188/11 Peter Hehenberger 2012 C 200 5.

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– statutory management requirements in the areas of public, animal and plant health, environment and animal welfare,108 and – good agricultural and environmental condition of land.109 It could be argued that the cross-compliance element incorporated into the eu agricultural law reflects the trend for ecologisation of agricultural support widespread within developed countries.110 5.2.2.4 eu Single Farm Payment in Light of the AoA The eu Single Farm Payment is notified to the wto as a “green” subsidy exempted from the Current ams calculation under para. 6 of Annex 2 of the AoA.111 This sub-chapter will analyse whether the measure is compatible with the fundamental criteria and the specific requirements in Annex 2.

Step 1: The Fundamental Requirement of No (or Minimal) Trade Distorting Effect or Effects on Production The compliance of eu direct, decoupled, farm income support with the tradedistortion criterion of para. 1 of Annex 2 of the AoA may be questioned, since the payments could provide an incentive to increase on-farm investment. This should be a direct consequence of farm income stabilisation due to the fact that producer revenues received through direct payments may be more stable than those obtained through the distribution of agricultural goods.112 In the case of the Single Farm Payment, the aid should theoretically have no influence on farmers’ decisions regarding the volume and type of production, but it may still have certain impacts on long-term decisions about the use of

108 Art. 5(1) of Council Regulation No. 73/2009, as well as 18 legislative acts listed in Annex ii to Council Regulation No. 73/2009. 109 Council Regulation No. 73/2009 provided only a general framework for definition of good agricultural and environmental condition of land (Annex iii to Council Regulation No. 73/2009 identified compulsory and optional standards for soil characteristics, level of maintenance and water management), while the Member States were to define minimum requirements (Art. 6(1) of Council Regulation No. 73/2009). 110 E.g. in Canada and Switzerland. Butault, Bureau and others, pp. 113, 119. 111 The eu’s ams in 2007/2008 was declared at the level of 12.4 billion eur (the bound ams of the eu is committed at 72.2 billion eur), while the amount of sps & saps in the same period reached 34.5 billion eur (33.8 million eur in 2010/2011). G/AG/N/EU/10; G/AG/N/ EU/17. In 2012–2014 the pattern was comparable. G/AG/N/EU/26; G/AG/N/EU/34. 112 Groupement Européen d’Intérêt Economique Agrosynergie. Evaluation of Income Effects of Direct Support, Brussels, 2011, p. 5.

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­production factors.113 Nevertheless, the overall effect of decoupled direct payments on the allocation of resources is estimated as negligible.114 On the other hand, the possibility should not be excluded that distribution of decoupled aid among farmers may attract labour from other sectors of the economy, thus increasing agricultural production, although this scenario is rather theoretical. Based on the above considerations, it is presumed for the purpose of this research that the Single Farm Payment fulfils the fundamental requirement of para. 1 of Annex 2 of the AoA. Conformity with this criterion is directly connected with the eu internal regulation: if the Single Farm Payment is non-trade distortive, it is quasi legitimised for exclusion from the eu state aid disciplines, since the element “affecting intra-Union trade” could not be present. This consideration, if interpreted that way for all domestic support, seems too broad given the fact that all national agricultural aids notified to the wto as “green box” measures must be of a non-trade distortive nature, and thus, shall not be reported to the Commission. However, the process of narrowing the scope of agricultural aid (i.a. in Pillar ii) subordinated to the disciplines of Art. 107–109 of the tfeu could still confirm the linkage between para. 1 of Annex 2 of the AoA, and the development of the eu secondary regulation.

Step 2: Chapeau-criteria of Origin of Funding and Prohibition of Price Support Being funded through European and national sources, the Single Farm Payment does not directly tax consumers and seems compatible with the requirement of financing through a publicly funded government programme, as per para. 1 of Annex 2 of the AoA. Furthermore, because the amount of eligible payments to farmers is not connected with world price dynamics, the scheme does not seem to have features of countercyclical support, namely, it does not compensate farmers for drops in market prices and therefore, could not provide any price support.

Step 3: Policy-specific Criteria of Para. 6 of Annex 2 of the AoA Since the eligibility of the Single Farm Payment is determined by agricultural activity (including the “passive” activity of keeping land in good environmental condition) and disposal over agricultural land in the base period, the scheme should not contradict the provisions of para. 6(a) of Annex 2 of the AoA requiring clearly defined eligibility criteria in a fixed base period. In the case under consideration, the legislator chose the criteria of producer or ­landowner status 113 Ibid. 114 Ibid.

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and factor use (agricultural land). Notwithstanding the conformity with international rules, there is an emerging concern over the fairness and efficiency of this approach, because all farms are paid irrespective of their objective need.115 Alternatively, efficiency of income transfers is attainable if payments only go to those actually in need of support, thus reducing income disparities among farmers.116 The decoupling required by para. 6(b), (c) and (e) of Annex 2 of the AoA seems to be attained since all agricultural activities are covered by the scheme, and production is not required to receive a payment entitlement under Council Regulation No 73/2009.117 On the other side, compliance with the requirement in para. 6(d) of Annex 2 of the AoA on non-relation to factors of production employed any year following the base period may be problematic because the aid amount depends on the number of eligible hectares, i.e. on the area of agricultural land that constitutes a factor of agricultural production.118 In this regard, the annual application of aid along with the possibility to review the payment amounts in instances of inheritance and mergers may be of concern.119 In respect to the prohibition of any requirement on production (para. 6(e) of Annex 2 of the AoA),120 the fact that the Single Farm Payment is linked to cross-compliance rules might be interpreted in a manner that the scheme ­requires a certain level of production, since even keeping land in good agricultural condition would require certain work and probably sowing. This ­argument is, in the author’s view, too weak to challenge the whole scheme, 115 Groupement Européen d’Intérêt Economique Agrosynergie. Evaluation of Income Effects of Direct Support, Brussels, 2011, p. 6. 116 Ibid., p. 7. 117 Even farmers not producing agricultural goods, but keeping agricultural land in good condition in accordance with Art. 6 of Council Regulation No. 73/2009 are eligible beneficiaries of Single Farm Payment. 118 See also Swinbank A. The Reform of the eu’s Common Agricultural Policy. In: MeléndezOrtiz R.; Bellmann C.; Hepburn J. (eds.) Agricultural Subsidies in the wto Green Box Ensuring Coherence with Sustainable Development Goals, Cambridge, 2009, pp. 70–85, p. 79. Questioned on this matter, the representative of the eu explained that holding eligible hectares was not the objective criterion in the sense of para. 6(a) of Annex 2 of the AoA, but payment entitlements determined by the payments received in a past fixed base period (Question from Australia submitted to the wto Committee on Agriculture on 2 July 2009). 119 Respectively, Art. 8, 3 and 5 of Council Regulation No. 73/2009. 120 See Panel Report us-Upland Cotton, para. 372 and Appellate Body Report us-Upland Cotton, paras. 343–344.

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as the attainment of good agricultural conditions would indeed be possible without the cultivation of crops. In summary, the Single Farm Payment is generally compatible with the Annex 2 of the AoA provisions and may be duly exempted from the eu Current ams calculations. Certain side effects might endanger the compliance with paras. 6(d) and (e) of Annex 2 of the AoA, but only if sufficient statistical evidence were submitted. 5.2.2.5 The Case of the Single Area Payment Scheme (saps) Before the large eu enlargement in 2005 and 2007, both acceding countries and old members were concerned about the inevitable adjustment of agricultural policies.121 Efficiency was a subject of concern regarding the significant difference between agricultural structures in Western and Eastern Europe, namely, whether high-income support would create incentives for agricultural development in the new Member States.122 The eu, in its turn, was forced to justify its agricultural regulation to afford financing twelve additional Member States with large agricultural sectors,123 as well as provide extensive pre-­ accession agricultural support. In 2002, the Council decided that direct payments based on arable land use, which were applied in the eu that time, would be granted to farmers in the new Member States at a lower level, gradually increasing year by year and aligning with the EU-15 payments by 2013.124 Resistance from the acceding countries led to the introduction of an option for a simplified income support system during a transition period, the so-called Single Area Payment Scheme (saps). The allocation of payment entitlements under this scheme was substantially simpler than with the EU-15 track and was determined through a simple ­division of the national envelopes (total expenditures available for the

121 The new members chose the option (or were forced to do so) of policy penetration in opposite to mutual adaptation, which is claimed to have resulted in an imbalance between the cap and the local needs of rural development. Gordon, Hubbard, p. 4. 122 The main constraints on the side of new Member States were a substantial share of largescale enterprises not immanent for EU-15, low productivity, and lack of administrative experience. See further Gordon, Hubbard, pp. 16, 18, 20, 22, 24. 123 The preparation for the Eastern enlargement was one of the reasons for the cap 2003 reform. 124 The ten years’ transition period was to start by allocating transfers at the level of 25 per cent of direct payments granted in the old Member States in 2004. Commission Issue Paper “Enlargement and Agriculture: Successfully Integrating the New ms into the cap” sec(2002) 95 of 30.1.2002.

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measure) by the square of national agricultural areas.125 Correspondingly, the shift to the new decoupled support mechanism in the course of the cap 2003 reform made the saps obsolete from the very beginning. Despite this, the transition period for the saps, which was initially going to be discontinued in 2009, was extended by the Health Check through the end of 2013.126 Like the Single Farm Payment, eligibility for saps aid is not conditional on an obligation to produce.127 The requirement for the minimum agricultural area in use is 0.3 ha,128 which is less than the general scheme, and will potentially extend the scope of participating farmers. For the purpose of the saps, eligible agricultural land is defined as the part of the “utilised agricultural area” that was maintained in good agricultural condition on 30 June 2003.129 This time reference was not applicable to Bulgaria and Romania because the “good agricultural condition” principle was implemented after the aid transfer. Thus, cross-compliance turned out to be exclusively a control criterion, not a payment prerequisite, in these Member States.130 Elaboration of the minimum criteria establishing good agricultural condition was left to the Member States’ competence analogous to the Single Farm Payment.131 Due to the resulting legal gap, it was reported that saps payments were systematically distributed in favour of unutilised or abandoned agricultural land or land not predominantly used for agriculture,132 as well as to individuals hardly engaged in agriculture.133 All in all, instances of agricultural aid misuse in the new Member States, predominantly Romania and Bulgaria, seem to be rather frequent.134 125 Art. 143(b) of Council Regulation No. 1782/2003 as amended by Council Decision 2004/281/ EC of 22.3.2004; Art. 122(2) of Council Regulation No. 73/2009. 126 Art. 122(3) of Council Regulation No. 73/2009. 127 Art. 124(3) of Council Regulation No. 73/2009. 128 Art. 124(2) of Council Regulation No. 73/2009. 129 Art. 124(1) of Council Regulation No. 73/2009. 130 See Art. 124(4)-(5) of Council Regulation No. 73/2009, Title iii of Commission Regulation No. 1121/2009 (oj L 316 2.12.2009 p. 27). 131 European Union Court of Auditors. The Effectiveness of the Single Area Payment Scheme as a Transitional System for Supporting Farmers in the New Member States, Special report No. 16/2012 of 10.10.2012 (further saps Audit Report), p. 24. 132 saps Audit Report, pp. 28–31. 133 Ibid., pp. 20–23. There were cases of providing aid to state entities for fulfilment of their public functions, e.g. leasing state-owned land, maintaining natural parks. saps Audit Report, pp. 16–18. 134 The share of fraudulent irregularities with agricultural aid in the EU-27 reached 25 per cent of the total fraudulent irregularities documented in 2011, where more than one third of them were ascribed to Romania and Bulgaria. Butault, Bureau and others, p. 10.

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Regardless of the generally positive effects on farmers’ income, it was determined that the saps scheme operated in favour of large-scale enterprises and crop producers, given the specific structure of production in the transitional states,135 and that small farmers and livestock producers received very small amounts of aid.136 Moreover, the agricultural support tends to be “capitalised” in land or land lease prices, i.e. farmers have to pay higher land prices or lease fees because the land plots are covered by the saps.137 This feature could have a negative impact on the effectiveness of this measure and may negatively a­ ffect farm profitability in the region. The impact of saps payments on restructuring and farm efficiency has not been assessed yet. However, it was found that structural weaknesses (attributed in particular to fragmented land ownership and underdeveloped infrastructure) still adversely affect farm income in the new Member States.138 5.2.2.6 saps in the Light of Annex 2 of the AoA saps is notified by the eu as an “other” exempted measure under para. 5 Annex 2 of the AoA.139 The exclusion of saps from the decoupled income support category is explained by its manifest non-compliance with para. 6(a) of Annex 2 of the AoA that demands aid be distributed on the basis of factors in use during the base period. saps, although based on the production factor (agricultural land) and calculated on the basis of national agricultural land in use on a fixed date, does not set forward any eligibility criteria to be fulfilled by a farmer on that date. To be compatible with para. 5 Annex 2 of the AoA, the saps should meet the terms of the Annex 2 fundamental requirements and para. 6(b) to (e) of Annex 2 of the AoA.140 When based on the same considerations laid out for the Single Farm ­Payment, on its surface the saps seems to be in conformity with the criteria of para. 1 of Annex 2 of the AoA. But the fact that producers’ income in the newest Member States is on average substantially lower than farm revenues in the old Member States, and that the saps aims to balance this difference, may somehow change this attitude. The saps implementation in 2004–2010 ­visibly 135 In 2010 98 per cent of the saps beneficiaries received less than 10 000 eur (almost one half of the total payments). At the same time, only 0.2 per cent of the recipients obtained over 100 000 eur representing 24 per cent of the total payments issued. saps Audit ­Report, pp. 34–35. 136 Ibid., p. 8. 137 Ibid., pp. 34–35. 138 Ibid., pp. 30–32. 139 See G/AG/N/EEC/58; G/AG/N/EU/11; G/AG/N/EU/10, pp. 3–4, etc. 140 As required by para. 5 of Annex 2 of the AoA.

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increased farm income in the new Member States.141 Though the average per ha support in the new Member States remains lower than in the EU-15,142 the per beneficiary payment statistics points to a very high level of support in several new Member States.143 Adding the concerns about inequitable aid distribution between farmers favouring large-scale producers and substantial saps budget,144 trade distortive effects of the scheme may not be excluded, but could be effectively assessed only by economic methods. Turning to the specific para. 6 rules, the saps would again generally be eligible on the ground of the same arguments already explained in regard to the Single Farm Payment under paras. 6(c) to (e) of Annex 2 of the AoA. A concern may only emerge in respect to the requirement to decouple support from the type or volume of production. In this context it should be recalled that the dsb found that para. 6(b) of Annex 2 of the AoA was violated because certain crops were excluded from eligibility for payments145 (de jure exclusion). There is no legal norm restricting eligibility for saps on the basis of specific crop production. An increase in the share of grain and industrial crops in the total agricultural production and a decrease of fruits, vegetables and livestock production146 may only be interpreted as a de facto impact of the measure on the specific production. Arguably, given the fact that the wto sets forth obligations on decoupling support in the sense of eligibility, not in the sense of its 141 The overall income per working unit increased by 34 per cent from 2004 to 2009 in the EU12. saps payments may be considered as the most important element of the net farmers’ income (over 50 per cent) in the new Member States. saps Audit, pp. 29–30. 142 Average direct payments per ha in the EU-27 make up around 280 eur, while most new Member States, except Malta, lay below the average. Commission Staff Working Paper “Impact Assessment Common Agricultural Policy towards 2020” sec(2011) 1153 final/2 of 20.10.2011, Annex 3 p. 13. 143 The EU-27 average payments lay at the level about 5 000 eur, where those in the EU-12 are in general twice as low (in 2010 the average saps payment per farm amounted to 1 668 eur), but some states, e.g. Czech Republic, Slovakia and Lithuania grant high and very high average payments (20 000–40 000 eur). Ibid., saps Audit Report, p. 28. 144 21.5 billion eur were allocated for saps payments in total during 2005–2011, including 2.2 billion eur for Romania, 8.6 billion eur for Poland, 3.8 billion eur for Hungary, 2.6 billion eur for Czech Republic. saps Audit Report, p. 45. This amount is, however, lower than the Single Farm Payments granted solely in 2009/2010 (over 31 billion eur). G/AG/N/ EU/10, p. 3. 145 Appellate Body Report us-Upland Cotton, para. 329. 146 Valkanov N. Application of the Single Area Payments Scheme in Bulgaria: Analysis of the Effects, Sofia, 2013. The share of cereals and oilseed in total agricultural production changed slightly in the EU-15 in 2007–2010 comparing to 2000–2003, while the EU-12 demonstrated a 10 per cent growth in these subsectors. lmc International, p. 36.

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effects, it may be suggested that the decoupled element of para. 6(b) of Annex 2 of the AoA should be generally met by the saps. From the perspective of differential treatment for farmers from the new Member States, it may be argued that the saps fit into the scope of regional assistance programmes, in the light of para. 13 of Annex 2 of the AoA. As it is limited to producers in the new Member States whose agricultural sectors are clearly less competitive than those in the EU-15, the saps regulation may satisfy the requirement of a “disadvantageous region” as per para. 13(a) of Annex 2 of the AoA, though neutral and objective criteria to determine the disadvantage of the region in question was not clearly spelled out in the saps regulation. In respect to this argument, it must be reiterated that the new Member States are rather heterogeneous and consist mostly, but not only, of post-­socialist states, and that even among the post-socialist states the problems of agricultural sectors may differ to some extent. Moreover, para. 13(a) of Annex 2 of the AoA demands indication in the respective regulatory rules that the difficulties of the region “arise out of more than temporary circumstances.” In this regard, it could be conceded that the structural disadvantages of post-centrally planned economies cannot be regarded be permanent, as they were caused by relatively short-term measures and have a rather artificial nature. While the decoupled character of the saps should not make it difficult to fulfil the criteria spelled out in paras. 13(b)-(c) of Annex 2 of the AoA, the ­compliance with the requirement on the aid limitation to additional ­producers’ costs or loss of income involved in agricultural production in the disadvantaged areas (para. 13(f) of Annex 2 of the AoA) could not be assessed, since the saps is not directly related to this kind of compensation. But inasmuch as saps aid is linked to the square of agricultural land in use and, thus, to the ­production factor, the payments must be digressive above a threshold level of the factor in order to be in conformity with para. 13(e) of Annex 2 of the AoA. Since no digression requirement has been established, the saps may be ­considered incompatible with this criterion. Last but not least, para. 13(d) of Annex 2 of the AoA requires general eligibility of regional assistance payments for all producers within the region. The fact that eligibility is limited to producers whose land is in good agricultural condition and producers disposing over the minimum threshold means the number of qualified producers is reduced, thereby threatening the ability to fulfil this obligation. All in all, it may be concluded that notification of the saps as a payment under a regional assistance programme in the sense of para. 13 of Annex 2 of the AoA would not be feasible. The same can be said about its qualification as decoupled income support under para. 6 of Annex 2 of the AoA. The ­notification

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of the measure as other “green” direct payments under para. 5 of Annex 2 of the AoA should not raise any major concerns. 5.2.2.7 Direct Payment Schemes in the cap 2013 Reform The general object of the recent reform of the eu direct payment schemes was to attain a more equitable aid distribution among the Member States and farmers. A more targeted character of direct support was envisaged in two dimensions. Concerning provision of public goods, there was a plan to strengthen positive agri-environmental effects and to simplify the cross-compliance procedure. Addressing income support, the new cap aims to support areas with natural and social constraints and to concentrate on aid for active farmers and small producers.147 One result of the 2013 reform is the merger of the Single Farm Payment Scheme and the saps148 into the basic payment scheme generally conditional on holding eligible hectares in 2015 (the first year of enforcement),149 where transitional rules for Bulgaria, Romania and Croatia are expected.150 The new general payment calculation rules are based on the national average (initial unit value)151 and are called to ensure internal convergence of rural income. Information about saps payment misuse in certain new Member States led to the eu-wide introduction of the “active farmer” concept,152 which aimed to “legitimise” direct support. The definition of farmer under the current regulation is given through agricultural activity which may be production or “maintaining an agricultural area in a state which makes it suitable for grazing or cultivation without preparatory action going beyond usual agricultural methods and machineries”153 (replacing the “good agricultural condition” criterion), or, alternatively, minimum activity “on agricultural areas naturally kept in a state 147 Commission Staff Working Paper “Impact Assessment: Common Agricultural Policy towards 2020,” Annex 3, p. 18. 148 The saps is allowed to be proliferated until the end of 2020. Art. 36 of Council and Parliament Regulation No. 1307/2013. 149 Art. 1 and Annex i, Art. 32(2) of Council and Parliament Regulation No. 1307/2013. The prerequisite for eligibility for a basic payment is holding payment entitlements in accordance with Art. 24, 30, 34, 39 and 20(4) of Council and Parliament Regulation No. 1307/2013. 150 Gradual introduction of direct payments in Bulgaria, Romania and Croatia must be implemented. Art. 16–17 of Council and Parliament Regulation No. 1307/2013. 151 Art. 25 of Council and Parliament Regulation No. 1307/2013. 152 Art. 9, 21(1)(a), 4(1)(a) in conjunction with Art. 4(1)(c) and rec. 10 of Council and Parliament Regulation No. 1307/2013; Art. 4(1)(a) of Proposal for direct payment 2011. 153 The corresponding criteria shall be developed by the Member States. Art. 4(2)(a) of Council and Parliament Regulation No. 1307/2013.

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suitable for grazing or cultivation.”154 Thus, preserving good agricultural condition may be replaced by minimal agricultural activities. It remains unclear whether these activities may be linked to production.155 The enhanced approach to eligible persons should most certainly contribute to the efficiency of the aid, but at the same time, it could endanger the decoupled character of the eu direct support schemes as required under paras. 6(b) and (e) of Annex 2 of the AoA. This observation is quite important, since the concept of an “active farmer” is also incorporated into the eligibility criteria of some rural development measures, e.g. support for young farmers, for organic farming, risk management.156 Besides the basic payment scheme, the eu introduced additional mandatory payments (30 per cent of total national envelopes) for eligible farmers against the obligation for observing agricultural practices beneficial to the c­ limate and environment, namely, crop diversification, maintaining existent permanent grassland, or having an ecological focus area on the agricultural area (normally this encompasses certification schemes going beyond the relevant mandatory standards).157 Since the scheme’s qualification as environmental payments under para. 12 of Annex 2 of the AoA would not be possible due to the measure’s lack of apparent compensatory character and, correspondingly, the resulting non-compliance with para. 12(b) of Annex 2 of the AoA, the only option for putting the measure into the “green box” would be classification as decoupled income support or other direct payments. In this regard, the condition on crop diversification may create a major obstacle. Thus, Art. 44 of Council and ­Parliament Regulation No 1307/2013 prescribes that eligible crop diversification should include the growing of at least two or three different crops, while the share of one of them is not to exceed 75 per cent of the total land plot. This provision could be interpreted as a production requirement in the sense of paras. 6(e) and (b) of Annex 2 of the AoA, as it directly calls for crop rotation which implies the growing of crops.158 On the other hand, crop diversification is an option within supported ecological practices. The other models described 154 The definition “minimal activity” must be established by the Member States. Art. 4(2)(b) of Council and Parliament Regulation No. 1307/2013. 155 Further delegated acts are expected to clarify this issue. Art. 9(5) in conjunction with Art. 70 of Council and Parliament Regulation No. 1307/2013. 156 Art. 19(4), 29, 36 of Council and Parliament Regulation No. 1305/2013. 157 Art. 43–47 of Council and Parliament Regulation No. 1307/2013. 158 Rec. 26 of Proposal for a Regulation of the European Parliament and of the Council establishing rules for direct payments to farmers under support schemes within the framework of the common agricultural policy com(2011) 625 final/2 of 19.10.2011 (further Proposal for direct payments 2011).

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by Art. 43(2) and (3) of Council and Parliament Regulation No 1307/2013 should not involve any mandatory production. It may be argued that environmental practices could not be equated to “types of production” in the sense of para. 6(b) of Annex 2 of the AoA, but may be defined rather as “methods of production.” Hence, the process of “greening” should not, in general, create major constraints for exempting the eu direct decoupled support from the Current ams calculation. At the same time, optional coupled support eligible for specific agricultural production, i.a. cereals and oilseed production in the disadvantaged regions,159 could hardly be reconciled with the decoupling requirement for regional assistance aid as defined in para. 13(b) of Annex 2 of the AoA. It would not permit notification of the scheme as another exempted decoupled measure under para. 5 of Annex 2 of the AoA, either. By the same token, the “blue box” classification is rather questionable inasmuch as the eligibility for coupled support depends on its necessity to create an incentive for maintaining production levels in the sectors or regions concerned.160 The foreseen progressive reduction and capping of support for large beneficiaries161 is expected to not only contribute to fairness of income distribution, but may also, presumably, decrease the risk of a measure’s trade-distortion.162 At the same time, the simplified aid scheme for small farmers163 that provides the possibility of a lump sum payment that would replace all direct payments and ease farmers’ obligations related to “greening,” cross compliance and controls164 should be verified on its possible trade-distortive impact due to a large number of small farmers in the eu. In summary, the eu post-reform system of direct payments seems to blur the line between Pillar i and Pillar ii of the cap, since several rural development schemes (support for young farmers, for farmers in areas with natural constraints, organic farming etc.)165 are now included in Pillar i. On the other hand, the new regulation should contribute to the flexibility between the Pillars, given that, as already indicated, the Member States may offset certain share of their national ceilings to rural development programmes.166 159 Certain amount of coupled support may be authorised under Art. 52(2) in conjunction with Art. 55 of Council and Parliament Regulation No. 1307/2013. 160 Art. 52(5) of Council and Parliament Regulation No. 1307/2013. 161 See rec. 13–14, 23 and Art. 7, 11 of Council and Parliament Regulation No. 1307/2013. 162 Proposal for direct payment 2011, p. 8. 163 Art. 61 of Council and Parliament Regulation No. 1307/2013. 164 Art. 61 seq. of Council and Parliament Regulation No. 1307/2013. 165 E.g. Art. 43, 48, 50 of Council and Parliament Regulation No. 1307/2013. 166 Art. 14 of Council and Parliament Regulation No. 1307/2013.

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Examples of Domestic Support “Greening” within Pillar ii

5.3.1 Investment Aid The eu provides substantial investment aid to agricultural producers that is notified to the wto under para. 11 of Annex 2 of the AoA.167 This category of domestic support is granted through rural development instruments, as well as the through the schemes authorised by the block exemption regulation for smes. Before the latest reform, Art. 26(1) of Council Regulation No 1698/2005 and Chapter IV.A. of the Guidelines 2007 envisaged the possibility for investment aid to agricultural holdings within Pillar ii, provided the aid was directed to improving the overall performance of the agricultural holding and was limited to primary production.168 Investment aid for agricultural processing and marketing was justified with certain restrictions.169 The new Rural Development Regulation provides a single track of agricultural investment aid: investment in physical assets.170 Not only producers’ activities, but also the size of production are deciding factors in obtaining investment aid. Guidelines 2007 established differential treatment between smes and large companies.171 This approach was further developed in the special rules for smes in agriculture that are today entitled to receive additional investment support on the conditions laid down in Art. 14 of Commission Regulation No 702/2014.172 Limitation of the scope of production grown by beneficiaries is permitted only for either the entire plant or animal sectors, as well as when a particular segment faces overcapacity or is lacking a market outlet.173 167 On average, around 6 billion eur (1/10 of the total eu “green box” and 1/5 thereof if direct payments are deducted). G/AG/N/EU/10, p. 4; G/AG/N/EU/17, G/AG/N/EU/26, G/AG/N/ EU/34. 168 Para. 27 of Guidelines 2007. 169 Chapter IV.B of Guidelines 2007 and Art. 26 of Council Regulation No. 1698/2005. smes active in processing and marketing are eligible for the general block exemption track. Rec. 11–12, Art. 15 seq. of Commission Regulation No. 800/2008. 170 Art. 17 and 45 of Council and Parliament Regulation No. 1305/2013. 171 smes are entitled for state aid for purchase of second-hand equipment both for ­production and processing, where large companies should only receive investment aid for purchase of new equipment. Paras. 27(h), 39, 41(f) of Guidelines 2007. 172 The aid is also limited to 40 per cent of investment under the general rule, and the overall payment caps are set. Earlier Art. 4(2) of Commission Regulation No. 1856/2006. 173 Art. 14(10) of Commission Regulation No. 702/2014 (earlier Art. 4(7) and 4(10) of Commission Regulation No. 1856/2007 granted an exclusion to the milk substitutes sector).

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Besides the restrictions for eligible aid recipients, there are two other important principles of investment aid provision. First, retroactive aid is not authorised. This is to ensure that only necessary aid is granted and incentives to develop certain activities are supported.174 The other principle is ­self-participation in investment, i.e. support is capped at a fixed share of farmer’ investment expenditures.175 Turning to the analysis of the eu approach to agricultural investment aid in the light of para. 11 of Annex 2 of the AoA, it could be presumed that the criteria of public funding and absence of price support are objectively satisfied. It is questionable whether the fundamental criterion of no or minimal trade distortion and no effect on production is fulfilled, since innovation and the modernisation of assets is an aim of most investments and may potentially lead to a certain increase in production. In this regard, this aid may still remain the least trade distortive, since the compulsory upper limitation of payments was calculated by the Commission for the entire scheme. Objectively demonstrated structural disadvantages as required under para. 11(a) of Annex 2 of the AoA may be assumed for smes and for agricultural producers in deprived regions or in areas with natural handicaps. Though any disadvantages of large agricultural producers, including processors, are not clearly defined in the European regulation. Limiting eligible state aid exclusively to horizontal aid for agricultural producers who are not smes, pursuant to Art. 1(1) of Commission Regulation No 702/2014, should rectify this concern. In the same vein, the decoupling elements (paras. 11(b), (c) and (e) of Annex 2 of the AoA) seem to be respected. The prohibition of some types of production for smes under Commission Regulation No 702/2014 (No 1857/2006) may be eligible under para. 11(e) of Annex of the AoA. As for mandatory aid limitation in time required by para. 11(d) of Annex 2 of the AoA, that is directly established only for processing and marketing smes in the eu.176 Nevertheless, if duly enforced, the requirement that aid is to be provided only for eligible investments and must be limited to the total sum of the investment, may suggest compliance with this rule. The latest argument is strengthened by the regulatory novelty that from 2014 onwards the 174 Rec. 23 to Commission Regulation No. 702/2014; paras. 66 seq. of Guidelines 2014 (para. 24 of Guidelines 2007). 175 For instance, the Guidelines 2007 limited maximal eligible aid to 40 per cent of the total sum of investment in the general case and up to 75 per cent in certain specific cases. Para. 27 (c) of Guidelines 2007; similarly, Art. 14 seq. of Commission Regulation No. 702/2014 and paras. 135 seq. of Guidelines 2014. 176 Art. 6 of Commission Regulation No. 800/2008 sets aid caps “per investment project.”

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maximal duration of support for investment in farm measures taken to c­ omply with mandatory requirements is restricted to a period of twelve months from the date of their start of being mandatory.177 While it satisfies the timing ­requirement, this provision may be too broad to embrace only structural disadvantages, if the link between every mandatory measure and the disadvantage is not demonstrated. In the same vein, the obligatory restraint of aid amount to the necessary compensation for structural disadvantage under para. 11(f) of Annex 2 of the AoA may become rather controversial in the context of the eu investment aid instrument. As already mentioned in Sub-chapter 3.1.3.3. (e), there is no wto definition of “structural disadvantage” and, respectively, no common method to calculate compensation for the economic effect of such disadvantage. Due to such a broad policy space, the eu rules for provision of farm investment support may very much be able to fulfil this requirement, presuming limits on aid amounts set up by the European legislator were calculated to correspond to this kind of compensation, e.g. maximal caps contained in Annex ii to Council and Parliament Regulation No 1305/2013. Nevertheless, a counterargument can be found easily by pointing to a clear and defined focus in the incumbent rules not on a structural disadvantage, but rather on improving overall performance and sustainability in the sector.178 With the above mentioned in mind, it can be concluded that investment aid in the eu granted between 2006–2013 to agricultural producers, as well as corresponding future payments, may in principle qualify as domestic support exempted from the calculation of the Current ams under Annex 2 of the AoA. 5.3.2 Risk Management Instruments of the cap Replacing price support mechanisms with decoupled direct payments in the eu basically replaced the burden of price risk management to farmers.179 With this in mind, it is suggested that market instruments, like insurance, must help agricultural producers in mitigating their production and income losses. However, as already discussed in Sub-chapter 3.1.3.3. (d), since most agricultural risks normally affect a large number of farms (the phenomenon of systemic risk), insurance companies have to buy expensive reinsurance to 177 Art. 17(3) of Council and Parliament Regulation No. 1305/2013. 178 Art. 17(1) of Council and Parliament Regulation No. 1305/2013. 179 Communication from the Commission to the Council on risk and crisis management in agriculture com(2005) 74 final of 9.3.2005, pp. 1–2.

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stay in this are of the market. The resulting unwillingness of private insurance companies to actively work in the sector may be perceived as a market failure by a state. A widespread governmental response to this issue is the practice of publicly funded ad-hoc disaster payments that are still extensively used in the eu.180 Not being the first-best option, it is claimed that they further hinder development of agricultural insurance in the eu,181 and consequently push governments to subsidise agricultural insurance.182 Addressing the above pitfalls of agricultural risk management, the Commission proposed in the mid-2000s the following options to replace ad-hoc governmental emergency measures: – supporting insurance against natural disasters within Pillar ii (financial participation in farmers’ premium payments); – promoting mutual funds that are non-profit in nature or are partially owned by the participants; – providing basic coverage against income crises; – designing subsidised schemes for reinsurance.183 As a result of the discussion on risk management in agriculture, it was proclaimed to reduce the use of deficiency payments in the eu. This obsolete instrument was expected to be substituted by market tools, unless a Member State could prove that “despite all reasonable efforts” an “affordable” insurance for a given type of occurrence or product was not available.184 Notwithstanding these terms, the granting of deficiency payments for agricultural producers remains, to date, justifiable under 107(2)(b) of the tfeu. However, the notions “natural disaster” and “exceptional occurrence” must be interpreted

180 Some eu Member States prohibit ad-hoc payments or make them conditional on partial insurance. Diaz-Caneja and Conte, p. 12. 181 Only 23 per cent of the eu crop production is insured comparing to 45 per cent in the us at the end of 2000s. The eu insurance market is claimed to be not particularly competitive. Ibid., pp. 10–12; 14. 182 In total, 32 per cent of agricultural insurance provided in the eu is subsidised by the states, with the largest shares granted by Portugal and Italy. Ibid., p. 15. 183 Communication from the Commission to the Council on risk and crisis management in agriculture, pp. 6–8, 10. 184 Para. 125(e) of Guidelines 2007.

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restrictively,185 and shall be distinguished from “adverse weather conditions.”186 The latter may also be categorized as natural disasters provided that the damage caused amounts to no less than 30 per cent threshold of normal production.187 In this case, direct aid must be authorised on the basis of Art. 107(3)(c) of the tfeu.188 It must be noted that the eu interpretation of what constitutes a natural disaster is narrower than the AoA approach laid out in para. 8(a) of Annex 2 of the AoA, which also includes diseases and pests. Simultaneously, adverse climate events that cause substantial losses are the prerequisite for deficiency payments under the eu regulation, and that could be too broad to fall within the scope of the AoA definition for “natural or like disasters.” Moreover, the eu threshold for production losses set on the 30 per cent level of “normal p­ roduction” should not necessarily coincide with “the average of production in the preceding three-year period or a three-year average based on the preceding five-year period, excluding the highest and the lowest entry” as required by para. 8(a) of Annex 2 of the AoA, unless deliberately interpreted in that way. The standpoint taken in Art. 1(16) of Commission Regulation No 702/2014 resolved this issue by harmonizing the eu norm with the wto rules. The eu secondary regulation is not clear on whether a formal recognition that a natural disaster is occurring or has occurred is mandatory (however, that is compulsory under para. 8(a) of Annex 2 of the AoA). A broad ­interpretation of para. 123 of Guidelines 2007 would permit the conclusion that such ­recognition (“the occurrence has been demonstrated”) is obligatory to be eligible for d­ eficiency payments. This conclusion may be also affirmed for the smes-­related support schemes.189 If all prerequisites are fulfilled, the Commission may authorise compensation of up to 100 per cent of material damage incurred (normally calculated at the level of an individual beneficiary). In order to avoid overcompensation, any payments due – insurance premiums, for example – should be deducted 185 As a general rule, the Commission does not accept that outbreaks of animal or plant diseases can be considered to constitute natural disasters or exceptional occurrences. Paras. 121–122 of Guidelines 2007. At the same time, para. 132 seq. of Guidelines 2007 and Art. 10 of Commission Regulation No. 1857/2006 authorised compensations by the damages caused by diseases and pests. 186 Para. 125(a) of Guidelines 2007. Similarly, Art. 1(9), (16) and Art. 25 of Commission Regulation No. 702/2014. 187 Art. 1(16) of Commission Regulation No. 702/2014 (para. 125(a)–(d) of Guidelines 2007). 188 Art. 25(1) of Commission Regulation No. 702/2014 (para. 125(a) of Guidelines 2007). 189 Art. 25(2)(a) of Commission Regulation No 702/2014 (Art. 11(7) of Commission Regulation No. 1857/2006).

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from the amount of aid.190 These provisions successfully address the requirements of paras. 8(c) and (e) of Annex 2 of the AoA. The rule that losses shall be compensated at the soonest possible time after the occurrence of an adverse event seeks to avoid the effect of operating aid191 and should basically meet the requirements of paras. 8(b) and (d) of Annex 2 of the AoA. Nonetheless, establishing causation between damages and loss may be rather complicated. On that ground, the Commission called to avoid compensating farmers for the full amount of damages incurred as an incentive to mitigate individual losses and to encourage agricultural producers to conclude insurance contracts wherever possible.192 In response to the moral hazard issue, deficiency payments for smes authorised by the block exemption regulation are capped at 80 per cent of reduced sales income resulting from the adverse climate event.193 In summary, in spite of the general conformity of eu rules on agricultural deficiency payments with the international commitments, from the economic point of view, the shift for governmental insurance programmes would be a better response to the farmers’ co-responsibility problem.194 These measures were available under the pre-reform regulation. The Guidelines 2007 allowed insurance subsidies for only small and middle-size producers active in agricultural primary production.195 Art. 11 of Commission Regulation No 1857/2006 provided particular conditions for exemption of this measure from the state aid disciplines, namely, it set forth compensation caps of 80 per cent of the insurance premium costs for coverage against natural disasters196 and 50 per cent if the coverage was extended to other losses caused by climatic events and/or losses caused by animal or plant diseases.197 The first category of insurance, if observed in the sense of Annex 2 of the AoA, could be associated with the measures foreseen under para. 8 of Annex 2 of the AoA, and the second one with those exempted under para. 7 thereof. At first sight, the upper limitations for compensation established by the eu may not be effectively 190 Art. 25(9), (10) of Commission Regulation No. 702/2014 (para. 123 of Guidelines 2007). 191 The limit is set for three years. Art. 25(6) of Commission Regulation No. 702/2014 (para. 119 of Guidelines 2007). 192 Para. 125(d) of Guidelines 2007. 193 Art. 11(2) of Commission Regulation No. 1857/2006. 194 In case of negative consequences of farmer’s imprudent production method choice or product choice, the public cost should not bear farmer’s losses. Paras. 112, 115 of Commission Communication on risk and crisis management in agriculture. 195 Para. 139(b) of Guidelines 2007. 196 Art. 12(2)(a) of Commission Regulation No. 1857/2006. 197 Art. 12(2)(b) of Commission Regulation No.1857/2006.

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estimated under the wto rules, since the AoA focuses in paras. 7(a)-(b) and 8(a)-(b) of Annex 2 of the AoA on compensation for the extent of loss, and Commission Regulation No 1857/2006 establishes compensation for ­insurance premiums (emphasis on mitigation of loss). On the other hand, insurance premiums are nothing else but payments for coverage of losses. Then the upper limits established by the eu should be compliant with the provisions of para. 7(b) and 8(b) of Annex 2 of the AoA (the caps at 70 per cent of ­producers’ income and 100 per cent of the damages). Despite this reconciliation, Commission Regulation No 1857/2006 did not seem to address other requirements of paras. 7 and 8 of Annex 2 of the AoA. Therefore, if the Member States had not harmonised their regulatory schemes with the Annex 2 requirements by designing compensation for insurance subsidies, these measures, although exempted from the European state aid disciplines, should have been included into the eu Current ams, since they would have subsidy features (financial participation by a government in providing services, where a benefit for producers was conferred through a price reduction of insurance premiums). Another legal base for insurance subsidies in the eu was the option for specific support described in Council Regulation No 73/2009.198 According to Art. 70 of this legal act, a financial contribution for insurance premiums could be granted directly to a farmer for economic loss caused by an adverse climatic event. Thereby, the measure had potential to qualify as a green wto subsidy under para. 7 (income insurance) or para. 8 (crop insurance) of Annex 2 of the AoA. This argument was supported by the fact that the threshold of losses caused by adverse effects established by Art. 70(2) of Council Regulation No 73/2009 referred to loss of production and was harmonised with para. 8(a) of Annex 2 of the AoA. By the same token, Art. 70(4) of Council Regulation No 73/2009 required recognition of an adverse event in the same way as para. 8(a) of Annex 2 of the AoA did, while Art. 70(5) of Council Regulation No 73/2009 prohibited overcompensation199 in the sense of para. 8(c) of Annex 2 of the AoA. Since the governments were supposed to participate in insurance premiums but not in the coverage payments, the issue of loss causation had to be dealt with by private insurance entities on market-based conditions. Thus, the compliance 198 Member States were free to decide to use up to 10 per cent of their national ceilings for specific support. Art. 69(1) in conjunction with Art. 68(1), 70(1) of Council Regulation No. 73/2009. 199 This direct prohibition was strengthened by limitations of the insurance contract duration, which was normally not to exceed one year. Art. 47(3) of Commission Regulation No. 1120/2009.

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with paras. 8(b) and (d) of Annex 2 of the AoA was deemed to be secured. In this regard, it could be assumed that the crop insurance subsidy authorised by Council Regulation No 73/2009 was generally compatible with para. 8 of Annex 2 of the AoA. Even so, restricting the financial contribution granted per farmer to 65 per cent of the insurance premium due200 was much more limited in comparison to the 100 per cent compensation allowed by para. 8(c) of Annex 2 of the AoA. This cap made the limitation closer to the income insurance rules laid down in para. 7(b) of Annex 2 of the AoA. Specific support within the national ceilings could also be spent on financial contributions to mutual funds, as ruled by Art. 71 of Council Regulation No 73/2009. Those measures had features of income insurance support. Since the compensation level was confined to 65 per cent of possible financial contributions to farmers, harmonisation of the scheme with the requirements of para. 7 of Annex 2 of the AoA is supposed to be attained.201 The shift from deficiency payments to insurance subsidies may contribute to an overall economic efficiency, but in respect to compliance with the wto norms, deficiency payments would be more favourable for the eu, since they easily fall within the scope of para. 8 of Annex 2 of the AoA. As for the insurance schemes prior to and after the implementation of Art. 70 of Council Regulation No 73/2009, the eu insurance subsidies were notified to the wto as the non-product specific Current ams granted from national sources.202 Payments for relief from natural disasters are, however, still provided at the much higher level, but fall within the “green box.”203 Within the eu, this instrument was transferred to Pillar ii.204 Additionally, the 2013 reform launched support for preventive i­nvestment measures aiming at reducing the impact of adverse weather effects in all

200 Art. 70(3) and 70 (6) of Council Regulation No. 73/2009. 201 Art. 71(1) of Council Regulation No. 73/2009 comparing to para. 7(d) of Annex 2 of the AoA. The compliance with this provision could be possible, if interested Member States incorporated the corresponding requirements. 202 Their amount was notified to the wto at the level of 210 million eur in 2007/2008 and slightly above 400 million eur in 2009–2011, and almost reached 700 million eur in 2013/2014. G/AG/N/EU/10; G/AG/N/EEC/68; G/AG/N/EU/17; G/AG/N/EU/34. 203 In 2007/2008 above 0.9 billion eur and in 2009/2010 almost 1.3 billion eur were transferred both from the eu and national sources. G/AG/N/EU/10; G/AG/N/EEC/68. In 2012– 2014 the payments were granted at the level between 0.6 and 0.8 million eur. G/AG/N/ EU/26; G/AG/N/EU/34. 204 Art. 36–37 of Council and Parliament Regulation No. 1305/2013; Art. 25–28 of Commission Regulation No 702/2014.

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forms205 (presumably it should be notified under para. 11 of Annex 2 of the AoA) and for investment into production restoration after these events. The latter is expected to be reported under para. 8 of Annex 2 of the AoA. This conclusion is based on the fact that Art. 18(3) of Council and Parliament ­Regulation No 1305/2013 harmonises this measure with the criteria of para. 8(a) of Annex 2 of the AoA and Art. 18(4) of Council and Parliament R ­ egulation No 1305/2013, respectively, with those of para. 8(d) of Annex 2 of the AoA. ­Conversely, the proliferation of investment support to all adverse climate conditions and not just natural disasters, may make it incompatible with the r­elevant AoA requirements inasmuch as para. 8 of Annex 2 of the AoA barely concerns natural disasters, while para. 7 of Annex 2 of the AoA deals with loss of income resulting from other adverse climate events, at the same time as Art. 18(4) of Council and Parliament Regulation No 1305/2013 directly prohibits compensation for income loss. Similarly, the model of government participation in mutual funds is designed under the incumbent regulation in the sense of para. 8 of Annex 2 of the AoA. At the same time, income stabilisation through mutual funds206 is a measure that could, under further conditions, satisfy the requirements of para. 7 of Annex 2 of the AoA. However, only one of the AoA mandatory criteria, namely, triggering volumes of production loss, is included into the legal prerequisites for receiving this kind of aid. Another alternative risk management instrument in the eu targets mitigation of loss through prevention of specific pests (diseases) and constitutes an in-kind compensation of up to 100 per cent of the costs spent for plant protection products, tests, and the destruction of plants. The aid may be conferred to smes, although with a time restriction.207 This support may not qualify as direct payments to producers under paras. 5 to 13 of Annex 2 of the AoA, but rather as general services of pest and disease control in the sense of para. 2(b) of Annex 2 of the AoA. Since the compensation is only eligible for a limited group of pests (where control costs are not to be carried out by agricultural holdings) and for a limited period of time, the criterion on minimal trade ­distortions should be fulfilled, provided that all affected producers have a right to this aid. This short overview of the risk management state aid available in the eu agricultural sector shows that there is still no effective eu-wide instrument capable of responding to both economic and legal challenges. As of now, it can 205 Art. 18(1) of Council and Parliament Regulation No. 1305/2013. 206 Art. 39 of Council and Parliament Regulation No. 1305/2013. 207 Art. 26 of Commission Regulation No. 702/2014 (Art. 10 of Commission Regulation No. 1857/2006).

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be concluded that governmental insurance support does not seem to be an accurate instrument for tackling the risk management problem in agriculture. With a view to create incentives for private initiatives in agricultural risk management, a valuable substitute for state participation in agricultural insurance may be index insurance. This tool is very close to financial derivative contracts and is expected to be operative against systemic risks. Hence, index insurance may contribute to the development of an agricultural insurance market and may make insurance services more accessible and affordable for small producers.208 But given the fact that index-based products are considered to be best suited for homogeneous areas,209 coverage of the entire eu territory may be neither profitable nor operable without public financial support. Nonetheless, state participation in index insurance schemes in the “green” form would be rather controversial for several reasons. First of all, index insurance does not foresee compensation for actual losses, but for losses indicated by a parameter. Thus, a farmer that did not suffer from a loss could potentially benefit from the refunds. For that reason, index insurance may not be in compliance with the provisions of paras. 8(b) to (d) of Annex 2 of the AoA, nor with the requirement of a formal governmental recognition of a natural disaster as per para. 8(a) of Annex 2 of the AoA.210 From another point of view, index insurance schemes, which are based on producers’ income, may have a higher chance of being recognised as compatible with para. 7 of Annex 2 of the AoA. They may be regarded as an effective alternative to countercyclical income support (widespread in the us), which would fail to fulfil the decoupling criterion of para. 7(c) of Annex 2 of the AoA, and may be distortive. The incumbent eu regulation introduced a combination of the index approach and the mandatory requirement of official adverse climatic event recognition (Art. 37(1),(2) of Council and Parliament Regulation No 1305/2013). At first sight, the scope of the “insured disaster” may seem to be larger than the limits of para. 8 of Annex 2 of the AoA, but the definition of “adverse climatic event” includes only weather conditions that can be assimilated to a natural disaster.211 The other provisions on the new insurance subsidy mechanism in the eu are duly harmonised with para. 8(b)-(e) of Annex 2 of the AoA.212 208 European Commission. Agricultural Insurance Schemes, 2008, pp. 101–102. 209 Ibid. 210 Ibid. 211 Art. 2(1)(h) of Council and Parliament Regulation No. 1305/2013. The eu definition of an adverse climatic event which can be assimilated to a natural disaster (Art. 3(b) of Single cmo Regulation 2013) is harmonised with the requirements of para. 8(a) of Annex 2 of the AoA on the threshold of loss. 212 Art. 37(1),(4) and Art. 36(4) of Council and Parliament Regulation No. 1305/2013.

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The recent developments allow for the conclusion that the eu is moving towards the general replacement of deficiency payments to agricultural producers with insurance subsidies. The latest insurance instrument should decouple insurance subsidies and switch them from non-product specific ams to the “green box.”

Conclusion on Chapter 5

The evolution of the eu grain policies illustrates that price support must be one of the key factors in creating incentives for export subsidies. Elimination or even a limited use of this measure is supposed to help balance out internal and external prices. That should normally remove the need for any kind of export measures. On the other side, the cap history also proves that successful implementation of the AoA disciplines will not necessarily lead to agricultural support reduction, but may be pursued by switching to the safe harbour of ams exemptions authorised by Annex 2 of the AoA. The eu aid for grain production acquires “greening” features inherent to all European agricultural policies. Where the Single cmo regime (Pillar i) is still partially based on market support (public interventions), it merely plays the role of a safety net and should not create price distortions on the grain market. The largest share of eu agricultural aid is, however, channelled through the system of direct payments to producers, mostly in the form of decoupled income support (Pillar i) notified to the wto under para. 6 of Annex 2 of the AoA. The key Pillar ii direct payments embrace investment aid (reported under para. 13 of Annex 2 of the AoA), deficiency payments (eligible under para. 8 of Annex 2 of the AoA), other payments (notified under paras. 5 and 6 of Annex 2 of the AoA), as well as regional and environmental payments (eligible under paras. 12–13 of Annex 2 of the AoA).213 213 G/AG/N/EU/10; G/AG/N/EU/17; G/AG/N/EU/26; G/AG/N/EU/34.

chapter 6

Interplay between State Support for Grain in Ukraine and International Trade Commitments

Scope of the Chapter

Based on the analysis of the international legal framework executed in Chapters 3 and 4, which may influence domestic agricultural policy space, the system of Ukrainian agricultural support will now be examined. Both direct and indirect agricultural support tools used in Ukraine will be studied, where only grain-specific tools, including measures applicable for the entire agricultural sector will be taken into consideration. The specific case of “external agricultural support” will be examined separately in Sub-chapter 6.8. The identified policy instruments will be analysed in the light of their compliance with the wto/AoA domestic support disciplines and will be, where viable, compared to the eu practice. The overall task of this chapter is to discover existing and possible conflicts of domestic grain support mechanisms with Ukraine’s international commitments, to identify internal enforcement drawbacks, and to provide potential solutions (Sub-chapter 6.9.). 6.1

Reference Point: Ukraine’s wto Domestic Support Commitments

Ukraine’s negotiations for accession to the wto were among the longest in the history of the organisation.1 One of the key reasons for the delay in negotiations was, apparently, Ukraine’s approach to agricultural policies, which is highly criticised for its protective character.2 By the accession Ukraine fixed its Bound ams at the level of 3 043 billion uah3 with the base period of 2004–2006,4 while no reduction commitments 1 Ukraine applied for wto accession in 1994 and became a member only in 2008. Ukraine’s wto Accession Protocol of 5.4.2008, ratified by the Parliament by Law No. 250-VI of 10.4.2008. 2 Strubenhoff, Movchan, Buriakovski, p. 40. 3 At the time of the accession, this sum equalled around 610 million usd, nowadays due to impressive currency devaluation this amount seems to be miserable. See Accession Schedule clxii WT/ACC/SPEC/UKR/1/Rev. 12. 4 Initially Ukraine was searching the base period 1994–1996 to increase the Bound ams commitment level. cmu Order No. 10-p of 12.1.2006. Under that scenario the Total Base ams would have been set at the level three times higher. © koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004353695_008

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for domestic support were taken.5 The ams de minimis is set at 5 per cent, ­making it equal to that of developed countries. Thus, Ukraine, although a ­developing country within the World Bank classification,6 opted out from the differential treatment clause authorised by Art. 6.2. of the AoA. It seems that the agricultural commitments in the case of Ukraine were a kind of a trade-off for better conditions for other trade sectors. This strategy is rather uncommon for large agricultural exporters and for transition states.7 Besides the trade-related commitments, Ukraine also confirmed its priorities for agrarian reform, outlined its preferred policy instruments, i.a. provision of low interest credits to agricultural enterprises and legal development for agricultural insurance instruments; promotion of investment, innovation and technologies by favourable tax and business environment; and expanded application of rural development measures and measures to support exports of agricultural products.8 These aspects are mostly covered by the domestic support pillar of the AoA. Last but not least, Ukraine also committed to harmonise domestic trade laws with wto rules.9 6.2

Overview of State Support for Grain in Ukraine

Due to the general pitfalls of agricultural production (discovered in Chapter 1), and the underdevelopment of market infrastructure in Ukraine as a consequence of the incomplete transition process (established in the conclusion to Chapter 2), the agricultural sector of Ukraine requires governmental support. Agricultural support policies in Ukraine have had different patterns over the course of the last two decades. Before 1991, a high support level persisted (on average, 72 per cent of the total transfers to producers were subsidised)10 supplementing state price control and trade monopolisation. The first years of transition (1992–1996) were characterised by unstable, mostly negative, 5 6

See Ukraine’s Accession Schedule clxii. Ukraine is classified as low-middle-income economy. url: http://data.worldbank.org/ about/country-classifications. 7 For example, Russia committed to increase its Bound ams during the first membership years with further gradual reduction in the subsequent years. Since country’s “green box” measures hardly attain one half of the Bound ams, Russia basically acquired a carte blanche for providing highly distortive non-tariff protection for the agricultural sector in the first years in the wto. WT/MIN(11)/2/Add.1. 8 Para. 378 of WT/ACC/UKR/152. 9 Ibid. 10 oecd; World Bank. Achieving Ukraine’s Agricultural Potential, Washington, 2004, p. 74.

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­agricultural support (taxation).11 In parallel, trade liberalisation pushed producers’ prices beneath world levels. As a countermeasure, a turn to positive, but lower, domestic support took place.12 However, due to lacking budget ­capacities for ensuring direct support, the government made use of fiscal subsidies and import protection, seeking insulation of the domestic market. Since the early 2000s, agricultural support in Ukraine has been expanding,13 accompanied by a simultaneous gradual reduction of import barriers. The next sub-chapters will scrutinise the current policy instruments, which may have the potential to affect producers’ prices in Ukraine. All policy tools may be divided into three groups: price policies, quasi income support and indirect income support for producers. Price policies can be broken down into two forms: support for producers’ prices and support for keeping consumer prices low.14 Quasi income support for the purpose of this research refers to direct subsidies whose goal is to ensure input purchases by producers. The third instrument – indirect support – embraces diverse favourable taxation methods. 6.3

Price Support15

6.3.1 Direct Support Until 2005, world grain prices tended to be low and the Ukrainian government was seeking to increase farm prices. For that reason, in 2003 it launched a direct income support programme for agricultural enterprises in the form of compensation for planted cereals.16 Before Ukraine’s wto accession, winter and summer grain was eligible for these direct payments.17 However, they ­covered only 6 per cent of total production costs in 2006–2008, and thus, were 11 Ibid. 12 Strubenhoff, Movchan, Buriakovski, p. 45. 13 See e.g. fao Investment Centre; ebrd Cooperation Program. Ukraine: Grain Sector Review and Public Private Policy Dialogue, Rome, 2010 (further fao, ebrd 2010), p. 18. 14 The AoA disciplines associate price support with the regime of administrated prices supporting producers’ price. However, this sub-chapter will operate with the oecd approach to market price support (see Sub-chapter 3.1.3.3. (f)). 15 The term “price support” for the purpose of this research shall mean policy mechanisms which target price development and may be oriented to both reduction and increase of prices. 16 cmu Regulation No. 1589 of 8.10.2003. 17 cmu Regulation No. 256 of 21.2.2007; Audit Chamber of Ukraine. Report for the Enforcement of State Agricultural Programme 2015.

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not supposed to have any feasible impact on production.18 This coupled support, which was reported as a product-specific ams to the wto,19 was used after the wto accession only for the least important crops and was granted in a negligible amount, although is still incorporated into the Law on State Support.20 At the end of 2016 a new direct support instrument was introduced in Ukraine by the amendment to the Law on State Support.21 Only livestock producers as well as fruit and vegetables producers are entitled to receive the direct payments.22 The production-type restriction makes the instrument a product-specific ams measure. Furthermore, the payment is based on the production-value sold by producers. Thus, the support is coupled to production and must be calculated into the Current ams of Ukraine starting from 2017. 6.3.2 State Grain Pledges A grain pledge purchase is a guaranteed state purchase of grain from agricultural producers when the producers retain the right to re-buy the grain under specified terms during the time fixed in the contract. Since 2005, the grain pledge regime in Ukraine has been regulated by the Law on State Support23 and has not been classified as price support,24 although it may determine price ­dynamics if applied to considerable grain volumes. Another argument for a price policy nature of this measure is the fact that the governmental body charged with price policy in the agricultural sector (the Agrarian Fund of Ukraine) is entrusted to execute grain pledges.25 Subsidies within the grain pledge mechanism are granted by means of ­budget loans (in principle, credit contracts) issued to eligible producers against delivery of their production for storage to the certified elevators. The loan amount is not to exceed 80 per cent of the minimal intervention price set

18 Kobuta and others, p. 31. 19 WT/ACC/SPEC/UKR/1/Rev.12. 20 Art. 17–2.1. of Law on State Support (introduced by Law No. 1447-VI of 4.6.2009) provides an opportunity for financial support to producers as per hectare payments. 21 Law N 1791-VIII of 20.12.2016. 22 Art. 16–1.3 of Law on State Support; cmu Regulation No. 83 of 8.2.2017. 23 Art. 12 of Law on State Support. 24 Allegedly due to the fact that the state is not authorised to regulate prices beyond the commodity exchanges. Art. 3.2. of Law on State Support. 25 Art. 9.1.1. of Law on State Support; cmu Regulation No. 705 of 6.8.2008 (with amendments in 2009–2011).

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up by the government.26 The minimal price established for state intervention purposes is calculated on the basis of average production costs (at a level sufficient to ensure production profitability at no lower than 10 per cent), taking into account development on domestic and international markets.27 Interest rates for the budget loans are fixed below market level.28 Basically, it is not the loan amount that determines the subsidy granted, but the difference between the interest rates paid under normal commercial credit contracts and those paid within this governmental programme.29 Obviously these loans are specific, as they are provided only for some types of grain.30 These arguments may lead to the conclusion that certain “amber” domestic support (since coupled) may be granted through Ukraine’s grain pledge programme. However, in the end, the economic efficiency of the budget loans could not be high, as grain producers are reimbursed only partially and shall carry out all transaction costs,31 which may turn out to be very burdensome for small farmers due to the already indicated market handicaps. The subsidy element of “benefit” must be thoroughly calculated in this case. Another aspect of the grain pledge mechanism is the price cap set up by the government in response to the surge of storage fees and the limitation of the

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Art. 12.2.2. of Law on State Support. Art. 5 of Law on State Support; cmu Regulation No. 159 of 11.2.2010. The capacity of minimal intervention prices to ensure profitable production may be questioned inasmuch as the applied calculation does not consider regional characteristics of grain production and distances between production units and warehouse location. The interest rate is to make up 50 per cent of the average interest for bank credits secured by collateral. Art. 12.4. of Law on State Support. The latest rate was set for 2013/2014 at the level of 6.9 per cent per annum. cmu Regulation No. 604 of 21.8.2013. This conclusion is made using the market reference approach of the dsb as presented in Sub-chapter 4.1.5. Before the budget loan mechanism introduction in 2005, grain pledge purchases used to be executed at the minimal prices calculated by the government at the level sufficient to ensure producers’ income. Provided that these minimal prices were set at the market level, it could be assumed that grain pledges in 2003–2005 did not fall within the wto subsidy definition. The fact that budget loans may be provided exclusively to agricultural enterprises could not automatically qualify them as specific, since chapeau of Art. 2.1. of the scma demands specificity for a group of enterprises, not the group of producers. The required absence of public debts may be claimed to be justifiable as an exception to the specificity, under condition that it is strictly adhered to, as it fulfils the conditions established for an objective criterion under Art. 2.1. (b) of the scma. Art. 12.2.7. of Law on State Support.

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eligible grain stores exclusively to certified elevators.32 These instruments, if duly implemented, may bring further subsidisation concerns under the wto rules. The financial contribution by government may be found granted, if the fee amount established by the state is below the market level. In this case, the government directs grain stores to reduce service prices in the sense of Art. 1.1. (a)(iv) of the scma. The government directs private entities or entrusts stateowned stores to provide services (otherwise provided by the government) at reduced prices. The escape clause for general infrastructure (Art. 1.1. (a)(iii) of the scma) may not be, in principle, applicable seeing as the advantageous conditions are granted to enterprises eligible for grain pledge loans (“group of enterprises”) and could not favour all or almost all enterprises in the agricultural or even cereals sector.33 By the same token, the benefit criterion would be in most cases fulfilled, if elevators complied with the requirement and collected reduced fees. The amount of a subsidy transferred should be, however, not the sum of the fee rebate, but pursuant to para. 13 of Annex 3 of the AoA in conjunction with Art. 1(a) of the AoA, the sum of revenue foregone, i.e. the taxes underpaid by the grain stores. The calculation of this kind of support would be highly complicated because the revenues of grain stores are composed of different income sources. A better calculation model could be the difference between the price of subsidised service and the market price of a comparable service.34 However, this discussion has a hypothetical character since there is no evidence that the measure in focus is duly implemented by the grain elevators. On the contrary, the storage fees have been steadily rising. In the case of non-payment of the full loan amount or interest rates by a producer, the pledged grain shall be transferred into state property at prices fixed at the time of the pledge evaluation.35 Presumably, these prices should mean market prices (prices at commodity exchange) at the time of contract conclusion. Under such circumstances, a subsidy could not be bestowed. The charge on the public account should not exceed 80 per cent of the minimal intervention price plus unpaid interest, where the former is typically lower than the market price. Consequently, at the end of the day a financial contribution 32

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The storage fees for 30 days shall not exceed 2 per cent of the grain value calculated on the basis of minimal purchase price. The prior cap was fixed at the level of 0.5 per cent of the minimal purchase price. Art. 14.2.4. of Law on State Support (as amended by Law No. 422-VI of 4.2.2009). See Sub-chapter 4.1.6. Para. 13 of Annex 3 of the AoA. Under these circumstances the state is to pay for storage services. Art. 12.2.6. of Law on State Support.

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by the government can be identified only where the market grain price at the time of the final purchase is substantially lower than that at the time of the loan issue. Apparently, a debtor (producer) usually obtains a certain benefit in that kind of situation. When analysing Ukraine’s notifications to the wto, it remains unclear whether grain pledges are included in the scope of domestic support. Although the measure has obvious features of product-specific ams due to its coupled character, Ukraine never informed about the ams in this form.36 Therefore, the grain pledges were notified, if they were, as a public stockholding ­programme under para. 3 of Annex 2 of the AoA.37 This argument may, ­however, not be supported given the fact that Ukraine’s methodology of ­domestic support ­calculation considers the measures falling within the scope of para. 3 of ­Annex 2 of the AoA includes only public procurement to the State Seed Reserve and to the State Material Reserve.38 Even if Ukraine were willing to include its grain pledge programme into the public stockholding “green box” sub-line, it would not be objectively possible inasmuch as pledge schemes may hardly be aligned with the provisions of Annex 2 of the AoA, which insists on the stocks having food security purposes exclusively. As long as grain producers are expected to buy out their pledges in a short-term period, the main idea of this instrument is directed to support farmers’ income. After 2005, the grain pledge instrument was rarely used because of price development and a shift in support for consumer prices (public interventions). The comparatively high allocation of grain pledges in 200939 may be a supplement to other tools targeting the prevention of bread price growth in response to the financial crisis. 6.3.3 Commodity and Financial Interventions for Cereals The Ukrainian legislature authorises state price regulation for most socially important foodstuffs.40 In turn, the Law on State Support specifically permits 36

Even if included into the Current ams calculation, small coverage of the grain pledge programme would most probably ensure the ams level for grain within de minimis. 37 Ukraine notified public stock-building in the amount of 109 billion uah for the year 2009. G/AG/N/UKR/9. 38 WT/ACC/SPEC/UKR/1/Rev.12. 39 In 2005 1 million t of wheat were purchased through the grain pledge programme. In 2009 budget loans were issued for over 1 million t grain (657 500 t wheat). In 2012–2013 further state grain pledge purchases were announced, but there is no official statistics about their factual volumes. cmu Regulation No. 295 of 29.7.2005; cmu Regulation No. 705 of 6.8.2008. 40 Art. 12 of Law on Price and Price Building No. 5007-VI of 21.06.2012 (earlier cmu Regulation No. 733 of 21.10.1994 with amendments).

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state regulation of wholesale prices on certain primary and processed agricultural products (further regulated products)41 by fixing minimum and maximum intervention prices.42 Given the fact that the period of price regulation may continue from one month to a whole marketing year,43 this mechanism could be characterised as de jure provisional. The list of the objects eligible for state price regulation is reviewed annually and shall be published at least 30 days before the beginning of the marketing year (thus, no later than 31 May).44 Nevertheless, de facto most cereals are subject to regulation on a continuous basis year after year. The essence of state price regulation in Ukraine is an intervention45 by the Agrarian Fund in volumes sufficient to fix the balanced prices for the regulated products.46 The Agrarian Fund shall execute financial or commodity interventions at the commodity exchange using the best market demand.47 Thus, it is expected to act as a private investor. At the same time, the Agrarian Fund is not entitled to speculative operations. The goal of commodity interventions is to reduce prices and to slow down food inflation, while the task of financial intervention is, respectively, to up prices and to increase producers’ income.48 Hence, only financial interventions may potentially fall within the category of market price support in the sense of the multilateral disciplines on agricultural subsidies.

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Art. 3.3.1. of Law on State Support determines these products (so-called objects of state price regulation). All important export cereals and oilseed, as well as flour and oilseed oil, are included into the list. The list has a tendency to extension. It included eleven positions in 2004 (mostly grain and oilseed, no processed products) and 23 positions after 2009 (more grain sorts and processed agricultural products were added). Law No. 1447-VI of 4.6.2009. Art. 3.1. of Law on State Support. Art. 3.3.3. of Law on State Support. However, the legislator has never pursued price regulation for the period less than a year, although a shorter regulation period could be more effective. Art. 3.3.2. of Law on State Support. This practice may reduce predictability for producers. The notion “intervention” refers to a state agent’s activity for buying-in of grain to the intervention fund, as well as selling such grain and its processed products to support the prices for these products on the domestic market. Interventions are executed through conclusion of sale contracts at certified commodity exchanges. Audit Chamber of Ukraine. Report for the Programme Grain of Ukraine 2001–2004. Thus, state intervention is, in principle, nothing else but trade with agricultural goods at the commodity exchange with a goal to ensure price stability. Art. 2.5. and 3.2. of Law on State Support. Art. 9.2.1. of Law on State Support. Art. 2.5. of Law on State Support.

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The commodity intervention mechanism is supposed to set a fixed price (a price of balance) at the level not exceeding the maximum intervention price. That is to be done by releasing the regulated products (or commodity derivatives) at the exchange by means of conclusion of spot or forward contracts.49 The maximum intervention prices for these goods are set by the government for every marketing year and are calculated on the grounds of the respective minimum intervention prices, indices of consumer prices or producers’ prices (the higher index must be taken), and the situation on domestic and external markets.50 Commodity interventions shall be triggered if demand prices during one trade session exceed five per cent of the maximum intervention price established by the government.51 In order to carry out commodity interventions, the Agrarian Fund creates a state intervention fund for each regulated product that cannot be smaller than 20 per cent of the annual domestic consumption of the concerned p ­ roduct.52 Previously, even a certain oversupply trend could be observed,53 whilst the purchase volumes shrunk in recent years.54 The state intervention fund must be operated exclusively for the needs of commodity interventions and the state reserve.55 It is, therefore, prohibited to sell the regulated products in the course of commodity interventions for their

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Art. 6.2. of Law on State Support. Art. 5 of Law on State Support; cmu Regulation No. 159 of 11.2.2010. This mechanism may be questionable within Ukrainian legal system as the Law on Grain guarantees a right to grain producers to dispose over their goods and to freely set their purchase prices. If a demand price exceeds 20 per cent of the maximal purchase price during one trade session, the trade shall be stopped by a simultaneous launch of consultations with participants willing to purchase the goods at the price higher than the maximal purchase price. Art. 6 of Law on State Support. The consumption level is established on the ground of supply and demand balance. Art. 9.3.1. of Law on State Support. At the beginning of 2009 1.5 million t cereals were stored in the state intervention fund which corresponds to 22 per cent of the internal grain consumption. Ministry of Economy of Ukraine. Report on Food Safety in Ukraine in 2009. In 2013/2014 over 1.8 million t and in 2014/2015 – over 0.5 million t wheat were to be purchased, but the Agrarian Fund completed only a negligible part of the planned grain purchases. In 2015/2016 only buckwheat and winter rye were to be bought in into the intervention fund. In 2016/2017 the purchases were even not authorised by any executive act. cmu Regulations of 20.2.2013, No. 362 of 20.8.2014, No. 1003 of 2.12.2015. url: http://publicaudit.com.ua/reports-on-audit/agrarnij-fond-prodovolcha-bezpeka -derzhavi-chi-dzherelo-zbagachennya/. Art. 9.3.2. of Law on State Support.

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further exportation.56 Thereby, the sought domestic effect on prices should be conferred. The core of financial interventions is, correspondingly, the purchase of spots or forwards aimed at fixing product prices at a level no lower than the minimum intervention price.57 The triggering mechanism and the procedure are analogous to commodity interventions.58 It may be assumed that application of financial interventions will give rise to market price support, where the minimum intervention prices are deemed to be administered prices in the sense of Annex 3 of the AoA. Buying-in of imported products is not allowed in the course of financial interventions without authorisation of the government.59 Apparently this restriction is expected to prevent additional drops in producer prices, but it may be questioned in the light of the national treatment requirement laid down in Art. III:4 of the gatt.60 Evidently, the minimum and maximum grain prices in Ukraine should serve as indicators to trigger market interventions. The corridor between these marks is supposed to be an “intervention-free zone.” Thus, if the minimum price is set higher than the average annual fob prices for primary products (external reference prices pursuant to Annex 3 of the AoA), a positive market price support in the sense of the AoA will be granted. This scenario is rather unlikely in Ukraine’s current regulatory environment since the entire export potential cannot be purchased on the market. Inasmuch as the demand on agricultural goods is not elastic, the Agrarian Fund would be expected to buy grain non-stop. Alternatively, when the maximum price is fixed beneath export prices61 and the subsequent commodity intervention further reduces domestic p ­ rices, 56 57

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Art. 6.3. (b) of Law on State Support. Presumably. This norm should serve to limit possible influence of the domestic price regulation on the world price. In case when the minimum intervention prices do not ensure producers’ profits (i.e. average production level without losses), additional state support is to be granted. Art. 4.4. of Law on State Support. Art. 7 of Law on State Support. Art. 7.3. (b) of Law on State Support. Art. III:8(a) of the gatt exempts application of the national treatment regime to laws, regulations or requirements governing the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or with a view to use in the production of goods for commercial sale. In this regard, the recent extension of government grain purchases in Ukraine to non-price related operations (Art. 9.2.1. of Law on State Support) with exclusion of foreign companies would not be justified under Art. III:8 of the gatt. Nonetheless, high additional infrastructure costs in Ukraine may distort the perception of the gap between the fob prices and the maximum intervention price.

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the risk of export subsidisation may not be excluded. During relatively large interventions, the fob grain prices in Ukraine were normally lower than the maximum prices calculated by the government,62 whereas the maximum intervention prices tended to correspond to world prices.63 Due to the devaluation of Ukrainian currency after 2014, the maximum intervention prices were below the fob of Ukrainian ports and the world level.64 But as long as no interventions for export-oriented cereals are executed, granting of any support is de facto not provided. The measure could still be considered “as such.”65 The domestic wholesale price dynamics regularly implies triggering of financial interventions to support producers’ prices: fob prices in Ukrainian ports are generally in line with the world grain prices,66 but producers’ prices are visibly lower than the world average.67 However, the Agrarian Fund does not launch financial interventions. For instance, the prices for all major grain 62

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Minimal and maximum prices in Ukraine in 2010 comparing to the fob, USD/t: food wheat – 146–178 and 165–201; 174–175; feed wheat – 123–127 and 148–152; 153–162; feed barley – 109.5 and 140; 137–140. Order of Ministry for Agriculture No. 78 of 23.2.2010 (with amendments); www.agrochart.com. As for 2013, the maximum intervention prices for wheat were set at the level comparable with the world prices, where the government prices for maize and barley were fixed even higher than the world level. The maximum prices 2013 in Ukraine and cbot futures, USD/t: wheat: 218–303; Black Sea wheat futures for September 2013 in August 2013 – 303; us wheat for September 2013 – 240; for December 2013–260; barley: 220–260; for ­September 2013 in August 2013–210; maize: 225–257; for September-December 2013 in August 2013 – 180–185; for November 2013 – 210, spot contracts in August 2013 – 240. See Order of Ministry for Agriculture No. 125 of 14.4.2012 with amendments and www.cmegroup .com. Minimal and maximum prices in Ukraine in 2015 comparing to the fob, USD/t: food wheat -152–159 and 205–214; 217–231; feed wheat – 141–148 and 190–200; 207–210. Order of Ministry for Agriculture No. 292 of 29.7.2015, www.agrochart.com. The maximum prices 2017 in Ukraine and cbot futures, USD/t: food wheat: 152–159; cbot futures delivery April 2017: 179–186 feed wheat: 141–148; cbot futures delivery April 2017: 176. Order of Ministry for Agriculture No. 305 of 14.9.2016 and www.cmegroup.com. See Sub-chapter 3.1.1. fob prices in January 2010, USD/t: food wheat: Ukraine – 174–175; average world price – 223; feed wheat: Ukraine – 153–162; Russia -140; maize: Ukraine – 185–187; average world price – 186; barley: Ukraine – 137–140; average world price – 158.The wheat world price in 2015 varied between 190–240 USD/t and the Black Sea wheat price corresponded to 195–210 USD/t. fao Food Price Monitoring and Analysis. www.fao.org; www.ukrexport .gov.ua; http://faostat.fao.org. The producers’ wheat prices in Ukraine fell from 194 USD/t in 2012 to 128 USD/t in 2015. www.faostat.fao.org.

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types were low between August 201368 and October 2013.69 A similar situation could be observed in autumn 2011.70 In the latter case, the government even contributed to a further domestic price fall by imposing an export tax on grain. On that basis, it may be concluded that Ukraine’s grain price intervention system does not show features of market price support in the sense of the AoA because the policy instruments, although legally eligible, are not used by the government.71 Furthermore, an effective consumer price support cannot be guaranteed by the commodity intervention mechanism either, since the volatile character of the price safety net regulation72 and delays in commencing interventions are not able to ensure a proper response to price spikes. As a consequence, export limitations continue to be the basic countermeasure to high agricultural prices preferred by the Ukrainian government. 6.3.4 Provisional Price Administration The provisional price administration regime may be enforced within the period not exceeding six calendar months and may be extended to price 68

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Wheat prices in summer 2013 were below the minimal prices, barley prices were in line with the minimal price, and only maize prices were at the level of the maximum price: food wheat: exw elevator – 1 470–1 600 UAH/t; minimal price – 1 800–2 000 UAH/t; feed wheat: exw elevator – 1 300–1 430 UAH/t; minimal price – 1 490–1 730 UAH/t; feed barley: exw elevator – 1 500–1 600 UAH/t; minimal price – 1 560 UAH/t; maize: exw elevator – 1 800–1 900 UAH/t; minimal price – 1 500 UAH/t. At the end October 2013 common wheat of the 1st class was traded at the Agricultural Commodity Exchange at 1 618 UAH/t (the minimal price calculated for 2013/2014 made up 2 096 uah); rye of the 1st class – at 1 290 uah (the minimal price 2013/2014 – 1 725 uah); barley of the 3rd class – at 1 480 uah (the minimal price 2013/2014 – 1 567 uah); maize of the 3rd class – 1 110 uah (minimal price 2013/2014 – 1 500 uah). In autumn 2011 cpt port prices in Ukraine (in-land transportation at seller’s costs) for common wheat laid approximately at the level of the minimal price, and those for barley were lower. In 2011/2012 the minimal prices for common wheat of 2nd–3rd classes were set at the level of 1 683–1 792 UAH/t and the maximal prices – 2 080–2 222 UAH/t; for barley the price corridor varied from 1 670–1 720 UAH/t to 2070–2140 UAH/t. The average purchase price for cereals in 2012 excluding transportation costs constituted around 1 550 UAH/t. www.ukrstat.gov.ua. Furthermore, market price support for grain producers in Ukraine (under the oecd classification) is strongly negative. Chapter Ukraine in: oecd. Agricultural Policy Monitoring and Evaluation: oecd Countries and Emerging Economies, Paris, 2016; Kobuta 2012, p. 10. For instance, the minimal and maximum intervention prices were reviewed three times from April to August 2011 (similarly in 2010). Order of Ministry for Agriculture No. 17 of 11.2.2011 amended by Order No.424 of 25.8.2011; Order of Ministry for Agriculture No. 78 of 23.2.2010 (with amendments).

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­control beyond the commodity exchange.73 The aim of this measure is to prevent or discontinue price fixing by buyers or sellers of the regulated products that cannot be rectified by state interventions.74 Although this mechanism has never been used, the procedure was questioned during Ukraine’s wto accession negotiations.75 In response to the expressed concerns, the representative of Ukraine confirmed that the sole goal of the instrument was to provide state support for domestic agricultural producers by guaranteeing that a minimum amount of their products was purchased.76 This explanation does not seem to be well grounded. According to that reasoning, the only justification for the measure would be to combat low producers’ prices, but the price administration regime can be launched in the time of high prices too.77 After Ukraine’s wto accession the respective regulation was amended with a view to eliminate possible discrimination against foreign trade partners.78 Yet, there are still some open questions left in regard to the measure’s proportionality. Thus, targeting anti-competitive practices through imposition of limits on purchase prices within the confines of the area between the minimum and maximum prices would be a rather non-­efficient tool given the fact that all market participants, including agricultural producers, would receive sanctions for the acts or the omission of others.79 In the light of the wto agricultural disciplines, the measures eligible within the price administration regime for stimulating producers’ prices probably fall within the “amber box” as they may be evaluated as an artificial increase of prices above the market level by means of market price support. The opposite situation, although highly harmful for farmers, would basically be authorised by the multilateral rules since no direct impact on exportation or importation of the regulated products could be expected. 6.3.5 State Forward Purchases The governmental grain forward programme is a public vertical c­ oordination practice that is nominally designed to fill up the state intervention fund. 73 Art. 8.4, 8.5. and 8.6. (c) of Law on State Support. 74 Art. 8.1. of Law on State Support. 75 Certain wto members argued that the minimum price provisions could contravene Art. III:4 and III:9 of the gatt if applied to imports. Paras. 60–61 of WT/ACC/UKR/152. 76 Ibid. 77 Art. 8.2. of Law on State Support. 78 Law No. 401 of 30.11.2006 amended Art. 8.6. of Law on State Support by excluding the right to introduce non-tariff restrictions on exportation and importation of the regulated products, and repealed Art. 8.8. of Law on State Support considering import-export price calculation during the price administration regime. 79 Klimenko, pp. 15–18.

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­ lthough, as already intimated, the list of eligible regulated products is A quite long, and the government is obliged to build in intervention funds for each ­product; public interventions are launched normally only for three ­commodities – wheat, barley, and rye in the form of forward purchases. The forward purchases are not conceptualised by the legislator as income support to grain producers,80 but as opposed to the state spot contracts, which are also in use, do have certain elements thereof. This instrument was introduced in 200781 as a substitute to the non-efficient grain pledge programme.82 The payment mechanism on the forward condition is expected to put an end to procurement underperformance caused by hard budget constraints and to increase the volume of purchases.83 Forward contracts are concluded between the Agrarian Fund and ­agricultural producers (only legal entities are eligible for the scheme) at the Agricultural Commodity Exchange. The Agrarian Fund must purchase grain from producers against an advance payment of 50 per cent of the minimum intervention price established for a specific grain, and calculated on the date of the contract conclusion. Producers pay for delivery and storage of the grain. The final payment is based on the average fixed prices of the delivery date, ­minus 12 months’ worth of regular bank credit interest rate for 12 months’ worth of credits.84 At first sight, this mechanism does not seem to acquire ­subsidy features in the sense of Art. 1 of the scma inasmuch as the final grain price is market-based, and the budget loan interests (the deducted part of the final price) are also paid at the market level. On the other hand, the charge on the public account for the period between the advance payment and the delivery may be perceived as a financial contribution in the sense of Art. 1.1. (a)(i) of the scma. Thus, the element of a financial contribution by a government85 may be found in this legal construct. 80

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Art. 17–2.2. of Law on State Support (in the Chapter “Other Support”): “the state guarantees support in form of forward purchases on organised agricultural market” (similar to Art. 10 of Law on Grain). cmu Regulation No. 736 of 16.5.2007 as amended by Order No. 879 of 24.9.2012. Forward purchases should help to replace pledges and short-term credits. Programme on Rural Development until 2015. Nevertheless, the Agrarian Fund is reported to be unable to ensure contract payments in due time. Allegedly for that reason, the Agrarian Fund tends to purchase grain through the intermediary – State Grain Purchase Corporation of Ukraine. Para. 1o f cmu Regulation No. 736 of 16.5.2007 with amendments. The scope of Art. 1.1. (a) of the scma extends to financial contribution by “any public body.” It may be argued that the Agrarian Fund constitutes a public body in the light of the wto law, if the Appellate Body’s functional approach taken in us-ad & cvd (China) (paras. 285 seq.) is applied. In respect to this, the Agrarian Fund’ governmental status and

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Before 2012, the situation was somehow different as public forward purchases were executed at the minimum intervention prices.86 Therefore, it may seem that the financial contribution could have been established only if the minimum prices had been higher than the market prices. Yet, it is reported that the Agrarian Fund does not tend to return budget credits issued for financing procurement into the intervention fund.87 Theoretically, the financial contribution by the government in the form foreseen in Art. 1.1. (a)(i) of the scma could be identified, but then the aid beneficiary is the Agrarian Fund, not grain producers. Regarding the benefits on the producer side, eligible grain producers do not automatically obtain specific benefits by concluding forward contracts with the Agrarian Fund. Albeit granting legal certainty about marketing of their future production, forward contracts are normal market instruments. Similarly, the fact that suppliers receive advance payments (credits), even if such practice is not common on the market, does not necessarily mean that a special benefit is conferred. Yet, the combination of the credit and the forward conditions may create a benefit, provided that the normal market practice does not foresee advance payments for grain producers at the same level or higher.88 The situation may be different if export restrictions are imposed. In these circumstances, the producers who conclude forward contracts with the state purchase agent have clear benefits because the farm gate prices of those selling their production on spot conditions are dumped, owing to limited export quantities. The volume of state grain intervention purchases rose quickly in 2007–2009, reaching 2.8 million t in 2009 and falling to 1–1.3 million t in 2010–2014.89 In 2016–2017 the planned purchased volumes were set at 0.7–0.8 million t, and were mostly wheat.90 The grain share acquired through forward purchases to the intervention fund has been volatile with a sharp decreasing trend after

its authority to exercise certain state functions (price policy on agricultural market) may suggest that this entity should be regarded a public body in the sense of Art. 1.1. (a) of the scma. 86 cmu Regulation No. 736 of 16.5.2007 comparing to cmu Regulation No. 879 of 24.9.2012. 87 See i.a. Audit Chamber of Ukraine. Report for 2011, p. 32. 88 The pre-payment practice is not uncommon among private grain traders in Ukraine. Its magnitude, however, cannot be estimated. 89 Audit Chamber of Ukraine. Report for the Enforcement of State Agricultural Programme 2015, p. 14; Official site of the Agrarian Fund of Ukraine: www.af.gov.ua (transferred). 90 Official site of the Agrarian Fund of Ukraine: http://agrofond.gov.ua/buy/forward-2016/.

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2013.91 It may be concluded that the cereals buying-in by the state is no longer just an agricultural policy instrument. Because government purchases for nonprice regulation purposes were declared eligible in 2013 (they may be executed within a broader price band in comparison to “normal” state interventions),92 it could be assumed that the state has aspirations to act directly as a commercial actor on the grain market. The expansion of the state forwards raises two questions: whether forward purchases may replace financial interventions by reducing supply on the market and whether this instrument may be efficient enough to support small producers’ income. The answer to the first question would be rather negative since the effective volumes of financial interventions cannot be determined in advance. The idea of forward purchases is basically to provide a “cushion effect” for producers’ prices in high supply periods.93 But the tool will attain this goal only if grain is purchased directly after the harvest (in summer-autumn) in a sufficient amount before the prices fall.94 Besides the timing and quantities of interventions, one of the major ­handicaps of Ukraine’s grain forward programme is automatic non-eligibility of all individual producers willing to participate in the public forward programme. In addition to this limitation, supplementary requirements may further restrict the number of beneficiaries, for instance, the requirement on package insurance leading to increased production costs and the mandatory vat payer status (a large share of small farmers are not registered as vat payers due to high administrative costs).95 On the other side, the minimal delivery sets that used to be too high for an average small-scale producer were

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In 2009, the Agrarian Fund had to establish a state intervention grain fund and to fill it with 0.97 million t grain, i.a. 0.89 million t wheat, where spot purchases were to make up only one third of the stock volumes. In 2009–2010 state forward purchases were not executed, but in 2011 their volumes rose steeply. cmu Regulation No. 655 of 1.7.2009; Order of Ministry for Agricultural Policy No. 50 of 24.1.2009; Audit Chamber of Ukraine. Report for 2012, p. 86; www.af.gov.ua; www.agro-business.ua. For comparison see footnote 54. The Agrarian Fund is entitled to purchase grain at prices not higher than those fixed at the three last Agrarian Commodity Exchange trade sessions within the price limits of not lower than 20 per cent of the minimal price and higher than 20 per cent of the maximum price. cmu Regulation No. 539 of 17.7.2013. Kobuta and others, p. 31. This is usually not a case in Ukraine. For instance, in 2009/2010 the planned intervention was to cover no more than 6 per cent of the annual wheat sale volume, where the real purchase corresponded to no more than 4 per cent thereof. Ibid., p. 45. cmu Regulation No. 736 of 16.5.2007.

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­substantially ­decreased in 2013/2014.96 That could potentially stimulate participation of small farmers in the scheme. In respect to support for small-scale producers, there were several proposals that considered introducing mandatory forward procurement against the right to export agricultural production. This measure targeted a shift of support for small producers to the private sector with a view to relieve the state budget. It may be, however, predisposed to establish export subsidies as it implies “­export contingency” of the support. The measure is supposed to fall within the scope of Art. 1.1. (a)(iv) of the scma, seeing as private entities will be directed by the state to grant subsidies the state would otherwise provide, and because non-provision of that support would make grain exportation – and in turn, all economic activities of grain traders – impossible. Still, the subsidy could not be conferred, unless the element of benefit for grain producers is duly proved. In this regard, finding a correct reference mark would not be not easy because pure market conditions may cease to exist in the export-oriented agricultural sectors. Currently, Ukraine does not notify forward and spot grain purchases as domestic support policies97 but only as procurement for the state food reserve, which is classified as public stockholding for food security reasons.98 But assuming that state forward purchases may constitute a subsidy in the sense of Art. 1 of the scma, it could be claimed that they may still fall within a nontrade distortive category and may be extended further without any danger of wto sanctions. Thus, accumulation of public stocks, even for price policy reasons, may be covered by the provisions of para. 3 of Annex 2 of the AoA provided that:

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In 2012 minimal sets were equal to 2 000 t for wheat, 1 000 t for barley and 500 t for rye and were reduced to 100 t for all cereals in 2013. cmu Regulation No. 514 of 17.7.2013; www .af.gov.ua. The notified public stockholding for food security declined from the level of 400–450 million uah in 2004–2006 to 100–200 million uah in 2009–2010, where the level of public procurement was reported to increase. G/AG/N/UKR/9 and WT/ACC/SPEC/UKR/1/Rev. 12; Chauffour J.-P.; Ivanic M. and oth. Impact of a Free Trade Agreement between Ukraine and the European Union on Ukraine’s Agricultural Sector, Conference Paper Presented at the 14th Annual Conference on Global Economic Analysis, Venice, 2011, p. 6. In 2009 the government of Ukraine reported to spend around 100 million uah for measures notified under para. 3 of Annex 2 of the AoA. In 2010 this sum equalled to around 200 million uah and in 2011 – to 237.7 million uah. G/AG/N/UKR/13; G/AG/N/UKR/13; G/ AG/N/UKR/18.

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– Purchase prices correspond to market prices for purchases and sales. This condition is deemed to be met by the governmental forward programme in Ukraine, presuming that the minimal intervention prices reflect market price trends; – Stock volumes are in proportion to the “predetermined targets related solely to the food security.” In that way, the oversupply tendency, namely, large carry-on stocks may be of concern, as well as the recent authorisation for non-price policy related interventions; – Eligible products form part of a food security programme identified in the national legislation. This requirement is basically fulfilled by means of Art. 3.2. of Law on State Support; – Financial transparency of stock accumulation and disposal is guaranteed. Due to involvement of intermediaries in Ukrainian government supply schemes, as well as a lack of public reporting mechanisms, the compliance with this rule could be questioned. Based on the abovementioned, it could be conceded that the incumbent government forward scheme for grain that is operated in Ukraine may ­potentially be exempt from the Current ams calculation under the condition that transparency is improved, and the stock volumes are adjusted to the legal r­ equirements laid down in the Law on State Support.99

Intermediary Summary

Ukraine’s practice of grain price interventions demonstrates that the government is concentrated on guaranteeing low prices for the population. Financial interventions to support producer prices are not directly applied. This price policy pattern tends to depress prices, and consequently, may lead to ­decreased agricultural production and demolish the advantages of other ­support instruments. Seeing that the farm income problem is aggravated by the commodity ­intervention mechanism, the state is forced to introduce other policy ­measures with a view to support agricultural producers. Therefore, the system of Ukraine’s state grain interventions may be characterised as a non-­conform policy measure requiring further interventions (see Sub-chapter 2.1.1.). ­Nevertheless, in spite of clear price support inefficiency, the government tends (at least until ­recently) to prioritise this instrument over other agricultural 99

For the purpose of this research, it will be presumed that the stocks volumes as required by the Law on State Support are economically justified.

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policy measures.100 Moreover, partial or complete non-notification of the state grain interventions to the wto may also contribute to further expansion of market interventions in Ukraine. 6.3.6 Direct Price Controls Regardless of the fact that the Ukrainian government is not allowed to regulate agricultural prices beyond the commodity exchanges,101 the legislature set forth consumer price limits for the regulated products until July 2017. Thus, the retail prices were not to be higher than 15 per cent of the wholesale prices.102 And since 2007, sellers who increase their wholesale prices for cereals and sunflower oil by more than one per cent in one month must provide a declaration and explanation of the reasons for the price increase to the local price inspections.103 From an economic point of view, price mark-up restrictions on the wholesale or retail market would not be effective because less than 10 per cent of grain is sold directly on the market.104 But a high degree of political sensitivity surrounding bread prices in Ukraine,105 and the demonstrated inability of state interventions to decrease prices for the population, have pushed the government to control the prices openly. The Government’s endeavour to support bakery enterprises is an illustrative example of these tactics.106 Among other privileges, bakeries are entitled to direct delivery of flour produced from the grain of the state intervention fund.107 This scheme, however, has a modest economic effect. Theoretically, this measure does not imply subsidies, because the sale prices are calculated based on grain purchase prices plus ­processing costs.108 100 The budget funds spent on grain interventions exceeded the planned expenditures in almost four times during the recent years, where most of other agricultural programmes were under financed. Audit Chamber of Ukraine. Report for the Enforcement of State Agricultural Programme 2015, p. 14. 101 Art. 3.2. of Law on State Support. 102 Art. 12.1. of Law on Price and Price-Building No. 5007 of 21.6.2012; cmu Regulation No. 1548 of 25.12.1996; cmu Regulation No. 394 of 7.6.2017. See also paras. 54–55 of WT/ ACC/UKR/152. 103 cmu Regulation No. 1222 of 17.10.2007. 104 In 2006, only 4.6 per cent of the grain harvested in Ukraine was sold to processing enterprises, where over 80 per cent was distributed through other channels. Klimenko, p. 15. 105 This feature is common for most of post-Soviet countries. See e.g. for Russia Csaki C.; Matusevich V.; Nash J. Agricultural Policy Issues for Russia, Washington, 2000 (further Csaki, Matusevich, Nash). 106 Already in the middle of 1994 the mandatory profitability level for bakery enterprises was nominally laid down at 15 per cent. cmu Resolution No. 733 of 21.10.1994. 107 Para. 2 of cmu Regulation No. 1128 of 27.12.2008 (amended in 2009–2014). 108 Para. 3 of cmu Regulation No. 1128 of 27.12.2008.

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But since the government indicates the sale prices within the scheme,109 consistency of the flour distribution prices with the market prices should be examined for each single transfer.110 Anyway, this approach hardly provides benefits for enterprises. It is reported that the advance payments required by the Agrarian Fund, which does not reflect a common market practice, put an additional burden on bakeries. Compulsory incorporation of transport costs into the final flour price should eliminate any remaining price advantages. Even assuming that the benefit could be conferred, the measure in concern may be rather qualified as an industrial subsidy, seeing as domestic support for processors shall be calculated into the Current ams only if it benefits primary producers (as per para. 7 of Annex 3 of the AoA). The link between basic crop producers and food producers in this regard could be hardly established. Another example of the government’s promotion of the bread industry may be the practice of administrative pressure on producers at the local level. The authorities reportedly forced agricultural producers to sell out grain to the milling industry at prices below the market rate.111 This issue may be addressed at the multinational level by means of Art. xi of the gatt, unless de facto export restrictions could be proved; or rather Art. X:3(a) of the gatt, if ­sufficient evidence could be found that the actions of local authorities constitute “administrative rulings of general application” (the pressure takes place in an established form and on a permanent basis). To sum up, owing to the consequences of partial food price liberalisation, the Ukrainian government finds itself between Scylla of half empty processing capacities and bread price increase and Charybdis of dissatisfied and non-­motivated producers. The state seems to have made a choice in favour of ­artificial support for consumer and processor prices. 109 Ibid. 110 Taking the examples of the years 2009 and 2012, the prices for 1st category wheat flour from the state intervention fund made up about 2 008 UAH/t in 2009 (the market price laid at 1 900 UAH/t) and in 2012 – around 2 700 UAH/t (the market price – 2 900 UAH/t). The comparison between the distribution and market prices in 2009 and 2012 may be interpreted in a way that the Agrarian Fund was selling wheat flour to the bakeries in 2012 at the price below the market level. Order of Ministry for Agriculture No. 4 of 12.1.2009; Quotation of the Minister for Agriculture (www.unn.com.ua); information of Ministry for Agriculture (url: www.rbc.ua). 111 Administration pressure was executed by restricting grain transfers to other regions (the information was obtained during the interviews with agricultural producers in Ukraine). At the same time, Art. 14.1.1. of Law on State Support prohibits any administrative, quantitative and qualitative restrictions for transfer of agricultural production and processed products across the territory of Ukraine.

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6.3.7 Market Alternatives to State Price Interventions To cure the imbalances of agricultural prices effectively, the government should decide which goal is currently most important: solving the farm income problem or addressing endangered food security for the population. Each problem should be tackled separately.112 It might be suggested that, in the present case, the priority should be given to producer income because its stabilisation would contribute to production growth and thus to the solution of the second dilemma. Since the motive of vertical coordination is to secure agricultural supplies, state support for small farmers may be at least partially replaced by purchase contracts offered by integrated structures. That should provide sufficient assistance. In essence, private vertical coordination schemes are supposed to play the role of the state and agricultural commodity exchanges.113 However, there is a danger that holding companies would switch to medium and large suppliers with a view to discharge their transaction costs.114 But this issue could be addressed by building up public-private partnerships to ensure small farmers’ participation in the supply chains.115 As it was earlier established, producers’ income in Ukraine is negatively influenced by state grain price policies. However, a substitute for these inefficient measures may not be easy to find. Because domestic grain prices in Ukraine are more variable than the world prices and there is no clear correlation between them, agricultural risk instruments widely used in international practice could not be effectively used in Ukraine.116 Moreover, the ­government does not welcome the use of futures and forward contracts by large-scale ­exporters. It is believed that they may put domestic purchases by processors at risk and may have a negative impact on state grain interventions. Since the current price policy model operates only for price reduction and not for price increase, it may be proposed that price building be liberalised. Under this scenario, a balance of internal and world prices should ensure ­higher farm prices and growing competition in the processing sector. A free regulatory environment should give a green light to the development of private risk ­management mechanisms (primarily, forward and futures contracts).117 As of 112 The role of the food security issue in agricultural price policy will be closely examined in the following chapter. 113 Swinnen, 2005, pp. 45–48. 114 Ibid., pp. 45–48, 51. 115 Ibid., 2005, p. 185. 116 Ukraine-Canada Grain Project 2007, p. 46. 117 Most commodity exchange contracts concerning agricultural goods concluded in Ukraine in 2005 were spots (91.1 per cent of all contracts), while forward contracts made up only 6.7 per cent. Ukraine-Canada Grain Project 2007, p. 52.

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now, the Agricultural Commodity Exchange controlled by the state118 may not guarantee effective hedging for consumers and producers. The shift to laissezfaire regulation would permit entry of global players into the Ukrainian commodity trade market.119 Meanwhile, the conclusion of long-term procurement agreements between the government of Ukraine and third states (e.g. Saudi Arabia, China), in fact provides a kind of forward financing for the agricultural sector and may play the role of a quasi substitute for private commodity contracts. An alternative way to change the incumbent price policy could be the promotion of infrastructural development aimed at ensuring fair price b­ uilding for producers, and guaranteeing access to storage and transportation ­capacities for small and mid-size producers. That would be not a one-day task, and should be considered a long-term goal. 6.4

Quasi Income Support

6.4.1 Subsidised Credits and Loans Market instruments may theoretically tackle income shortfalls of agricultural producers, primarily through short-term and long-term commercial credits, as well as (long-term) investment. However, weak competition in the Ukrainian banking sector and a lack of other credit facilities diminish small borrowers’ chances (smes and individual producers) of receiving commercial credits.120 High requirements for collateral greatly limit the probability that small producers will be able to successfully apply for long-term credits.121 Above that, government interventions – in particular, export restrictions – increase credit risks of agricultural producers.122 For that reason, credit interest rates for the

118 Agricultural Commodity Exchange (ace) is de jure a non-profit enterprise. Art. 17 of Law on State Support. The Agrarian Fund as a representative of the government is a founder of this entity. The ace members and its supervisory board are not entitled to decide on the structure and internal rules. 119 The Chicago Board of Trade (cbot) expansion to Eastern Europe is expected. Memorandum of Co-operation between Ukrainian Government, Ukrainian National Bank and cbot of 26.5.2011; Memorandum of Co-operation between Ukrainian Stock Exchange and cbot. 120 oecd 2012, p. 18. 121 Ukrainian banks are reported to require over 130 per cent of the loan value as collateral. That is higher than in most other cis countries. Ibid., pp. 23, 31 seq. 122 Ibid., p. 34.

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sector are double those of other branches of the economy.123 As a result, agriculture (especially small and mid-size entities) obtains a small share of the total loans issued in Ukraine.124 The state addressed this issue already in 2002 by introducing credit subsidies as a partial credit interest rate reimbursement on a competition base.125 This measure covers short-term (less than 12 months), mid-term (less than 36 months), as well as long-term credits (compensation is granted for up to 84 months); the latter group was included into the programme only in 2011.126 In 2012, the Ukrainian agricultural sector received 13.5 billion uah credits (one third of the total credit demand in the sector), and 80 per cent of this sum (11 billion uah) was partially subsidised by the state.127 Notwithstanding the high share of support, the credit subsidy coverage is not very broad.128 In general, the measure is not very efficient since the budget funds allocated for credit subsidies may be amended several times in the course of the year.129 That is why credit support for Ukrainian agriculture is rather volatile. Credit subsidies are available for “subjects of agricultural commercial activity” (“subiect hospodariuvannia”) with the exception of debtors under the grain pledge contracts130 (presumably this restriction should serve to prevent ­overcompensation). The eligible entities are not limited to agricultural ­enterprises, but include grain and livestock processing enterprises.131 Also, farmers acquire a right to special credit subsidies together with non-­ reimbursable direct support. Currently, the credit subsidy is provided in the form of reimbursement for credit interests paid by eligible producers in person.132 The compensation level 123 As for the year 2010, average interest rates for Ukrainian agribusiness constituted 25 per cent p.a., while the average annual interest rate for other credits amounted to 14.6 per cent. Ibid., p. 21. 124 Ibid., p. 13. 125 Art.13 of Law on State Support does not operate with the notion credit subsidy anymore, but uses the term “credit payment reduction” (zdeshevlenniia kredytiv). See Law No. 4216 of 22.12.2011. 126 Ibid. 127 Information of Ministry for Agriculture. 128 In the period between 2008 and 2011, around 14 500 agricultural producers benefited from credit subsidies (less than 1/6 of the total actors in the sector). Audit Chamber of Ukraine. Report for Programme 2015, p. 16. 129 See e.g. Audit Chamber of Ukraine. Report for 2004. 130 Art. 13.2.2. of Law on State Support. 131 cmu Regulation No. 794 of 11.8.2010 (with further amendments). 132 Credit payments issued by third parties are not covered by the programme. Art. 13.3.2. and 13.3.4. of Law on State Support.

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depends on credit currency and is not fixed as a specific percentage, but as a range.133 The compensation is capped at the interest level agreed on in the credit contract. Arguably, this method may not prevent artificial interest rate inflation for agricultural producers. Moreover, this approach may lead to decreased predictability for producers who are interested in this type of support, as well as to discretionary bank decisions. To date, the handicap of high interest rates has not been combated in Ukraine. In response to this drawback, the government was promoting the State Land Bank (slb) project. The idea of creating a state agricultural bank was perceived as rather controversial since the institution could minimise participation of the private sector in the branch, limiting competition. At the end of the day, the project has ceased to exist. It may be argued that the solution could be the establishment of an earlier proposal by the government Credit Guarantees Fund whose task would be the provision of partial credit guarantees for agricultural development projects and micro-credit support for small farmers.134 Also, the oecd recommends alternative credit guarantee schemes with government participation (e.g. mutual associations, limited companies and development banks), where the state liability would be limited to 60–70 per cent of a loan.135 Basically these instruments should provide a certain guarantee for involved banks. At the same time, it could be recommended to focus additional attention on default rules when drafting state guarantee projects. Credit guarantees issued by the Ukrainian government, although not widespread, proved n ­ on-productive

133 Art. 13.3.1. of Law on State Support and cmu Regulation No. 794 of 11.8.2010 provide different margins of support. Credits in foreign currency may be compensated at the level not lower than 10 per cent p.a. as for the Law, whilst according to the Regulation- at 7 per cent p.a. For credits in national currency the compensation may be provided at the level not less than 150 per cent of the central interest rate, and respectively, at the level not lower than a double central interest rate (in 2014 that made up 9.5–14 per cent p.a., in 2016 it varied from 22 to 30 per cent p.a., in 2017 – 14–12.5 per cent p.a.). Average interest rates for agricultural credits in national currency in 2012 made up 20–24 per cent. Correspondingly, the factual interest rates paid by farmers participating in the credit subsidy programme equalled to annual 5–7 per cent inasmuch as the interest rate was reimbursed at the double central interest rate (that time amounted to15 per cent) according to the information of Ministry for Agriculture. In 2014–2015 the interest rates did not change substantially, but due to an increase of the central interest rate the producers could basically benefit from the higher reimbursement. 134 Para. 3.43. of State Programme on Rural Development for the Period until 2015. 135 Some of the schemes are reported to be profitable. oecd 2012, p. 22 seq.

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and led to massive credit debt.136 In this regard, the importance of instruments combating moral hazard should be reiterated, e.g. upper limitations for guarantees amounts, preferences for agricultural over non-agricultural regions.137 By the same token, state guarantees could be made through the payment of a commission fee linked with the risk exposure.138 That would relieve the state budget and bring the scheme closer to market conditions. Alternatively, credit subsidies may be replaced by direct decoupled payments to producers. That, however, would increase pressure on the budget. The above measures should not only combat the moral hazard concerns related to state participation, but also provide for less trade distortion and a more multilateralism-friendly character of the aid. Ukraine notified credit subsidies for agricultural producers to the wto as non-product-specific ams at a relatively high level until 2011.139 Special farmer support was also presented as non-product specific ams, but its amount is negligible.140 For 2012 (the latest notification available) the credit programmes were not included in the calculation.141 Despite the economic crisis in Ukraine, credit subsidies after 2014 have been at the high level.142 For that reason, their classification within the AoA domestic support must be clarified. It is not clear whether interest rate compensations granted to grain and livestock processors are to be calculated into Ukraine’s Current ams. Having in mind the rule of para. 7 of Annex 3 of the AoA, that inclusion of subsidies for processors may be effective only “to the extent that such measures benefit the producers of the basic agricultural products”, aid for investment into p ­ rocessing 136 As by the end of 2011, a state-owned enterprise “Bread of Ukraine” was liable for credits issued under state guarantees for the amount of 20.7 million usd, a joint venture ­Ukrintersugar – for almost 35 million eur, and the Agricultural Commodity Exchange – for over 60 million usd. State Budget Report of Ukraine for 2011. 137 oecd 2012, pp. 38, 57. 138 Ibid., p. 42. 139 Credit subsidies granted to agricultural producers in Ukraine were notified at the level of 415 million uah in 2005, 373 million uah in 2009, 727.3 million uah in 2011. G/AG/N/ UKR/9; G/AG/N/UKR/13; WT/ACC/SPEC/UKR/1/Rev. 2; G/AG/N/UKR/18. The growth of expenditures should be associated with a high inflation rate in Ukraine. 140 Farmer support was notified at the level of 27 million uah in 2005, 19 million uah in 2009, 40 million in 2010, and 21.7 million in 2011. G/AG/N/UKR/9; G/AG/N/UKR/13; WT/ACC/ SPEC/UKR/1/Rev. 2; G/AG/N/UKR/18. It is not clear whether farmers’ credit debts are included into the calculation (on 1.1.2009 the farmers’ debts for subsidised credits were equal to 10.3 million uah). Audit Chamber of Ukraine. Report for 2009. 141 G/AG/N/UKR/26 published in March 2017. 142 About 300 million uah. url: http://www.agro-business.com.ua/ostannia-vip-novyna/ 6442-scho-gotuie-derzhbiudzhet-2017-dlia-agrariiiv.html (accessed on 2 June 2017).

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capacities should theoretically satisfy this prerequisite, since modernised processing industries are expected to increase the demand for supplies and contribute to growing competition on the market. The sufficiency of this link could not be estimated now. It will depend on its acceptance or non-acceptance by the wto community. The dsb has never interpreted the provisions of para. 7 of Annex 3 of the AoA. Besides the credit support mechanism, Ukrainian legislation provides a separate option for investment aid reimbursing up to 50 per cent of construction costs spent by livestock production units and up to 30 per cent invested by processing and storage capacities.143 This kind of domestic support, also classified as non-product-specific ams, constituted around half of the total credit subsidies granted before.144 Owing to the fact that this measure covers solely the livestock and feed processing sectors, its qualification as non-product specific ams does not seem to be feasible. Nevertheless, the consequences of this alleged misrepresentation might only have an impact on the cattle and milk sectors, provided that their share in the granted investment support was sufficient, since the level of the product-specific ams for these goods was close to the de minimis ceilings.145 The “green” element of the investment aid may be hardly recognised seeing as the compensation is clearly coupled to the type of production. Moreover, this measure may be prone to a high degree of distortion as the aid is provided only for some producers. That would obviously not be compliant with para. 11(b) of Annex 2 of the AoA. Furthermore, there is no objective structural disadvantage on the beneficiaries’ side, nor does the measure properly address this disadvantage. Thus, the requirements of paras. 11(a) and (f) of Annex 2 of the AoA could not be met either. Therefore, Ukraine’s agricultural investment aid may be exempted from the Current ams calculation only under condition of its decoupling. The new investment measure introduced in 2011 allows interest rate reimbursement for investment credits in storage capacities for grain, fruits and vegetables, livestock production units, and some other infrastructural objects (i.a. agricultural wholesale markets). The compensation allowed is between 90 and 100 per cent of the total expenditures.146 This type of support, though not as 143 Art. 17–2.3. of Law on State Support. 144 The measures (the sub-line “construction and reconstruction of livestock farms and complexes, and feed production enterprises”) were financed at the level of 373 million uah in 2010 and 347 million uah in 2011. G/AG/N/UKR/13; G/AG/N/UKR/18. 145 G/AG/N/UKR/13. 146 Art. 13.3.3. of Law on State Support.

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strongly linked to production as the preceding instrument, also seems incompatible with the provisions of paras. 11(b) and (e) of Annex 2 of the AoA. It can be understood from the measure’s description that aid recipients are directed by the state to produce. Presumably, only agricultural wholesale market construction may be classified as a general infrastructure measure, and therefore, would seem to fall within the scope of para. 2(g) of Annex 2 of the AoA. However, since direct payments to producers or processors are prohibited under the chapeau to para. 2 of Annex 2 of the AoA, the investment aid in favour of agricultural wholesale markets may not be qualified as a “green box” measure. Theoretically, the entire set of credit subsidy tools used in Ukraine may potentially be covered by para. 11 of Annex 2 of the AoA, if they are duly ­re-­designed to credits provided for investment (preferably mid-term and longterm credits).147 Another pre-condition for this shift should be expansion of eligibility to all production sub-sectors (addressing the requirements of paras. 11(b), (c), (e) of Annex 2 of the AoA). A demonstrated objective disadvantage required under para. 11(a) of Annex 2 of the AoA may be identified by providing evidence of soaring credit interest rates in the sector. To be compatible with para. 11(f) of Annex 2 of the AoA, compensation for the disadvantage should represent the difference between the average interest rates on the market and the average payments for credits issued to specific groups of agricultural producers (a size and a sector of production are to be taken into account). 6.4.2 Leasing Subsidies In response to stagnating agricultural machinery and equipment sales, the government of Ukraine introduced a leasing subsidy in the form of partial reimbursement of leasing payments transferred by agricultural producers.148 The agricultural leasing programmes did not increase domestic agricultural machinery production and technical modernisation of farms.149 The major drawbacks of the leasing instrument were an undersupply of equipment,150 high debt rates,151 a low coverage of the measure, insufficient financing by the 147 See e.g. the practice of Argentina WT/TPR/S/277, pp. 129–130. 148 Art. 13.1.2. and 13.3.5. of Law on State Support allows compensating 40 per cent of the leasing object value and a commission payment, where cmu Regulation No. 130 of 1.3.2017 authorises reimbursement of solely 20 per cent of the leasing object value, excluding vat. 149 See e.g. fao, ebrd 2010, p. 16. 150 Audit Chamber of Ukraine. Report for 2009; Audit Chamber of Ukraine. Report for 2010. 151 In the period between 1998 and 2009 only 73 per cent of the leasing payments due were ­returned by the leasers. Audit Chamber of Ukraine. Report for 2007–2008. By the same token, public debts of two domestic agricultural technique manufacturers exceeded respectively 230 million eur and 923 million usd in 2011. State Budget Report of Ukraine for 2011.

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state,152 as well as some legal gaps.153 Furthermore, the market situation in Ukraine basically undermines the effect of the leasing subsidies for domestic manufacturers as about 80 per cent of agricultural machinery is imported.154 That level is expected to grow further due to the government granting its dutyfree regime to the importation of agricultural technology not manufactured in Ukraine in response to the economic crisis.155 Leasing subsidies are granted only to agricultural enterprises or individuals registered as private entrepreneurs.156 The provisions of Art. 13.3.5. of Law on State Support are applicable to the purchase of domestically manufactured agricultural equipment; it also applies to equipmment manufactured abroad, if comparable models are not produced in Ukraine.157 The latest regulation restricted the eligibility to the equipment manufactured at least to 60 per cent in Ukraine.158 As long as the law is not amended, a buyer of imported ­equipment produced outside Ukraine may claim to be entitled to participate in the programme. The domestic-content limitation may create a conflict with Art. III:4 of the gatt since domestic manufacturers of agricultural machinery benefit from more favourable treatment than importers of analogous goods. It could be claimed that the restriction on the machinery origin may not be exempted by Art. III:8(b) of the gatt authorizing provision of subsidies “exclusively” to domestic producers, on the ground that the Ukrainian government may also promote foreign manufacturers (when agricultural technology is not (partially) produced in Ukraine). In the same vein, the scheme may be prone to bestowing industrial subsidies as the state artificially expands demand for domestic machinery. Provided that purchase prices for the equipment are negotiated at a rate no lower than market level, the benefit for the machinery sector might be conferred. However, Art. 14(c) of the scma makes establishment of a ­benefit 152 In 2008–2011 over 4 500 agricultural producers have received the ordered equipment. Only 25 per cent of the planned amount was transferred by the state. Audit Chamber of Ukraine. Report for the Enforcement of State Agricultural Programme 2015, p. 13. 153 For example, a leasing cycle in Ukraine does not coincide with amortisation cycle. Strubenhoff, Movchan and Buriakovski, p. 177. 154 Audit Chamber of Ukraine. Report for 2010, p. 121. 155 Art. 17–2.3. of Law on State Support. 156 cmu Regulation No. 130 of 1.3.2017. At the same time, Art. 13.3.5. of Law on State Support allows the eligibility for the leasing subsidies to be extended to all “subjects of agricultural commercial activity.” 157 The acceptability of imported equipment is evaluated in accordance with the list issued by the cmu. Art. 13.3.5. of Law on State Support. 158 cmu Regulation No. 130 of 1.3.2017.

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conditional on evidence of “more than adequate remuneration” granted to the recipient. That shall be determined in relation to prevailing market conditions for the goods in focus unless it can be proved that market conditions were adjusted by the measure. In 2010 and 2011 Ukraine notified to the wto exclusively leasing compensations for domestically manufactured equipment.159 Ukraine’s leasing subsidies obviously fall within the non-product specific ams. Their re-qualification into exempted support may be doable if the measure is intended as investment aid (i.e. “physical restructuring of a producer’s operations”).160 In this case, the identification of an objective structural disadvantage in the sense of para. 11(a) of Annex 2 of the AoA will be required, but that should not be difficult due to producers’ credit difficulties in Ukraine. As for now, low measure coverage161 diminishes its effect on trade.162 But newly defined leasing subsidies will thoroughly address the fundamental issue of (minimal) trade distortion. If it turns out not to be feasible, the undersupply of agricultural technology may alternatively be targeted through the system of direct decoupled support. 6.4.3 Other Input Subsidies Input subsidies, as already indicated in Chapter 1, are deemed to be trade distortive, and are classified as “amber box” measures within the wto system (according to para. 13 of Annex 3 of the AoA). In the course of the last decade, the government of Ukraine made use of input subsidies for agricultural producers several times, and thereby followed a path taken by many other developing countries. The major patterns of input subsidisation in Ukraine will be scrutinised briefly in this sub-chapter. By the beginning of the 2000s, agricultural land in Ukraine had been insufficiently fertilised or not fertilised at all,163 so the government launched a budget 159 G/AG/N/UKR/13; G/AG/N/UKR/18. 160 Investment measures eligible under the “green box” (para. 11 of Annex 2 of the AoA) and input subsidies falling within the scope of ams (para. 13 of Annex 3 of the AoA) may have similar features. 161 This measure was notified as a non-product specific ams in the amount of over 20 million uah in 2006, 2.6 million uah in 2009, 30 million uah in 2010 and 10 million uah in 2011. This support fell within de minimis. WT/ACC/SPEC/UKR/1/Rev. 12; G/AG/N/UKR/9; G/ AG/N/UKR/13; G/AG/N/UKR/18. 162 The state’s share in purchase of agricultural technique makes up around 15 per cent. Audit Chamber of Ukraine. Report for the Enforcement of State Agricultural Programme 2015, p. 13. 163 In 2004 only 40 per cent of grain was fertilised. Audit Chamber of Ukraine. Report for the Programme Grain of Ukraine 2001–2004.

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programme tasked with supplying agricultural producers with mineral fertilisers in 2004.164 Pursuant to the adopted regulation, chemical manufacturers were to sell fertilisers to agricultural producers at below-market prices.165 But the advantageous export conditions drove manufacturers to increase domestic fertiliser prices. In the end, the programme failed and did not provide visible benefits for agricultural producers.166 It is questionable which rationale the government followed by introducing this support measure: aid for the agricultural sector or rather for the chemical industry (by means of promoting a secure distribution net). There is also a concern regarding the very presence of a market failure in respect to access to fertilisers in the Ukrainian agricultural sector. Taking into consideration the increasing use of mineral fertiliser along with a steep reduction in organic fertiliser inputs,167 it could be assumed that further stimulation of mineral fertilisation is not desirable in Ukraine.168 In answer to the inputs inflation, the Agrarian Fund in 2009 obtained permission to purchase inputs for agricultural producers under exceptional circumstances.169 In the very same year, the authority made use of this option and procured mineral fertilisers and petrol at costs allocated within the special budget for grain interventions.170 The inputs were supposed to be supplied to 164 Order of Ministry of Industrial Policy No. 18 of 20.01.2004; WT/ACC/SPEC/UKR/1/Rev. 12. 165 cmu Regulation No. 13 of 14.01.2004; paras. 63–64 of WT/ACC/UKR/152. 166 Under those circumstances, agricultural producers were forced to purchase imported fertilisers. The partial reimbursement of costs spent on those covered not more than 4 per cent of all fertilisers bought by producers. Audit Chamber of Ukraine. Report for ­2003–2004; Audit Chamber of Ukraine. Report for the Programme Grain of Ukraine ­2001–2004; Kobuta and others, p. 32. 167 In 2005–2008 mineral fertiliser utilisation rose 63 per cent and that of organic fertilisers declined 16 per cent. See Audit Chamber of Ukraine. Report for 2007–2008. In 2011–2012 75–78 per cent of Ukraine’s agricultural land was fed with mineral fertilisers (the most intensively for sugar beet, some vegetables and rapeseed). Only around 2 per cent of the agricultural land was composted with organic fertilisers. The organic fertilisation level for grain and oilseed was negligible. See State Statistics Service of Ukraine. Statistic Bulletin: Use of Mineral and Organic Fertilisers for Agricultural Production in 2012, Kiev, 2013, pp. 5–6. 168 Nevertheless, after the outbreak of the economic crisis in 2009 the draft law seeking reintroduction of partial compensations for mineral fertilisers was presented to the ­Parliament, but was dismissed. The document goal was, again, rather support for the chemical industry which lost its foreign markets in result of the crisis. 169 Art. 9.2.1. of Law on State Support (included in 2009 by Law No. 1447 of 4.6.2009). 170 cmu Regulation No. 152 of 18.2.2009 with further amendments; cmu Regulation No. 778 of 29.7.2009.

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producers against advance payments within the set limits. Agricultural producers acquired all volumes of the procured petrol and a part of the fertilisers.171 This input distribution to agricultural producers in 2009 was not notified to the wto.172 But it may be argued that this policy measure has features of a subsidy in the sense of Art. 1 of the scma. The benefit for producers could be conferred by artificial price stabilisation on specific inputs. Nonetheless, the margin between the purchase prices that the Agrarian Fund paid and what the producers paid for the inputs cannot be calculated effectively due to the lack of official information on price dynamics for the specified markets in 2009. Furthermore, a charge on the public account may not be easy to find. As for the sold petrol, the Agrarian Fund (as already assumed, a public body in the sense of Art. 1.1. (a) of the scma) allegedly did not gain the price it would have been paid if it had purchased the inputs at market prices. The difference between the purchase and sale prices may result in a charge on the public account as stipulated in Art. 1.1. (a)(iii) of the scma. It was also reported that the unsold fertiliser stocks were marketed through schemes favourable to agricultural exporters in 2009–2010 at prices no lower than that of the initial purchase, plus storage costs.173 To be specific, exporters willing to purchase grain, flour, or fertilisers from the intervention fund174 were entitled to receive a vat reimbursement.175 This construct might incur a financial contribution by the government and a benefit to agricultural producers on the same ground as the petrol distribution. However, the tax privileges may not be regarded as a ­benefit inasmuch as vat reimbursement constitutes the obligation of the state in accordance with Ukrainian tax law. On the other hand, benefits for producers in this context may be found by taking not the national law provisions, but its factual application as a reference mark (the vat reimbursement level in the branch). This approach has never been used by the dsb; one can only guess whether this benefit identification method could be viable. At the end of the day, in spite of state intervention, diesel price stabilisation did not happen in 2009. Still, the government succeeded in getting certain control over fertiliser prices by concluding an agreement on fixed prices (conditional on gas price movements) with suppliers and agricultural p ­ roducers. 171 Audit Chamber of Ukraine. Report for 2010. 172 G/AG/N/UKR/9. The instrument was reflected in the ams methodology submitted before the accession. WT/ACC/SPEC/UKR/1/Rev.12. 173 cmu Regulation No. 86 of 4.2.2009. 174 The wording of the regulation does not indicate whether the distribution of grain and flour from the intervention fund is coupled to the acquisition of fertilisers or whether exporters may choose buying grain without mandatory input purchase. 175 cmu Regulation No. 86 of 4.2.2009.

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­Under that agreement the government acted as an intermediary and guaranteed to the chemical plants vat repayments in a timely manner and other kinds of support such as accelerated depreciation schemes, low tariffs on energy consumption, and transportation.176 Hence, the state secured benefits in favour of the agricultural sector at the cost of the chemical producers, while obliging itself for certain revenue foregone “otherwise due” through tax burden reduction for the chemical industry. As a result, the industry’s commitment to stabilising prices was no more than a trade-off. The total balance of b­ enefits for the scheme participants should be thoroughly calculated. The link between the public costs involved and benefits for the agricultural sector, if any, is not explicit. Therefore, it could not be clearly established whether industrial subsidies or domestic support were bestowed. On the other hand, given the government’s clear intention to direct chemical manufacturers to supply farmers with inputs at stabilised prices (not simply an effect of governmental regulation which provided support), the element of financial contribution by the government under Art. 1.1. (a)(iv) of the scma may be found, if it can be established that agricultural producers did indeed receive a benefit through the input price reduction. Thus, a subsidy in the form of a non-product specific ams should be calculated in accordance to para. 13 of Annex 3 of the AoA. Another agricultural input of insufficient supply in Ukraine is seed. ­Responding to this problem, the legislature introduced direct state support for seed producers and partial reimbursement to producers who use highproductive sowing materials.177 The plant selection programme was launched in 2001178 and was notified to the wto as the product-specific ams for cereals and rapeseed between 2004–2006, and in 2009 within the de minimis level.179 Although the initial seed production goals established in the programme were fulfilled,180 seed quality did not get better. That is why only small seed volumes could be sold.181 It may be argued that the state participation in this form, regardless of the extent of support, may not be justified economically since the state promotes seed imports by levying zero import tariffs on cereals 176 Kandul, pp. 11–12, 25. 177 Art. 10 of Law on Grain, Art. 17–2.1. of Law on State Support (included in 2009). 178 cmu Order No. 438-р of 15.9.2001; Order of Ministry for Agriculture No. 300/86 of 05.10.2001. 179 WT/ACC/SPEC/UKR/1/Rev.12; G/AG/N/UKR/9. 180 Although the Programme faced substantial financial problems, and not all producers were reimbursed. Audit Chamber of Ukraine. Report for 2002; Audit Chamber of Ukraine. Report for 2003–2004. 181 Audit Chamber of Ukraine. Report for the Enforcement of the State Agricultural Programme 2015, p. 10.

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seeds.182 As a consequence, a large share of sowing material in some production sectors is imported.183 The other input subsidy notified by Ukraine to the wto is compensation for energy costs that agricultural producers spend on irrigation.184 Some other policy measures may be predisposed to grant input subsidies, for instance, free of charge land distribution to newly grounded farmers.185 In that case, a financial contribution in the sense of Art. 1.1(a)(iii) of the scma may easily be established.186 Obviously farmers obtain benefits by acquiring property right on land plots. Although there is no land market in Ukraine, the land lease market could be taken as the reference mark.187 The interpretation of this kind of subsidy would be rather complicated in the light of the AoA. The exemption of Annex 2 of the AoA could hardly be used seeing that investment aid as defined in para. 11 of Annex 2 of the AoA requires support provision in the form of direct payments (in the same way, other measures exempted under para. 5 of Annex 2 of the AoA). Hence, distribution of agricultural land is a clear “amber box” measure. But its quantification may raise certain issues. Thus, pursuant to para. 13 of Annex 3 of the AoA,188 the only suitable calculation method could be the gap between the price for a subsidised good and the representative market price for a similar good. Owing to the lack of a land market in Ukraine, there is a chance that such a reference price could not be identified. To summarise, it may be inferred that while they may not endanger compliance with Ukraine’s Bound ams commitments due to their minor amount, agricultural input subsidies are potentially highly trade-distortive owing to their 182 Ukraine’s wto Accession Schedule clxii. 183 Where agricultural producers in the wheat and barley segments used almost 100 per cent domestic seeds, their share in the maize and oilseed sector does not exceed 50 per cent. See e.g. Audit Chamber of Ukraine. Report for 2008. 184 This category of domestic support was notified to the wto as non-product specific support at the level of 38 million uah in 2009, 27 million uah in 2010 and 3.2 million uah in 2012. In 2011 this support was not granted. G/AG/N/UKR/9; G/AG/N/UKR/13; G/AG/N/ UKR/18; G/AG/N/UKR/26. 185 This conclusion is based on the postulate that land constitutes a factor of production. It is reported, however, that massive transfers of land do not take place any more. 186 Financial contribution is granted by provision of goods other than general infrastructure. Distributing land plots for all farmers may not be classified as general infrastructure since the word “general” should be interpreted as one object accessible to nearly all entities, but not different objects provided to nearly all and accessible to those whom they are transferred to. See chapter 4.1.1. and Panel Report US-Large Civil Aircraft, para. 7.1037. 187 If the state had not provided land plots for farmers, they would have leased them. 188 This measure should be classified as other non-exempted support, since no market price support or direct payments are conferred to producers.

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character and mode of application. Moreover, input subsidies do not seem sufficient enough to resolve the high production costs problem, in particular, soaring logistic expenditures. At the end of the day, the most widespread survival strategy of Ukrainian family farms in a time of high input prices is to retreat and lease their land plots to agriholdings,189 that may be able to afford buying inputs. Thus, by addressing the inputs issue the government should rather concentrate on deprived small producers, i.a. by promoting service cooperatives of individual farmers. Otherwise, both distortion and inefficiency could be avoided, or at least reduced, by switching to “green” decoupled income support for producers.190 Besides, input supplies may run without any state participation.191

Intermediary Summary

Partial reimbursement of credit and leasing payments by the government together with input subsidies have been used at a comparatively low level in Ukraine. Currently these measures do not endanger compliance with the AoA commitments, although leasing subsidies may be questioned in regard to the national treatment obligation. Nevertheless, a potential classification of some non-notified measures as the Current ams (e.g. credit subsidies, distribution of land or inputs supply promoted by the state), as well as the practice of declaring substantial allocations for input subsidy provision in the regulatory acts, may become questionable under the wto disciplines.192 In this regard, it may be recommended to redirect the policies to direct decoupled support in the forms previewed by paras. 6 and 11 of Annex 2 of the AoA, and to promote ­development of market-based alternatives. 6.4.4 Alternatives for Input Subsidies Apparently the most obvious response for the agricultural inputs issue should be the promotion of private credit facilities. Addressing this task, it is suggested that the overall goal be to launch a land market in Ukraine with a view to 189 Kandul, p. 22. 190 Provision of general infrastructural services (para. 2(g) of Annex 2 of the AoA) excludes subsidies for inputs. 191 There are some successful private initiatives for small and middle-scale producers in Ukraine. oecd 2012, pp. 50–51. 192 Potential direct fund transfers also fall within the definition of subsidy. Art.1.1. (a)(i) of the scma.

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ensure a stable collateral base. Supplementary governmental actions may embrace development of co-operative banks or establishment of a credit insurance market.193 Both instruments may be enforced without the introduction of WTO-concerned subsidies.194 The Ukrainian legislature has already introduced two instruments that may be efficient market alternatives for input subsidies and even for price interventions; these are grain warehouse certificates and agricultural receipts. Initiated in 2002, warehouse certificates are securities195 that affirm ­property rights to the goods stored in a warehouse.196 They may be issued exclusively by certified warehouses.197 This type of document could be produced in two forms: non-personal simple warehouse certificates with a description about the goods accepted for storage198 and double warehouse certificates with an indication of the obligor’s name.199 If the second form is issued, grain transferred for storage may be used as collateral for commercial credits.200 Thus, in general, there are two main purposes for using warehouse certificates: – reduction of transaction costs for transfer of property, i.a. as a delivery mechanism under futures contracts, and – providing collateral for bank credits.201 Apparently, in the absence of a land market, the second purpose became the rationale for introducing warehouse certificates in Ukraine because overcoming the collateral obstacle for small producers is expected to ease the concern of high production costs. 193 oecd 2012, p. 24. 194 The Appellate Body in Canada-Feed-in Tariffs found that establishment of a non-existing market by the government is not a distortion and the granting of benefits is not automatic. Appellate Body Report Canada-Feed-in Tariffs WT/DS412/AB/R, WT/DS426/AB/R para. 5.188. 195 Warehouse certificates are securities in opposite to warehouse bills that are issued for “normal” storage services. Art. 43 of Law on Grain. 196 Art. 961 seq. of Civil Code; Art. 294 of ComC. 197 Art. 1–2 of Law on Certified Warehouses and Simple and Double Warehouse Certificates No. 2286-IV of 23.12.2004. 198 Art. 3 of Law No. 2286-IV. 199 Art. 4 of Law No. 2286-IV. 200 Art. 14 of Law No. 2286-IV. 201 National Bank of Ukraine and others. Using Grain Warehouse Certificates in Credit Relationship (in Ukrainian), Kiev, 2006, p. 12.

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The instrument implementation faced difficulties with some particularities of contract enforcement,202 over-formalisation of the insurance question,203 as well as the issue of performance guarantees which may endanger the certificates’ use as collateral.204 To rectify the last issue, the government ordered the establishment of the Guarantee Fund for Obligations under Grain Warehouse Certificates at the end of 2012. This body is supposed to protect interests of warehouse certificate holders in case of elevators’ incapacity to fulfil their obligations.205 If the fund does not possess the sum of money needed to cover its liabilities206 (the assets of the fund shall consist mostly of contributions by the participants207), the state shall provide the fund with interest-free credit for 12 months. Thereby, under this scenario, domestic support with the ­product-specific ams features may be provided. Furthermore, the Guarantee Fund project has certain shortcomings, in particular, the rule on mandatory participation of grain stores, the ambiguity of government competence and the very necessity of the structure. On the other hand, visible obstacles for warehouse certificates development cannot be disregarded. Currently, there is no evidence of the instrument’s success in Ukraine. Thus, the institute was designed to support small producers who do not possess their own storage capacities. Nevertheless, in spite of the determined storage fee cap, farmers usually perceive the storage prices as too high. It is also reported that warehouses are not interested in storing small amounts of grain and tend to purchase grain themselves for further resale instead of dealing with small producers.208 This problem may be solved by guaranteeing storage in state-owned elevators209 or by addressing producers’ income directly. The latest instrument for input supply stabilisation – agricultural receipts – was launched in 2012.210 Agricultural receipts are documents endorsing a debtor’s obligations to deliver agricultural goods or to repay the debt, which 202 Especially, overlap of Law on Warehouses and Law on Grain sanctions for delay in delivery. 203 Art. 37 of Law on Grain. 204 cida. Canada-Ukraine Grain Project ii. System of Warehouse Documents on Grain, Kiev, 2007 (in Ukrainian), pp. 13 seq., 31 seq. 205 Art. 2–2, 19–2 and 51 of Law on Grain; Law No. 5493–17 of 22.11.2012. 206 Art. 57 of Law on Grain. 207 Art. 55 of Law on Grain. 208 This information was obtained from Ukrainian ngos in a private conversation. 209 This practice might, however, confer a subsidy due to discrepancies from the marketbased behaviour. 210 Law on Agricultural Receipts (agrarni rozpysky) No. 5479-VI of 6.11.2012.

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is secured by a pledge of future agricultural production (zastava maibutniogo vrozhaiu).211 An eligible creditor is any individual or legal entity that provides services or purchases goods as a reciprocal obligation under a contract with agricultural producers.212 In fact, regulation of agricultural receipts legalises de facto existing relations between agricultural producers (mostly low-profit agricultural enterprises) and commercial structures, where the latter provide inputs and small amounts of money to the former in exchange for future agricultural production. The incumbent regulation distinguishes two types of agricultural receipts: commodity agricultural receipts concerning delivery of goods213 and financial agricultural receipts obliging debtors to pay a certain sum of money (through a cashless settlement) calculated by taking into account agricultural prices.214 The law is not specific about the term “agricultural prices.” Thus, if it is not ­explicitly agreed on in the receipt, it may be confusing whether the prices at the time of the document’s issue or at the time of harvesting shall be considered. The margin may be substantial because prices during harvest time tend to fall. Therefore, it could be recommended that signatories agree on the precise definition for “agricultural prices.” If loss of harvest occurs, a debtor may provide other assets to substitute the pledged production. Correspondingly, when the harvest is not sufficient to cover the debt, the outstanding pledge part is transferred to the following year’s production.215 For that reason, it may be assumed that the use of agricultural receipts would create incentives on the producers’ side to conclude insurance contracts. All in all, it could be assumed that agricultural receipts – basically the simplest commodity derivatives modification – may become a promising instrument in addressing the inputs issue in Ukraine’s agricultural sector. Given the fact that formally any owner or leaser of agricultural land may be an eligible debtor under agricultural receipts,216 the scope of the eligible producers is much broader in comparison to most governmental support measures. However, mandatory receipt authorisation by a notary217 may make agricultural 211 The information about all agricultural receipts shall be accumulated in the unified ­receipts register. Art. 1 and 10 of Law No. 5479-VI. 212 Art. 1 of Law No. 5479-VI. 213 Art. 3 of Law No. 5479-VI. 214 Art. 5 of Law No. 5479-VI. 215 Art. 7 of Law No. 5479-VI. 216 Art. 2 of Law No. 5479-VI. 217 Art. 4 and 6 of Law No. 5479-VI.

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receipts too burdensome for small producers, as agricultural receipts shall be issued for each kind of agricultural production separately.218 6.4.5 Insurance Subsidies for Agricultural Producers Private risk management in the Ukrainian agricultural sector was developing at a very slow pace before the mid-2000s.219 One reason for the deficits in this segment was the tendency of state interventions to be triggered by adverse weather conditions. The government usually issued direct payments from the reserve fund that may be characterised as unsystematic situational deficiency payments. At the same time, those measures did not cover more than 10–20 per cent of the sector’s total losses. Obviously this policy could not effectively target incurred income losses on the production side, and must have mostly resulted in inefficient spending. This practice did not create incentives for producers to conclude insurance contracts because compared to direct state support, insurance typically puts additional obligations on producers. Yet, in this matter, the state must be interested in expansion of private insurance contracts aimed at preventing public expenditures in the event of natural catastrophes and adverse weather conditions. Supposedly for that reason, the Ukrainian government made an attempt to launch the insurance rate compensation programme for grain in 2002. It was supposed to reimburse 50 per cent of insurance premiums from the state budget.220 However, the programme was frozen as the 2002 budget law did not endorse the costs. In 2004, insurance subsidies were incorporated into the scope of the Law on State Support, although neither distribution criteria nor an administrative mechanism of the measure were set forth. The explicit distribution criteria would require regular amendments to the Law on State Support with a view to ensure adherence to market development. That is why the insurance subsidy programmes are usually designed on an annual basis at the by-law level. In the period of 2005–2008, state insurance support was being operated for most cereals and oilseed crops221 and may have led to an increase in ­insured areas,222 although defaults in reimbursement were also documented. 218 Art. 9 of Law No. 5479-VI. 219 In 2005 only 10 per cent all agricultural producers and 20 per cent of grain producers insured their harvests. Over 3/4 grain producers did not insure their grain stocks. ­Ukraine-Canada Grain Project 2007, pp. 54, 112–113. 220 cmu Regulation No. 1000 of 11.07.2002. 221 cmu Regulation No. 325 of 6.5.2005. 222 The share of the insured areas rose from 2 per cent in 2005 up to 8 per cent in 2007. ifc. Agricultural Insurance Market of Ukraine in 2011, Kiev, 2012 (in Russian), p. 4.

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In ­2009–2013, the budget law did not allocate costs for this budget programme at all, allegedly due to budget constraints. The available statistics cannot directly prove that compensation for insurance premiums had much impact on the increased number of agricultural insurance contracts.223 Moreover, there is not enough evidence of a market failure in the agricultural insurance segment since Ukrainian private insurance companies work in the agricultural sector. Correspondingly, it would not be reasonable to blindly follow public insurance models used in some other countries and refuse to use the experience accumulated in the domestic private sector.224 Nevertheless, the market could not resolve some concerns. First of all, insurance may still be inaccessible to small agricultural producers (a subject-based obstacle), or the production of a particularly risky crop may lead to a situation where the provision of insurance services may not be attractive to private companies due to a high systemic risk probability (an object-based obstacle). Furthermore, the government indirectly promotes agricultural insurance through other non-subsidy measures. Art. 10 of the Law on State Support ­required concluding insurance contracts by agricultural producers who are ­eager to receive any domestic direct support, as well as by commodity derivative traders at the agricultural exchange. By the same token, Art. 9.4. of the Law on Grain prescribes that grain harvest be insured “in accordance to the law.” It should, however, be remembered that mandatory insurance could aggravate the moral hazard problem since farmers tend to make riskier decisions.225 For that reason, in 2009 the Law on State Support terminated the mandatory insurance obligation for agricultural producers.226 Hence, the passage of Art. 9.4. of the Law on Grain regarding the compulsory insurance character “in accordance to the law” should be, in the author’s view, interpreted in the way that grain

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In ­comparison, in 2012 the insured area under agricultural crops did not exceed 1 per cent. Kobuta and others, p. 32. In 2005 only 910 agricultural producers concluded insurance contracts (the insurance subsidies were granted in the amount 5.8 million uah), in 2007 – 4 397 contracts were registered (the insurance subsidies made up 12.5 million uah), in 2008 – 1 637 contracts (the granted subsidies amounted to 72.8 million uah), in 2009 – 1 980 contracts, and in 2011 – 2 710 contracts (in both years subsidies were not provided). Ibid. ifc. 2010. Moreover, mandatory insurance could be regarded be a tax paying by more effective producers in favour to less effective ones. Yakubovich V. Insurance Regulation, ifc, Kiev, 2004, p. 4. Art. 10.1. of Law on State Support.

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insurance is not mandatory due to the permissive character of the general ­regulation, which is the Law on State Support. Nevertheless, the provision of certain support is still conditional on insurance coverage, in particular, forward purchases by the government.227 Government participation in agricultural insurance is still on the agenda. The latest novelty was the Law on Agricultural Insurance with State Support adopted in 2012.228 Beyond the subsidisation component, this legislative act made an important contribution to the expansion of agricultural insurance by prohibiting the use of state funds for any direct reimbursement of producer losses (de jure prohibition of deficiency payments).229 Insurance contracts developed over the course of implementation shall ­cover production losses caused by insured events. The loss must be calculated as the difference between the value of an insured (prospective) harvest, as fixed in an insurance contract, and of a factual harvest.230 Certain restrictions, i.a. coverage exclusion in case of gross violation of agro-technical, sanitary, veterinary, and other conditions by an insured person,231 should help minimize the moral hazard problem. This law distinguishes between catastrophic agricultural risks (extraordinary situations of technical and natural character leading to substantial losses)232 and agricultural insurance risks (risk of loss or damage of insured plants, loss (underproduction) of insured harvest caused by occurrence of an insured event).233 This approach may be interpreted as a separation of risks according to their exposure. However, differently from the eu approach, the Ukrainian legislature does not seem to be precise enough in distinguishing the risks since no quantitative or qualitative criteria are established. 227 Similarly, Art. 3 Law on Agricultural Insurance with State Support No. 4391 of 9.2.2012 (in force since 1.7.2012). 228 The Law does not mention Law on State Support as a legal base for the agricultural insurance support mechanism. But since the framework legal act also addresses agricultural insurance policy, the Law on Agricultural Insurance with State Support 2012 must be read as lex specialis to the Law on State Support. 229 Deficiency payments were still granted by the government in 2012, just a couple of months before the entering into force of Law No. 4391. cmu Regulation No. 278 of 19.3.2012. 230 Art. 11.1. of Law No. 4391. As for the winter wheat scheme, insurance compensation is to be calculated at the level 80 per cent of the average sowing expenses (1 250 uah x ha). Para. 8.5.2. of Order of National Financial Markets Commission No. 1968 of 30.10.2012. 231 Art. 6 of Law No. 4391. 232 cmu is to establish the procedure of risk determination as catastrophic. 233 Art. 1 of Law No. 4391.

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The essence of insurance subsidies under the incumbent regulation is the government reimbursement of 50 per cent of insurance payments.234 Where the subsidies for insurance premiums are usually paid directly to an insurance company in world practice,235 Ukrainian regulation requires producers to pay the whole amount to an insurer as a prerequisite for the compensation. The state may only participate in insurance schemes for specific agricultural products.236 Thus, the legislation seems to target the object-based obstacle by limiting eligible insured products, while the subject-matter obstacle is not tackled directly inasmuch as production size restrictions are not foreseen. The distribution procedure for insurance subsidies may also raise some equality ­issues. First of all, only legal entities may be aid recipients. Second, they have to fulfil further additional criteria set by the cmu.237 On the other hand, insurers are also subject to certain eligibility criteria for providing insurance services with state support. An insurance company must obtain a special license,238 participate in the catastrophic risk fund, and become a member of the Agricultural Insurance Pool.239 If the catastrophic risk fund cannot provide a sufficient coverage amount to guarantee the corresponding payments, the government shall provide a budget loan to ensure insurance indemnifications.240 Allegedly, triggering this provision may lead to large public costs comparable to the deficiency payment mechanism. From another point of view, the selective access of insurance providers to the programme may hide subsidisation of insurance companies. That may also be found, even if no insurance subsidies to agricultural producers are provided, but when state support is granted to them under the condition of insurance contract conclusion with particular private companies.241 Anyway, under the 234 Art. 25.1. of Law No. 4391. 235 ifc 2010, p. 8. 236 Art. 5.2. of Law No. 4391. For instance, in 2012 barely winter wheat was covered by the measure (owing to the risks associated with winter time), while in 2013 and 2014 eligible crops were not specified by the government at all. cmu Regulation No. 813 of 15.8.2012. 237 Art. 1.1. and 5.3. of Law No. 4391. 238 Art. 4 of Law No. 4391. 239 Art. 15.2.-15.3. 17 of Law No. 4391. Founded in November 2012, Agricultural Insurance Pool is charged with coordination, coverage of catastrophic risks and organisation of ­re-insurance programmes. Nine companies obtained licenses for providing agricultural insurance with state support. To date, only four insurance companies are Pool members. See www.uaip.com.ua. 240 Art. 18.1. of Law No. 4391; cmu Regulation No. 841 of 15.8.2012. 241 In 2011 governmental forward purchases contracts were concluded only with producers who insured their harvests. Only three insurance companies were accepted for the scheme.

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present circumstances, the measure could hardly be targeted internationally, as Art. xv of the gats does not preclude subsidies for services. When talking about the external impact of this regulation, it should be indicated that the Law on Agricultural Insurance is based on the principle of compliance with Ukraine’s international obligations.242 In respect to the AoA disciplines, it may be presumed that conformity should simply mean input subsidies provision are within the borders of the committed ams, rather than the design of “green box” measures. In this regard, the declared shift from ­deficiency payments – which may potentially qualify as the ams exemption under para. 8 of Annex 2 of the AoA – to insurance subsidies coupled to specific ­production (a classical “amber box” measure) could not be regarded as contradictory to the principle of the wto compliance. Deficiency payments to agricultural producers issued in 2012 were notified by Ukraine to the wto as the non-product-specific ams.243 The measure clearly does not fall within the scope of para. 8 of Annex 2 of the AoA since no triggering loss level was set as required by para. 8(a) of Annex 2 of the AoA.244 ­Furthermore, by interpreting the term “partial losses” local authorities recognised that wheat crops suffered from adverse weather conditions in winter 2011/2012. Yet, para. 8(a) of Annex 2 of the AoA expects official recognition that a natural disaster occurred. Evidently, the notions “natural disaster” and “­adverse weather conditions” may not be automatically equalised. By virtue of Annex 2 of the AoA, the first is to be targeted by the measures eligible under para. 8 of Annex 2 of the AoA (compensation for production losses), while the second should fall within the scope of para. 7 of Annex 2 of the AoA (decoupled payments triggered by loss of income). Therefore, the authorities’ recognition of the unfavourable weather impact in winter 2011/2012 cannot constitute a ground for application of para. 8 of Annex 2 of the AoA. The introduction of the notion “adverse weather conditions that may be assimilated with natural disaster” similar to that developed in the eu could serve for reconciliation of the measure with the “green box” criteria. However, the recent prohibition of government ad-hoc payments makes any legislative adjustments in this context redundant. The insurance subsidies granted in 2005–2009 in Ukraine were notified to the wto as non-product specific ams.245 Conversely, the new insurance 242 Art. 3 of Law No. 4391. 243 G/AG/N/UKR/26. 244 Instead of a triggering level, the rules mentioned “partial loss.” cmu Regulation No. 278 of 19.3.2012. 245 The Current ams notified under this sub-line laid at 5.8 million uah in 2005 and at 12.2 million uah in 2009. In 2010–2011 insurance subsidies were not granted. WT/ACC/SPEC/ UKR/1/Rev.12; G/AG/N/UKR/13; G/AG/N/UKR/18.

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­instrument should be classified as a product-specific ams since only specific crops are eligible246 and the covered risks are extended beyond catastrophic risks.247 However, due to the fact that no other product-specific ams for wheat is granted in Ukraine and the buffer space within the wheat de minimis is substantial, the insurance subsidies may be issued at high levels without any legal consequences for the country. Differently from other direct subsidies that may be potentially substituted by direct decoupled income support, the particularities of agricultural risks could not be rectified by producers’ income stabilisation.248 In this regard, state participation in the mitigation of systemic agricultural risks (re-­insurance) may turn out to be unavoidable. Besides that, addressing agricultural risks could be possible through other “green box” measures supporting producers’ income.249 It is recommendable to follow the model of para. 7 of Annex 2 of the AoA, since para. 8 of Annex 2 of the AoA covers production loss insurance that may be triggered only by natural disasters and will not apply to most situations of unfavourable weather conditions. In any case, the moral hazard issue must be combated. To do that, the government should elaborate certain ­encouragement for mitigation of losses by producers.250 6.5

Shortcomings of Agricultural Direct Support in Ukraine

6.5.1 Foreseeability Concern Until recently, Ukraine’s budget expenditures on agriculture had a tendency to expand,251 while de facto support grew at a slower pace. The most probable 246 The exemption is not possible given to its non-compliance with para. 7(c) of Annex 2 of the AoA. 247 Thereby, requirement of para. 8(a) of Annex 2 of the AoA may not be fulfilled. The covered risks for winter wheat extend beyond natural disasters to adverse weather conditions and illegal acts of a third person. cmu Regulation No. 813 of 15.8.2012. 248 The recent introduction of expanded insurance support in the eu, where efficient direct payment schemes are operated, supports this argument. 249 Though, state support extension to all producers may be non-efficient and extremely costly. 250 There are specific private risk management techniques, e.g. diversification of crops, land leasing in several regions to reduce weather-related risks (appropriate only for large corporations). 251 In 2008 agricultural budget expenditures made up 7 billion uah (in 1.9 times more than in 2007 and 9 times more than in 2003); in 2010 – almost 11.3 billion uah followed by a decrease in 2011. Audit Chamber of Ukraine. Report for 2010; Audit Chamber of Ukraine. Report for 2008. For 2014, the expenditures made up about 5 billion uah, in 2016 – 2.1

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­explanation for this phenomenon is that the resources reserved for agricultural expenditures in annual budget laws are not always allocated in full.252 That outcome is related to the particularities of so-called special budget funds widely used in the country’s budget system.253 The idea is that state expenditures for some budget programmes depend strictly on special fund revenues.254 This kind of “conditional” financing255 has proven to be highly insecure. Agricultural support in Ukraine is provided through plenty of underfunded programmes.256 Despite the number of declarative development programmes, the government of Ukraine does not have a strategy for the agricultural sector and tends to manage it through unsystematic257 short-term measures that are often reviewed in the course of their implementation.258 It is suggested that these tactics diminish foreseeability for agricultural producers and makes the support measures less efficient inasmuch as producers plan their activities without taking into account government aid and do not apply for that at all. Normally, producers are not aware about support opportunities at the beginning of the calendar (budget) year.259 Consequently, the

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billion uah. The plan for 2017 is set at 7.4 billion uah. However, due to inflation and devaluation of Ukrainian currency, the agricultural budget has been in fact stagnating in the course of the recent years. url: http://www.agro-business.com.ua/ostannia-vip-novyna/ 6442-scho-gotuie-derzhbiudzhet-2017-dlia-agrariiiv.html (accessed on 2 June 2017). In 2007–2008, 89 per cent of the agricultural budget and in 2011 respectively 75 per cent of the agricultural budget was executed. See Audit Chamber of Ukraine. Report for 2007– 2008; Audit Chamber of Ukraine. Report for 2010. At the same time, some schemes may suffer more than others, e.g. in 2003 micro-credits for farmers were underfinanced on 90 per cent. Audit Chamber of Ukraine. Report for 2003–2004. The state budget of Ukraine consists of general and special budget funds. Art. 13.1. of Budget Code (Law No. 2456 of 8.7.2010). The special budget fund may be filled in with budget revenues and credits re-payments. Art. 13.3. of Budget Code. For instance, in 2012 the special budget fund expenditures included credits for farmers financed via the credit repayments by farmers; the Agrarian Fund programmes funded through loan payback by the Agrarian Fund and through internal bonds; partial reimbursement for agricultural leasing, anticipated financed by state loan repayments for purchase of agricultural products in 1994–1997. Art. 40–45 of Budget Law 2012 No. 4282-VI of 22.12.2011. In 2001 there were five state support programmes for agriculture, in 2004 – eleven and in 2008–29 programmes. Audit Chamber of Ukraine. Report for 2003–2004; Audit Chamber of Ukraine. Report for 2008; Strubenhoff, Movchan, Buriakovski, p. 89. Audit Chamber of Ukraine. Report for 2002. The Budget Law is often amended during the budget year. See e.g. Audit Chamber of Ukraine. Report for 2009; Audit Chamber of Ukraine. Report for 2007–2008. Audit Chamber of Ukraine. Report for 2007–2008.

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number of applicants is declining as they are uncertain about the support mechanism (due to constant legal changes), non-transparency,260 and additional criteria set up by local commissions that distribute costs.261 At the end of the day, a large share of support is transferred to agricultural producers involved in relations with governmental authorities. To sum up, there is an obvious problem with the efficiency of public finance management in Ukraine since agricultural expenditures fixed in legal acts cannot be carried out due to a lack of endorsed costs. That issue may aggravate already existing information asymmetry among agricultural producers. 6.5.2 Selectivity v. Equity It could be argued that one of the preconditions for efficient domestic support is transparent eligibility criteria and a guarantee of equitable access to aid for all eligible producers.262 In Ukraine though, the situation is quite the opposite; government support tends to be doled out disproportionately among agricultural producers.263 In addition, there is evidence that state aid is inaccessible for a large portion of agricultural producers and for the majority of small farmers.264 It cannot be overlooked that the present system stimulates ­large-scale production units which have a higher degree of access to budget transfers.265 Such discrimination in favour of large enterprises may, 260 Representatives of one of the largest Ukrainian agriholdings information said in a private conversation that their enterprise had never applied for governmental subsidies because of corruption schemes involved. For the same reason, it never interacted with the Agrarian Fund of Ukraine. 261 Audit Chamber of Ukraine. Report for 2004. 262 Among other aspects, the adherence to this rule would exclude subsidy’s specificity (­selectivity) and thereby would make the measure non-actionable (thus, authorised) in the light of international disciplines on subsidies. 263 In the mid-2000s, 75 per cent of agricultural subsidies were distributed among only 6 per cent of Ukrainian producers. Similarly, in 2007 only 4.6 per cent of all farms (and 5 per cent in 2008) received state aid. See Audit Chamber of Ukraine. Report for 2007– 2008. However, such discrepancies may also appear in developed countries, e.g. in the us the top 10 per cent of aid recipients (mostly large farms and corporations) reportedly collected over 70 per cent of the farm support issued, while in 2002 two-thirds of us farmers and ranchers did not receive any direct government support at all. In the eu, 21 per cent of beneficiaries were granted 82 per cent of the total direct payments in the early 2000s. World Trade Report 2006, p. 121. 264 In 2007 the average land plot area of the enterprises being granted state aid for winter grain production constituted 2 000 ha, and the average under summer crops made up, correspondingly, 9 000 ha. Audit Chamber of Ukraine. Report for 2007–2008. 265 Strubenhoff, Movchan, Buriakovski, p. 86.

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­ evertheless, be ­comfortable for the government because dealing with a small n number of producers is more efficient for meeting the budget goals and food security concerns. However, this approach may help unprofitable farms remain on the market. Beyond that, the widespread practice of competitive financial support distribution may even cause inequity among enterprises of a similar size.266 Thus, selectivity based on production size, the sector of production, as well as discrepancies in favour of non-agricultural regions267 should not be overlooked. Examination of the selectivity margin would be empirically difficult since there is no publicly accessible list of agricultural producers who receive state aid. 6.5.3 Efficiency As long as there is no official reporting on state expenditures for agricultural support in Ukraine, any efficiency evaluation for these spendings will not seem credible. Though, even the indirect evidence available points out some irregularities. To begin with, a receipt of state support is not supposed to be a crucial factor for agricultural production growth, i.a. in the cereals sector.268 The only example of success must have been the short-term direct payment scheme for crop production in the early 2000s that indeed contributed to an increase in yields and producers’ income.269 In a different way, disproportionally high and trade distortive support for the livestock sector270 granted in the course of the 2000s did not show overall positive results, but was re-introduced after a short break with certain modifications (see Sub-chapter 6.3.1.).271 266 It is reported that credit subsidies are subject to corruption and high transaction costs. fao, ebrd 2002, p. xxx. 267 oecd, 2012, p. 46. 268 In 2007–2008 enterprise production, which received state support, grew 84 per cent. Meanwhile, this indicator for private households not eligible for any direct state support increased by 73 per cent. By the same token, the rise in grain yield was almost the same for both groups. Private households had even higher yields of some crops in comparison to the supported producers. Audit Chamber of Ukraine. Report for 2007–2008. 269 Audit Chamber of Ukraine. Report for 2003–2004. 270 Livestock subsidy and crop production support in 2007–2008 amounted to 40–50 per cent of all agricultural expenditures, i.a. around 60 per cent of the spendings flew to the livestock sector. See Audit Chamber of Ukraine. Report for 2007–2008. This category of support was reported as a product-specific ams at the level under de minimis ceiling. See WT/ACC/SPEC/UKR/1/Rev.12; G/AG/N/UKR/9; G/AG/N/UKR/13. 271 Comparing Ukraine’s domestic support notifications in 2006, 2009 and 2010, substantial and on-going rise of production value may be established only in the milk sector

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Second, the efficiency of agricultural subsidies in Ukraine suffers from budget volatility: large shares of allocations are issued at the end of the calendar (budget) year,272 while producers need financial injections mostly during the first part of the year.273 Consequently, a part of the budget costs cannot be used by local aid distributors, and the funds must be returned to the state budget at the beginning of the subsequent budget year.274

Intermediary Summary

Direct agricultural support in Ukraine is characterised by ad-hoc short-term measures that are usually unable to fix market imperfections. They may even aggravate the difficulties faced by small producers. This is the consequence of indirect selectivity of domestic support that favours large-scale producers and that must be the result of non-foreseeability and information asymmetry within the domestic agricultural community. In addition, government price support policies do not seem to target the farm income problem, but rather seek to hold consumer prices low. Nonetheless, the market interventions of the government may not be considered efficient enough to stabilise food prices for the population. At the end of the day, neither producers nor consumers find themselves in a win situation. In such circumstances, the government usually searches for alternative methods for producer and consumer support. The choice was made in favour of indirect (tax) support and border measures (import and export restrictions). (­respectively, from 12 billion uah in 2006 to 33 billion uah in 2010). However, this growth should at least partially be linked to a high level of food price inflation. The poultry and swine production increased from 5 to 11 billion uah during this period, while cattle production remained at the previous level. Considering that the production value was calculated in the devaluated Ukrainian currency, it may be assumed that the cattle sector even stagnated in spite of financial support. WT/ACC/SPEC/UKR/1/Rev.12; G/AG/N/UKR/9; G/ AG/N/UKR/13. See also Audit Chamber of Ukraine. Report for 2007–2008. 272 For instance, in 2004 more than a half of the total agricultural budget expenditures was transferred in the last year quarter and 35.8 per cent of those were in December. Audit Chamber of Ukraine. Report for 2003–2004. 273 During the first quarter of 2007 and 2008, only 5 per cent of the planned expenditures were executed. Audit Chamber of Ukraine. Report for 2007–2008. 274 For example, in 2007 around 16 per cent of the expenditures reserved for credit subsidies and 18 per cent for the plant selection programme could not be used by recipients. Audit Chamber of Ukraine. Report for 2008. See also Audit Chamber of Ukraine. Report for 2003–2004.

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291

Indirect Support: Tax Subsidies

6.6.1 Introduction to Ukraine’s System of Agricultural Taxation Tax incentives are perceived as government revenue foregone and generally recognised as subsidies under the wto/gatt disciplines.275 There is no common view on the issue of whether direct subsidies or tax incentives are more favourable state intervention instruments.276 A relatively simple administration of tax benefit schemes and their invisibility to taxpayers277 makes fiscal incentives a powerful alternative to direct subsidies, provided they are used more effectively than subsidies.278 In this regard, it could be argued that a mere compliance of tax incentives with international disciplines on subsidies is not sufficient. The tax mechanism is also expected to be transparent.279 Several possible methods of agricultural taxation exist,280 including income tax for individuals, corporate tax, vat schemes, and land tax.281 Taxation of the agricultural sector may be rather complicated (it is supposed to be “the hardest to tax of all hard-to-tax sectors”282) due to the small scale of production, vulnerability to external factors, as well as high information costs inherent to developing economies.283 As a result of the above problems, agricultural taxation in developing countries tends to be substituted by industrial import protection, leading to soaring input prices. As a consequence, agricultural sectors may be still taxed indirectly while, in parallel, the need for input subsidies emerges.284 In turn, only a few examples of agricultural tax support practices may be found in developed countries.285 Generally speaking, fiscal subsidies are mostly used by the states with budget constraints, especially by the East ­European transition states,286 i.a. Ukraine. This tendency may have a h ­ istorical 275 The wto recognises direct transfer of funds in the form of revenue foregone as a financial contribution as defined in Art. 1.1. (a)(i) of the scma. 276 Luja, p. 18. 277 Ibid., p. 14. 278 Tipke K. Die Steuerrechtsordnung, Volume 1, Cologne, 1993, p. 364; Luja, p. 18. 279 Luja, p. 13. 280 Demjanenko, Zoria, pp. 6–9. 281 Rajaraman I. Taxing Agriculture in a Developing Country: A Possible Approach, Washington, 2004 (further Rajaraman), p. 3. 282 Rajaraman, p. 2. 283 Bird R. Income Tax Reform in Developing Countries: The Administrative Dimension Bulletin for International Fiscal Documentation, 37(1), 1983, pp. 3–14, pp. 3–4; Rajaraman, p. 1. 284 Rajaraman, p. 2. 285 For instance, tax subsidies are granted at the province level in Canada. See WT/TPR/S/246. 286 See e.g. WT/TPR/S/71, p. 75; Csaki, Matusevich, Nash.

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e­ xplanation. Under the Soviet Union, agricultural producers did not pay taxes in the sense of a market economy.287 During the first decade of transition, agricultural enterprises in Ukraine used to be incorporated into the general tax regime.288 At the end of the 1990s the young state urgently looked for financial support models for the stagnating agricultural sector. Tax exemptions seemed to be the most suitable instrument in the absence of budget capacities for direct support provision.289 The government launched two favourable taxation mechanisms, which were directed correspondingly to direct and indirect taxation. With a view to ensure the instruments’ efficiency, the state cut off tax debts of agricultural enterprises in 2000–2001.290 6.6.2 Fixed Agricultural Tax (fat) Regime 6.6.2.1 Conditions and Effect of the fat The fat regime was introduced in 1998 as a provisional instrument291 and served to replace 12 direct taxes and duties for agricultural enterprises whose share of agricultural production, including processing, exceeded 50 per cent of their total production (with a historical base period of one year).292 The flat tax rate was initially set at 0.09 per cent293 of agricultural land value294 and resulted in an immediate release of tax pressure for agricultural producers by almost three times.295 The scheme was so attractive that the fat 287 In the ussr, a corporate tax rate for agricultural enterprises was dependent on their profitability. For the least profitable enterprises the tax was levied at 0.1 per cent, while for the most profitable ones, respectively, at 0.5 per cent. Demjanenko, Zoria, p. 10. 288 The consequences of this regulation were devastating: most of state and collective enterprises were de facto insolvent. 289 Demjanenko, Zoria, p. 11. 290 The eligibility for the cut off extended also to enterprises that had filed for bankruptcy. Art. 1 of Law No. 1565-ІІІ of 16.3.2000. 291 Law on fat No. 320-XIV of 17.12.1998 with amendments. After the outbreak of the economic crisis Law No. 639-IV of 31.10.2008 extended the fat lifetime for the unlimited time. The Law on fat was repealed in 2010 with the adoption of Tax Code, but the fat regime was preserved. 292 Art. 2 of Law on fat. 293 Art. 3 of Law on fat. The flat rate was increased up to 0.15 per cent in 2004. Law No. ­2287-IV of 23.12.2004. 294 The “agricultural land value” was evaluated in accordance to the special calculation elaborated by the state. 295 Audit Chamber of Ukraine. Report for 2002. As a consequence, in 1999–2001 the tax burden for agricultural enterprises in Ukraine made up 1.5 per cent of the output value (comparing to 3–11 per cent in the eu and 9 per cent in the us). In absence of the fat ­exemption the tax burden would have made up 5–6 per cent thereof. Demjanenko, Zoria, p. 14.

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coverage among eligible producers hit 80 per cent during the first years of the tax implementation.296 In spite of its initially provisional character, the fat regime was integrated, with slight amendments, into the new Tax Code 2010 on the permanent ­basis.297 The agricultural production share required for an enterprise to be eligible for the fat increased to 75 per cent of the total production value, but the historical base rule was abolished.298 The general tax rate remained at 0.15 per cent per ha.299 The eligibility extended to legal entities which produced agricultural goods and processed them, as well as those involved in supplying these products.300 At first sight, the language “produce and process agricultural goods” does not make it clear whether primary production, without any degree of processing, was covered by the fat; or whether processing activities, in absence of primary production, fell within the scheme’s scope.301 The fat implementation practice clearly confirmed the appropriateness of the first case. Moreover, since the notion “agricultural production” given in Art. 2.15. of the Law on State Support embraces processing, it may be accepted that processing enterprises were eligible for the fat, provided they were also involved in primary production inasmuch as the fat base was agricultural land. fat was to be paid on a monthly basis (one third of the quarter payment): 10 per cent of the annual sum was transferred at the first and second quarter, 50 per cent in the third quarter and 30 per cent in the fourth quarter.302 This mechanism was designed to reduce the tax burden for producers in periods of constrained costs. Notwithstanding the fact that the fat system had clear advantages by ­reducing tax administration costs and the risk of corruption, it demonstrated a certain degree of inequality. The fat taxation placed the lowest tax burden

296 Audit Chamber of Ukraine. Report for 2002. 297 In 2011–2016 the fat accumulated four taxes, i.a. corporate income tax (general tax rate amounted to 25 per cent before 2011 and was reduced to 18 per cent in 2014) and land tax. Art. 307 of Tax Code. 298 Art. 301.1. of Tax Code. The share of agricultural production was calculated on an income basis. Art. 14.1.262. of Tax Code. At the same time, enterprises were not entitled to the fat exemption if they had tax debts, except for those caused by force-majeure circumstances. Art. 301.6.3. of Tax Code. 299 Art. 304.1. (a) of Tax Code. The tax base was agricultural area in use. Art. 302 of Tax Code. 300 Art. 301.1. in conjunction with Art. 14.1.235. of Tax Code. 301 Differently, the repealed Law on fat used the enumeration “produced..., processed agricultural goods.” 302 Art. 306.2. of Tax Code.

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on enterprises with high profits. Thus, this scheme encouraged the formation of agriholdings which were free to bring in non-agricultural revenues of up to 25 per cent, and in so doing reduced their taxes. Disproportionalities could also appear in the sector-to-sector dimension. Livestock production units using relatively small land holdings (mostly poultry farms, which are characterised by comparatively low production costs) were obviously not proportional beneficiaries of the fat regime. Moreover, the fat scheme was also subject to a series of concerns about its efficiency. First of all, the argument that fat did not favour rural development should be recalled.303 Overall, the fat application caused the agricultural sector of Ukraine to be, in fact, untaxed, while the tax burden was shifted to other sectors of the economy.304 The above concerns, but primarily the government’s demand for additional fiscal revenues, manifested the need for the fat reform. After years of hard discussions, the fat regime was discontinued on 1 January 2015.305 6.6.2.2 fat Interpretation under the AoA Ukraine did not consistently notify the fat scheme to the wto under Art. 18 of the AoA. For 2004 and from 2010–2012, the fat was not calculated within country’s domestic support at all.306 In 2005–2006 and in 2009, the measure was partially notified into a non-product specific ams because the compensation was paid to the Pension Fund of Ukraine to offset losses caused by applying the fat special rate, as compared to the mandatory pension insurance charges they would have paid if the regular rate had been applied.307 After the Tax Code adoption in 2010, the payments to the Pension Funds were not a component of the fat system anymore.308 That must be the explanation for the ­non-inclusion of this support sub-line into the Current ams calculations after 2010. Allegedly, Ukraine was seeking to include all fat components into the ams calculation methodology before its wto accession, but for some reason rejected this idea. fat non-inclusion into the notifications is eligible under the wto 303 The major part of the fat payments flew to the central social funds, only one third remained on the local level. 304 In 2010 the fat resulted in an average tax payment of only roughly 6 uah per hectare of arable land (that time around 0.7 EUR/ha). be Berlin Economics, p. 20. 305 Law No. 71-VIII of 28.12.2014. 306 See WT/ACC/SPEC/UKR/1/Rev/2; G/AG/N/UKR/13; G/AG/N/UKR/18; G/AG/N/UKR/26. 307 In 2005–2006 the notified support varied between 1.2 and 1.6 million uah and in 2009 constituted 626 million uah. WT/ACC/SPEC/UKR/1/Rev/2; G/AG/N/UKR/9. 308 Art. 307 of Tax Code.

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practice. However, the interpretation of the ams definition given in Art. 1(a)(ii) of the AoA seems to give preference to the calculation rules of Annex 3 of the AoA rather than to the Members’ Schedules.309 In this regard, the place of the fat within the domestic support ­classification should be clarified. It could be claimed that the fat acquired clear ­revenue-foregone features as a substitute for four taxes. That would make it fall under the definition of subsidy under Art. 1 of the scma. The financial contribution by government as defined in Art. 1.1. (a)(1)(ii) of the scma is deemed to be conferred since government revenue that is “otherwise due” is foregone for all taxes replaced by the fat. Provided that the entire economy is taken as a reference mark, the criterion “otherwise due” can be fulfilled since the inclusion into the fat scheme exempts legal entities from tax liabilities of substantially higher amounts. Should the latest dsb approach to the reference mark as “tax treatment of activities in the same branch”310 be taken, the revenue foregone otherwise due could still be identified inasmuch as enterprises with agricultural production shares below 75 per cent and subsidiary farms were taxed at the general tax rate. Moreover, the incorporation of non-agricultural activities into the beneficial tax scheme should also incur revenue foregone from other ­sectors of the economy and, thereby, may be prone to bestow ­industrial subsidies. The element of benefit conferred by the financial contribution (Art. 1.1. (b) of the scma) was also present in the fat scheme because of the reduced tax burden for producers. Based on that, it could be concluded that this taxation mechanism may constitute a subsidy in the light of the wto rules. Nonetheless, the question about the fat specificity in the sense of Art. 2 of the scma needs further examination. Although the fat was applicable only to “certain enterprises,” it could be still justified under Art. 2.1. (b) of the scma as long as its eligibility criteria were neutral, economic in nature, horizontal in application, and did not favour certain enterprises over others (substantive requirements). Furthermore, eligibility for the scheme must be automatic and the elaborated criteria must be strictly adhered to (procedural requirements). The problem is that the provisions of Art. 2.1. (b) and footnote 2 to the scma have never been analysed by the dsb. By the same token, the negotiation history does not give a clue as to what is “neutral” in that context. Yet, the specificity e­ xemption 309 Art. 1(a)(ii) of the AoA stipulates that the ams shall be “calculated in accordance with the provisions of Annex 3 of this Agreement and taking into account the constituent data and methodology used in the tables of supporting material incorporated by reference in Part iv of the Member’s Schedule.” 310 Appellate Body Report US-Large Civil Aircraft, paras. 823–824.

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was initially perceived by the members as permissible if given through neutral c­ riteria that would normally be economic in nature and horizontal in application, i.e. not restricted to certain enterprises.311 On the one hand, the eligibility for the fat was based on production value, so the economic nature of the criteria may be presumed. On the other hand, the measure was restricted to enterprises active in agriculture and, therefore, was objectively limited to the group of certain legal entities. In view of that, horizontal application of the measure may hardly be recognised.312 Hence, the fat would be probably treated as a specific subsidy within the wto/gatt system. Although the fat included subsidy elements, challenging the measure’s impact on industry or services would require major efforts (as the examination may be pursued only on a case-by-case basis). Being for the most part an agricultural subsidy, the fat will be analysed in the context of the AoA disciplines for the purpose of this research. First of all, it should be examined whether the fat may be classified as direct payments to producers in the form of revenue foregone in accordance with para. 5 of Annex 2 of the AoA. The measure does not seem to fit into the concept of decoupled income support or other exemp payments, since the eligibility for the advantageous taxation was conditional on the obligation to produce.313 Therefore, the criterion of para. 6(e) of Annex 2 of the AoA could not be fulfilled in this case. Furthermore, the mere compliance of the fat with the fundamental ­criterion of para. 1 of Annex 2 of the AoA seems highly problematic. Likewise, although the final decision on trade distortion effects should be left to economists, it is beyond any doubt that the threat of distortion by the fat should not be disregarded given its probable incentivising effect on production and a considerable portion of Ukraine’s agricultural sector. First, the fat motivated enterprises to shift to the agricultural sector and produce. The higher the value of agricultural goods produced, the greater the profits from other activities that may be exempted from corporate tax liabilities. Second, due to the indirect discrimination favouring large-scale enterprises ascribed to the fat scheme, production expansion may be promoted further. Correspondingly, the fat scheme is not to fall within the scope of Annex 2 of the AoA and should be calculated to the Current ams as another non-exempted policy on the basis

311 MTN.GNG/NG10/W/38/Rev.1, Art. 4, p. 4. 312 Differently, it could be suggested that support granted for small agricultural producers provided under the framework of the general sme subsidy scheme would normally satisfy the requirements of Art. 2.1. (b) of the scma. 313 Para. 5 of Annex 2 of the AoA requires compliance of non-listed payments with the provisions of paras. 6(b)-(e) of Annex 2 of the AoA.

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of budgetary outlays314 (within non-product specific ams).315 Had it been the case, the fat inclusion into the non-product specific ams in 2010–2012 would most probably crack the de minimis ceiling.316 Exceeding de minimis in this category would have breached Ukraine’s Bound ams commitment.317 Arguably, the fat could be decoupled by eliminating eligibility based on production value and, respectively, the requirement on production; this would meet the conditions of para. 6(e) of Annex 2 of the AoA. In that way, the fat could be maintained for small producers which would have considerably reduced the charge on the public account. Ukraine’s Tax Code foresaw an alternative to the fat regime. Agricultural enterprises (legal entities with a share of agricultural production over 50 per cent) could choose the general income taxation scheme.318 In that case the income tax was calculated at the general tax rate of 18 per cent319 minus the land tax paid.320 This scheme did not incur a revenue foregone by the government and did not constitute a subsidy. Choosing general income taxation could be advantageous for large agricultural producers due to the exemption from the obligation for taxpayers whose annual income exceeded 10 million uah to pay monthly income tax advance payments in the amount not less than 1/12 of the income tax levied for the previous year.321 This exemption would not decrease an enterprise’s general tax burden directly, but may strongly influence its economic activities. It is unclear, however, which share of agricultural enterprises in Ukraine switched to this taxation scheme. 6.6.3 vat Regime for Agricultural Production 6.6.3.1 Basics on the Special vat Scheme It is assumed that the inclusion of a vat into producers’ input costs conveys a reduction of real on-farm investment and may further aggravate the farm 314 Para. 12 of Annex 3 of the AoA in conjunction with Art. 1(c) of the AoA. 315 At the first sight, the fat should be qualified as a non-product specific ams, but its ­supposed discrimination in favour of poultry producers may potentially lead to another conclusion. Para. 1 of Annex 3 of the AoA. 316 The non-product specific ams equalled to over 8.2 billion uah in 2010, where the de minimis ceiling constituted some 9.6 billion uah. In 2011–2012 this gap was shrinking further (respectively, 12.3 million uah comparing to 12.7 million uah, and 11.9 million uah comparing to 13 million uah). See G/AG/N/UKR/13; G/AG/N/UKR/18; G/AG/N/UKR/26. 317 The Bound ams is fixed at the level of about 3 billion uah. 318 Art. 155 of Tax Code. 319 Art. 151.1. of Tax Code. 320 Tax payers are land owners and land users. The general tax rate is set at 0.1 per cent of normative land evaluation per hectare. Art. 261.1. and 272.1. of Tax Code. 321 Art. 57.1. of Tax Code.

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income problem.322 In response to this concern Ukrainian agricultural producers were entirely exempted from vat liabilities in the period of 1999–2004. In 2004 the special voluntary vat regime for agricultural production was ­introduced.323 Within this structure, producers were taxed at the general vat rate,324 but these vat payments were not transferred to the state budget and were instead accumulated on enterprises’ accounts as a reimbursement for the vat paid by producers for agricultural inputs. Unless the entire allocated amount was not spent on inputs, the costs left could be used by the agricultural enterprise for other production purposes.325 By the same token, producers were also entitled to a refund for any vat paid for inputs for the export of agricultural production.326 The coverage of the vat scheme was initially narrower than the fat. One reason for that could have been a higher mandatory share of agricultural production required for the vat discount eligibility (no less than 75 per cent with the historical base of one year).327 Furthermore, the entities willing to participate in the vat scheme had to pay the tax under the general rules for at least one year before applying for the beneficial taxation. Thus, new entrants were excluded and often hindered because paying a vat one year without ­exemption was too costly for most small and mid-size producers. By the same token, the scope of the special vat regime did not embrace agricultural processing until 2009.328 In the same year, agricultural production became eligible for the vat beneficial taxation under the tolling agreements (commission), ­apparently with a view to promote processing activities on the territory of Ukraine. The Tax Code repealed the vat Law in late 2010, but maintained the beneficial vat regime for agricultural enterprises on a permanent basis.329 322 See Sub-chapter 2.3. 323 The regime was extended until 2011 (later on until 2012) in response to the financial crisis by Law No. 639-vi of 31.10.2008. 324 Only livestock producers could choose special vat exemption scheme. 325 Art. 8–1.2. of Law on vat No. 168–97 of 3.4.1997 with amendments. Essentially, the vat allocation system may be perceived as an instrument against government abuses and corruption. 326 Art. 8–1.4. of Law on vat. 327 Art. 8–1.16. of Law on vat. 328 For the purpose of the specific vat scheme, agricultural production extends to processing if the row materials used for processing are grown by the vat payer. Art. 8–1.16. of Law on vat. After the inclusion of processing into the vat scheme the coverage of taxable activities became identical with the fat regime. 329 Processing is covered by the vat scheme for agriculture only if processed by a taxable person. Art. 209.17.1. of Tax Code.

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The ­eligibility criteria were generally not amended.330 The essence of the policy was not substantially changed either.331 The special vat regime was eliminated on 1 January 2017332 after thirteen years of extensive use. 6.6.3.2

Examination of vat Regime for Agricultural Enterprises under the gatt/wto During Ukraine’s accession to the wto, the special vat taxation system for agricultural enterprises was criticised by other members, primarily in connection with the national treatment obligation (Art. iii of the gatt).333 Indeed, it would be hard to find a credible justification for the measure since the exemption of Art. III:8(b) of the gatt for subsidies to domestic producers does not extend to revenue forgone.334 Thus, in response to this issue, the representatives of Ukraine underlined the provisional character of the agricultural vat regime and promised to amend the rules for specific livestock sectors, which put at risk the equal treatment of imported products in the sense of Art. iii of the gatt.335 Nevertheless, the more favourable vat regime for livestock producers was extended with some modifications until 2015.336 It was applicable to legal entities registered as vat payers and individual producers engaged in primary production and processing of domestic basic animal products. From 2010 ­onwards, on top of the general vat agricultural scheme, livestock primary producers were entitled to receive additional payments. Thus, processing enterprises transferred a positive difference between their tax obligation and the tax credit (plainly speaking, it is the vat received from the production of processed animal products deducted from the vat which must have been paid for the inputs) on a special account for reimbursement to their suppliers and to the special state budget fund. The share of the payments assigned to the budget had to be increased from 30 per cent in 2012 to 50 per cent in 2014. ­Thereby, food processors in the livestock sector essentially subsidised producers of basic animal products. On the other hand, the state did not receive the vat “­otherwise due.” Consequently, the revenue foregone in the sense of ­Art. 1.1. (a)(ii) of the scma could be easily established. But given the fact that 330 Art. 209.6. of Tax Code comparing to the Law on vat. Service providers were excluded from the eligibility. 331 Art. 209.2. and 209.4. of Tax Code. 332 Para. 2(4) of Chapter xix of Tax Code. 333 WT/ACC/UKR/152, paras. 158 seq. 334 See Panel Report US-Malt Beverages DS23/R-39S/206, para. 5.8. 335 WT/ACC/UKR/152, paras. 158–162. 336 Para. 2.1 of Transitional provisions of Tax Code.

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the government did not directly provide the support, it would be more correct to speak about a financial contribution as defined in Art. 1.1. (a)(iv) of the scma. Thus, the benefits obtained by the farmers are not directly related to the tax release, but to the revenues generated by their goods. It may be argued that the government makes payments to a funding mechanism, and in so doing confers a contribution provided that revenue foregone is accepted as payments under Art. 1.1. (a)(iv) of the scma.337 The fact that the processors are directed to provide support for their suppliers – primary producers – does not seem to be debatable.338 The compliance with the second part of Art. 1.1. (a)(iv) of the scma needs an answer to the question of whether the practice was not complex enough to be “in no real sense” different from practices normally followed by governments, i.e. whether the practice was linked to taxation and public expenditures (i.a. loans).339 That could be attained seeing as direct payments to primary producers were transferred from the funds allocated the vat due, and the state explicitly delegated the processors to distribute a part of the funds among their suppliers. Adding the clear benefits for livestock producers that resulted from the partial vat release, the subsidy in the sense of Art. 1 of the scma could be established. Yet, the modified vat scheme for livestock producers was not notified to the wto by Ukraine.340 Perhaps the specific livestock support was merged with the general vat scheme for the purpose of the Current ams calculation. That would be, however, highly controversial from the point of view of the coherence requirement for the ams methodology. The general track of vat exemptions for the agricultural sector is notified by Ukraine as a non-product specific “amber box” measure.341 Although the corresponding expenditures were still within the de minimis level, they were approaching the cap.342 This development could jeopardise Ukraine’s 337 The notion “payment” has never been interpreted by the dsb in the light of Art. 1.1. (a)(iv) of the scma. However, in respect to Art. III:8(b) of the gatt, it was found that revenue foregone would not fall within the scope of “payments.” See footnote 334 to this Chapter. 338 The measure in concern may also fall within the narrowest interpretation of “direction” as “delegation.” See Sub-chapter 4.1.3. 339 See Sub-chapter 4.1.3. 340 The special vat regime for livestock producers was notified by Ukraine within productspecific ams before 2011. G/AG/N/UKR/18. 341 See WT/ACC/SPEC/UKR/1/Rev/2; G/AG/N/UKR/9; G/AG/N/UKR/13; G/AG/N/UKR/18; G/AG/N/UKR/26. 342 While in 2004–2006 the vat subsidies were granted within the limits of 1.5–1.7 billion uah, vat accumulations reached 2.8 billion uah in 2009, multiplied to 7.1 billion uah in 2010, and surged up to 11.1 million uah in 2011 and then 11.8 million uah in 2012.

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­compliance with its Bound ams commitments in the years before 2017.343 The pitfall of the vat support is that the de minimis exemption is based on the total value of agricultural production. It would be reasonable to expect the vat volumes to expand in parallel with growth of agricultural production. At first sight, vat subsidies may not exceed the de minimis limits, but further aspects should be taken into consideration: (1) The de minimis ceiling is formally dependent on total agricultural production (by both vat payers and other producers). In recent years around 40 per cent of agricultural production were delivered by private households344 which were not vat payers. Similarly, outputs of small farmers not registered as vat payers was also substantial. (2) Both vat and fat regimes favoured formation of vertical structures (holding companies) in the agriculture that were mandatory vat payers.345 (3) The integration process promoted expansion of large-scale agricultural units, namely, enterprises (vat payers). That means that vat payments and, correspondingly, vat subsidies were getting higher. There were basically two alternatives to the incumbent advantageous taxation regime: its elimination or the reduction of vat rates for agricultural ­producers.346 vat reduction for goods of primary necessity is a widespread practice globally. Its major drawback is the tax burden reduction for all producers and the entire population regardless of their income. Hence, it could be the case that vat reduction at the production level would stimulate ­vertical integration with a goal to evade taxation. That would contribute to already existing distortive competition in the sector.

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For ­comparison, the country’s Bound ams is fixed at around 3 billion uah. See WT/ ACC/SPEC/UKR/1/Rev/2; G/AG/N/UKR/9; G/AG/N/UKR/13; G/AG/N/UKR/18; G/AG/N/ UKR/26. In 2010 the share of support granted through the beneficial vat regime constituted over 85 per cent of the total non-product specific ams notified by Ukraine. The Current nonproduct specific ams made up about 85 per cent of the de minimis level and its amount exceeded the Bound ams in almost three times. The share of private households in crop production may reach up to 20 per cent and up to 80 per cent in the livestock sector. Own evaluation based on the information of www .eastagri.org; Kobuta and others, pp. 5, 19–20. Art. 181.1. of Tax Code obliged for vat registration all companies with an annual turnover exceeding 300 000 uah (less than 30 000 eur). The second possibility was largely discussed in 2012–2013. An upublished ministerial proposal from 2013 offered to reduce the vat for agricultural producers to 7 per cent and to terminate vat benefits (the general vat rate makes up 20 per cent).

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Another point is that a reduced vat rate, if applicable only for producers, may increase consumer prices as a consequence of the tax burden shift to ­processors and food producers. Conversely, if a vat rate reduction had been implemented for the complete food chain with the goal of avoiding disadvantages for processing enterprises, vat benefits for agricultural processors should have been calculated into Ukraine’s Current ams in accordance with para. 7 of Annex 3 of the AoA. The tax support for processors would likely benefit primary producers also due to the potential expansion of in-land input purchases because of increased liquidity.347 In this regard, neither a budget relief nor a decrease of non-product specific ams could be reached, while even the reverse effect could be expected. Yet, adjusting the special vat regime to the wto “green” area was not realistic given the coupled character of the taxation base (inputs used for agricultural production). Based on the above arguments, the latest abolishment of the special vat regime should be welcomed. It could be recommended to switch to direct payments for small and mid-size producers that would not substantially overcharge the public account. 6.6.3.3 The Issue of vat Export Refunds vat export refunds are widely used in international trade with the purpose of avoiding double taxation.348 The Ukrainian tax system faces difficulties securing vat reimbursement to exporters in sectors showing a large increase in export volumes, especially the grain sector.349 The resulting vat arrears may be recognised as an additional tax burden on agricultural producers only to some extent since not all grain exporters are producers. Even though indirect exporters’ taxation must have dumped farm gate prices, seeing as grain purchasers were seeking to reduce their operation costs. To tackle the vat arrears problem and simultaneously stimulate farm prices, the government launched an accelerated vat reimbursement procedure for grain exporters who purchased goods directly from producers at commodity

347 This allegation must be proved on a case-by-case basis. However, since most processing capacities in Ukraine, i.a. in the vegetable oil and feed sectors, are underfilled, a proposed tax relief may contribute to the demand expansion. 348 Export transactions are usually subject to a zero vat rate. Thus, an exporter is entitled to get a refund of the vat paid by procuring goods for exportation. 349 Reported already in the early 2000s, the vat refund debt for grain exports grew further and was estimated at the level 7.9 billion uah, including 3.6 billion uah overdue debts, in 2008. fao, ebrd 2002, p. xxxii; fao, ebrd 2010, p. 19. This amount exceeded Ukraine’s annual Bound ams in more than two times.

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exchange prices, provided that these prices were not lower than the minimal ­intervention price set by the government.350 This measure initially c­ ontributed to some debt reduction,351 but has not settled the issue up to now. Aiming at combating rising debts before exporters and looking to increase external competitiveness,352 the government also temporarily banned vat export refunds for grain, sunflower seed, and rapeseed starting at the end of 2010 (in force until the end of 2015).353 Thus, domestic supply of these products was exempt from vat, except for the first transaction by producers or enterprises that directly purchased the goods from producers, as well as exportation of these goods.354 This means that producers of the concerned crops could still benefit from the vat allocation scheme. The vat burden was switched to supply chain intermediaries and grain exporters. Practically, this exemption may be inclined to remove vat support scheme advantages because export traders may reduce farm gate prices to ensure their own revenues. Taking into consideration the inefficiency of short-term measures, it seems obvious that a constructive and permanent solution is necessary to combat vat debt arrears in Ukraine. That is vital since the payment of vat refunds in due time is supposed to be one of the key prerequisites for an attractive investment climate in the country.355 It may be argued that the vat reimbursement problem is a result of the overall shortcomings within the country’s tax administration and public finance management. Moreover, the fat and vat regimes could be regarded as important contributory factors that led to exponential output in the profitable production segments. Apparently, an efficient solution of the vat debt problem could not be achieved without rectifying its causes. The only possible temporary alternative to vat reimbursement would be to 350 cmu Order No. 1082 of 6.8.2008. 351 Blue Ribbon Centre. Recommendations for Economic and Institutional Reforms: undp project, 2009 (in Ukrainian), p. 54. 352 oecd; European Union. Value-Added Taxes in Central and Eastern European Countries. A Comparative Survey and Evaluation, 1998, p. 120. 353 Para. 2.15. of Transitional provisions of Tax Code. Law No. 713–18 of 19.12.2013 reintroduced vat reimbursement for export traders purchasing grain directly from producers. The regime was discontinued at the end of 2015 by Law No. 909-VIII of 24.12.2015. 354 Para. 2.15. of Transitional provisions of Tax Code. The vat rate for grain and oilseed export is bound to zero. Art. 209.14.2. in conjunction with Art. 193.1. (b) of Tax Code. 355 One of the reasons why Ukrainian exports are concentrated in just a few commodities must be that anyone considering exporting a different product must expect non-refunded vat payments as a major potential source of unprofitability. Crane K.; Larrabee St. Encouraging Trade and fdi in Ukraine, Santa Monica, 2007 (further Crane, Larrabee), p. 24. Also recognised in para. 3 of cmu Order No. 1073 of 19.5.2010.

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implement it through indirect modes, such as credit provision for other taxes payable by concerned enterprises.356 Besides the economic impact on price building in the grain sector, large vat arrears may be found inconsistent with certain wto provisions, including para. 2(c) of the Annex of the trims Agreement.357 The dsb’s broad approach to the scope of “trade-related investment measures” as not being limited to investment measures within national orders, together with the conclusion that internal taxes and regulation may constitute trims,358 should allow for the vat reimbursement arrears to fall under the disciplines of trims Agreement. The trims falling within the scope of para. 2 of the Annex of the trims Agreement have been found to be inconsistent with Art. xi of the gatt.359 Following the typical pattern of the dsb examination of disputes involving claims under the trims Agreement, the analysis shall start with the gatt provision allegedly in breach, not with norms of a specific multilateral agreement.360 Art. XI:1 of the gatt authorises restrictions in the form of taxes, including export taxes. But do vat debt arrears constitute an export tax for grain exporters or for producers? Evidently the government did not pursue any intention to impose an export tax on producers, but an effect on exporters could not be excluded. The most probable rationale for this would be postponement of the final decision on vat arrears. Interpreting the procedure de jure, inclusion of the vat in the first in-land grain purchase and its exclusion for exports imposes a tax on the entity (person) that executes the second and the subsequent in-land purchases and/or exportation. Should this approach be accepted, the exclusion granted by Art. XI:1 of the gatt will be justified. In the opposite case, the analysis is to proceed to the trims requirements.361 356 fao, ebrd 2002, p. xxxv. 357 This provision deals with restrictions of exportation or sale for export by an enterprise inconsistent with Art. xi of the gatt. 358 Panel Report Indonesia-Autos, WT/DS54/R WT/DS55/R WT/DS59/R WT/DS64/R, paras. 14.73., 14.80.-14.81. 359 Panel Report Indonesia-Autos, para. 14.83.: examination of a measure under the illustrative list is also to indicate whether it is inconsistent with the gatt (Art. xi of the gatt in the case in focus). 360 E.g. Panel Report Canada-Wheat WT/DS276/R para. 6.378.; Panel Report EC-Bananas (ecu) WT/DS27/R/ECU, para. 7.123. Differently, the recent Appellate Body Report Canada-Feed-in Tariffs, paras. 5.86.–5.91., 5.104.–5.105. 361 The dsb has never decided on the violation of Art. xi of the gatt in the trims context. Usually claims are based on Art. iii of the gatt rather than on Art. xi of the gatt. The rare cases based on both provisions were started by dealing with Art. iii of the gatt. After non-compliance with Art. iii of the gatt was found, the analysis of Art. xi of the

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Both cumulative criteria shall be met by a measure to fall within the scope of para. 2(c) of the Annex of the trims Agreement. First, the measure must be mandatory or enforceable under domestic law (administrative rulings), or practically binding to obtain the advantage. It could be argued that this condition cannot be satisfied by the practice of vat non-reimbursement to exporters in Ukraine inasmuch as it is not foreseen by the national law. In fact, this practice violates the provisions of the country’s tax law.362 The incumbent vat exemption for export-oriented crops is somehow different. The instrument is incorporated into the Tax Code, and thus, the first condition of para. 2(c) of Annex of the trims Agreement is fulfilled for this measure. Second, a trim measure is to constitute a restriction of exportation or sale for export by an enterprise where such restriction is specified i.a. in terms of particular products. The second requirement seems to be satisfied for the vat non-reimbursement practice since only grain and oilseed transactions are exempt from the general refund scheme. However, the measure’s qualification as a restriction to exportation and sale for export is contentious. On the one hand, exporters should be at a disadvantage given that the purchase price they pay to producers should theoretically include the vat. That should be so because producers “pay” vat nominally, and the first domestic purchase is not exempt from the vat. If exporters buy crops directly from farmers, they basically pay the vat and have a right to the reimbursement, but they cannot enforce this right pursuant to para. 2.15. of the Tax Code Transitional Provisions. It could be claimed that “taxation” of these grain exporters at the level equal to the vat paid by producers might constitute a restriction in the sense of para. 2(c) of Annex of the trims Agreement. The decision on this issue will be made on the basis of the export dynamics in the concerned segment. The situation is somehow different when exporters purchase grain and oilseed through intermediaries, which is often the case.363 Under these circumstances, exporters do not pay the vat at all. The vat should be included into the farm-gate grain price and it is expected that the vat costs may be split between participants of the supply chain. In practice, as already intimated, unwilling to be faced with disadvantages, grain exporters tended to dump ­producers’ prices and buy grain at prices adjusted to the vat losses of i­mporters. Therefore, a gatt was not pursued, e.g. Panel Report India-Autos WT/DS146/R, WT/DS175/R, para. 7.208.; Panel Report Turkey-Importation of Rice WT/DS334/R, para. 7.259. 362 Hence, following the recent approach taken in Canada-Feed-in Tariffs, the vat debt ­arrears in Ukraine could not be effectively combated under the trims Agreement. 363 The intermediaries’ market share is estimated at 50 per cent of the total exports according to the information of Ukrainian Club of Agrarian Business.

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restriction on an enterprise’s export sales may be established since the mandatory vat exemption for grain and oilseed purchase de facto restricted producer sales owing to dumped demand prices. On the other hand, the purchases may be restricted de facto, not de jure. Moreover, primary producers were free to sell their goods at reduced prices or to refuse to do so. That makes the challenge of this measure under para. 2(c) of Annex of the trims Agreement rather complicated. What’s more, an increase in Ukrainian grain exports in 2011–2014 does not provide additional evidence of a de facto restrictive effect on trade. Ukraine’s temporary vat exemption for grain and oilseed exports may also be viewed from the perspective of export competition. If it can be proven that the measure helps respective exporters overcome the barrier of vat reimbursement and/or reduces domestic grain and oilseed purchase prices, it may be ­argued that this policy could result in the granting of export subsidies for to grain exporters. Nonetheless, even if the measure acquired such an ­effect and this could be proven, the strict interpretation of mandatory contingency to export performance within the wto law would make including the vat ­exemption under the definition of export subsidies under Art. 3.1. of the scma difficult to achieve. Since all transactions with the concerned agricultural products, both domestic transfers and exportation, were exempt from the vat, the strict contingency test could not be passed by the measure, even potentially. At the same time, the illustrative list of export subsidies embraces exemption of exported products from indirect taxes in excess of those levied in ­respect of the production and distribution of like products when sold for domestic consumption.364 Thereby, the reference mark for the identification of benefits conferred by the measure shall be the “like products,” not the same products. The dsb in Border Tax Administration distinguished four criteria of likeness: properties, products’ end-use, consumers’ tastes and habits and tariff classification.365 Nevertheless, there is no absolute definition of likeness; a case-by-case study is required.366 It is not possible to identify like products for the crops exempted from the vat on Ukrainian market. Every grain sort (except buckwheat and rice) and 364 Lit. (g) of Annex i to the scma. 365 Panel Report Border Tax Adjustment L/3464, para. 18. 366 Ibid. In EC-Asbestos the Appellate Body decided for the overall determination of the products as “like” on the basic of each criterion and other evidence. Appellate Body Report E­ C-Asbestos WT/DS135/AB/R, para. 109. See Mavroidis P. Trade in Goods: The gatt and Other Trade Agreements Regulating Trade in Goods, 2nd ed., Oxford, 2012 (further Mavroidis), pp. 273 seq.

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all oilseeds are concerned. Given the fact that buckwheat and rice cannot substitute wheat and rye for bread production or replace barley and maize for animal feed, and since there are hardly any oilseed substitutes for extraction of traditional Ukrainian vegetable oils (due to predominant consumer tastes), the reference mark of “like products” for the purpose of lit. (g) of Annex i to the scma cannot be identified. Another attempt to classify the vat exemption for specific goods may be the identification of a subsidy in the sense of Art. 1 of the scma. As for provision of financial contribution by government, it does not seem that there is any kind of revenue foregone due. The state puts a charge on exporters through exemption of certain operations from the vat reimbursement, since exporters are not compensated for the internal tax paid at the beginning of the supply chain. Footnote 1 to the scma, which constitutes an exemption from the rule of Art. 1.1. (a)(ii) of the scma, states specifically that exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption shall not be a subsidy. In our case, both domestic ­purchases (except for the first transaction) and sales for export are exempt. Hence, the vat exemptions for grain and oilseed under the Tax Code may not be included in this exception. However, due to the fact that the vat for exportation is bound to zero for all products with a view to avoid double taxation, exporters who are legally entitled to be exempted from the vat (either in case of a provisional ex ante exemption or a common posterior reimbursement), the state, in fact, does not carry any revenue foregone for export transactions, but solely for domestic supply transactions exempted from the vat. Exclusively this disbursement may potentially be recognised as a component of the Current ams, but that cannot be linked to promotion of export operations. Alternatively, it may be considered that the vat exemption for specific goods may be associated with subsidies provided to exporters directly or indirectly through private actors (i.e. income reduction at producers’ side and its shifting to exporters due to dumping of farm-gate prices). This approach is highly disputable. First, the conclusion on financial contribution under Art. 1.1. (a)(iv) of the scma could not be positive owing to the benefits granted by effects, not the intention of the measure.367 Second, the form of export subsidies provided in Art. 9.1. (c) of the AoA,368 besides the burdensome ­procedure to

367 See Panel Report US-Export Restraints, Sub-chapter 4.1.3. 368 Panel’s approach in Canada-Dairy (para. 7.31.) demonstrated that where there is a subsidy falling within the illustrative list of Art. 9.1. of the AoA, no examination under Art. 1 of the scma is required.

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establish “payments financed by virtue of governmental action,”369 does not undermine the proof of export contingency by virtue of Art. 1(e) of the AoA. The vat exemption would most certainly fail this test, as already indicated above. At the end of the day, the form of vat exemptions for export-oriented crops operated in Ukraine does not seem to fit into the wto concept of subsidies, and could be hardly targeted multilaterally, although it may be trade restrictive. Apparently, vat debt arrears for agricultural producers in Ukraine (­before the imposition of the temporary vat reimbursement ban) may only be considered in the light of Art. X:3(a) of the gatt that requires administration of trade-related laws, regulations, rulings and decisions in a uniform (i.e. consistent and predictable370), impartial, and reasonable manner.371 Supposedly, unstable and unequal enforcement of mandatory legal provisions, namely, vat refunds to exporters, may be challenged as non-uniform administration in the sense of Art. X:3 of the gatt. The reported rent-seeking and discrimination among exporters372 is prone to contribute to the impartiality (contingency of discretion) when applying the vat law.

369 Art. 9.1. (c) of the AoA “embraces the full-range” of activities by which governments “‘regulate,’ ‘control’ or ‘supervise’ individuals” which is not limited to direction and mandating. Appellate Body Report, Canada-Dairy (Art. 21.5-New Zealand and us), para. 112; Appellate Body Report Canada-Dairy (Second recourse to Art. 21.5), paras. 127–128. There must be, however, a “demonstrable link” between governmental action and the “payments.” Panel Report Canada-Dairy, para 5.106; Appellate Body Report, Canada-Dairy, para. 113. In our case, vat regulation for grain purchases may be recognised as a governmental action since it provides mandatory rules of behaviour for individuals. The payments in the sense of Art. 9.1. (c) of the AoA might be the vat transferred by the first purchaser to grain producers (the purchasers were charged without further reimbursement in 2011–2013). The link between the governmental action and the payment could also be found due to the binding character of the vat regulation. Reduction of farm gate price in favour of export purchasers (in fact, deduction to the vat amount) may be also potentially recognised as “payments.” But under this approach the demonstrable link between the regulation (vat exemption) that does not preview “payments” and the deductions may be not easy to prove. 370 “(L)aws should not vary… every exporter and importer should be able to expect treatment of the same kind, in the same manner both over time and in different places.” Panel Report Argentina-Bovine Hides, para. 11.83. 371 See also Sub-chapter 3.1.1. 372 See Crane, Larrabee, p. 25.

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6.6.4 Taxation of Private Households Private households in Ukraine have their own set of tax benefits. Subsidiary farms not exceeding 2 ha are exempt from land tax.373 Revenues from the purchase of agricultural goods produced in private households are not calculated into the monthly taxable income of the individuals concerned.374 As private households are not legal entities, the fat and vat were also not levied. In short, this category of agricultural producers is not directly taxed at all. However, it is not as simple as it appears. Because private crop-producing households are not eligible to participate in any support scheme for agricultural enterprises, they do not receive help in acquiring their inputs. Thereby, their tax benefits may be economically annihilated.375 Adding to this a lack of synergistic effect with small-scale production, along with weak access to credit facilities and market infrastructure, it may be concluded that the constraints faced by private households in Ukraine are generally higher than those of other agricultural producers. Nevertheless, an entirely untaxed agricultural sub-sector in a large exporting country may be associated with subsidies in the form of revenue foregone by the government. But it is highly questionable, given the illustrated economic constraints, whether the element of “benefit conferred” may be established in the present case.

Intermediary Summary

Ukraine’s indirect agricultural support through the fat and vat regimes and the tax exemptions for individual agricultural producers can hardly be challenged successfully under the multilateral rules. The reasons for this are the initial non-inclusion of the fat and beneficial taxation for private households into the ams methodology, as well compliance of the notified vat subsidies with the de minimis ceilings. The next step should be identifying the interaction between Ukrainian tax policies in the agricultural sector and the provisions of the eu-Ukraine rta. 373 Art. 281 of Tax Code. 374 Art. 165.1.24. of Tax Code. 375 The situation of livestock producers who were eligible for vat support was different. However, the number of favoured livestock producers may be limited inasmuch as not all private households are capable of delivering livestock production of sufficient quality for further processing.

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6.6.5 Taxation in the Framework of eu-Ukraine Co-Operation 6.6.5.1 Introduction In addition to the impact of the wto disciplines, some aspects related to ­agricultural taxation in Ukraine are influenced by eu policies. The first ­commitments on the gradual approximation of Ukraine’s tax regulation to the eu principles of good governance in the tax area, and to the European Code of Conduct for Business Taxation,376 were incorporated into the bilateral ­co-operation agenda prior to the signing of the eu-Ukraine aa.377 In addition to that, the parties agreed on an external approximation mark – the implementation of the wto tax disciplines.378 Before the launch of the eu-Ukraine aa, the co-operation on taxation remained in the soft law area given that the competence of the Co-operation Council was limited to recommendations,379 and the legal approximation for rules on indirect taxation was subject to Ukraine’s discretion.380 However, the eu-Ukraine aa seeks to enhance and strengthen the co-operation, i.a. through obligatory gradual approximation of Ukraine’s indirect taxation to the eu ­acquis381 within five years.382 It is suggested that Ukraine’s approximation to the eu tax practice shall run in two parallel dimensions: – tax subsidies under the framework of approximation to eu state aid rules as established in the Sub-chapter 4.5.; – harmonisation of indirect taxation and implementation the Code of Conduct for business taxation. 376 Conclusions of the Ecofin Council Meeting, on 1 December 1997 concerning taxation policy (oj C 2 6.1.1998 pp. 1–6) (further Code of Conduct), Annex 1, lit. A. 377 Parties seek “improving international tax cooperation…taking into account the principles of the eu Code of Conduct for Business Taxation.” Para. 57 of the List of the eu-Ukraine Association Agenda priorities for 2011–2012 Agreed by the Joint Committee at Senior ­Official’s Level of eu-Ukraine Association Agenda on 20.5.2011; enpi. National Indicative Programme for Ukraine 2011–2013, pp. 12–14, Sub-priority 1.3. 378 Within the eu-Ukraine Association Agenda, Ukraine confirmed an intention to reform its tax system and tax administration in accordance with the wto provisions. Para. 2.3.5. of Ukraine-eu Action Plan 2005. 379 Art. 85 of pca. 380 “Ukraine shall endeavour to ensure that its legislation will be gradually made compatible with that of the Community.” Art. 51(1)–(2) of pca. 381 Council Directive 2006/112/EC of 28.11.2006 on the common system of value added tax with exemption of provisions on special tax regimes (oj L 347 11.12.2006 p. 1) (codified version of 1.6.2016) (further vat Directive). 382 Art. 351, 353 and Annex xxviii of the eu-Ukraine aa.

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Each axis should be examined separately. First, the perspective of catching tax policies by the state aid rules will be examined followed by an analysis of the basic vat rules in the eu. 6.6.5.2 Particularities of eu State Aid in the Tax Form Tax regulation is mostly not harmonised in the eu.383 At the same time, 42 per cent of state aid for industry (with a trend to increase) is provided in the form of tax measures.384 For that reason, the eu pays a lot of attention to Member States’ tax measures. A non-binding European Code of Conduct for Business Taxation covers measures which affect or may affect, in a significant way, the location of business in the eu. This instrument is supposed to target harmful measures, i.e. measures that lead to a significantly lower effective level of taxation. The ­criteria of harmfulness include an exclusive effect on non-residents or on transactions with non-residents; missing effect on the domestic tax base; acquiring advantages without real economic activity within Member States; a lack of transparency etc.385 Therefore, the scope of the Code of Conduct is broader than just tax subsidies and may also encompass tax administration issues. In reaction to the adoption of the document, the Commission issued a notice which reiterated the important role of state aid disciplines to defeat harmful tax competition.386 Although there are proponents for the application of Art. 114–115 of the tfeu to taxation – like those who believe it should be a matter of legal approximation instead of state aid disciplines387 – the ecj has consistently indicated that tax incentives for producers may constitute state aid,388 as Art. 107(1) of the

383 Taxation is the Member States’ competence (as not listed in Art. 2 and 3 of the tfeu) and is subject of co-operation under Art. 5(1) of the tfeu. 384 Commission Staff Working Document “Regulatory Cycle – Example Sectors” (Accompanying document to the 26th Annual report of the Commission on Monitoring and Application of Community Law sec(2009)1683 of 15.12.2009. Internal taxation is supposed to have a large potential to distort internal market. Micheau C. State Aid and Taxation in the eu. In: Szyszczak E. (ed.) Research Handbook on European State Aid Law, Cheltenham, 2011, pp. 193–218 (further Micheau), p. 193. 385 Code of Conduct, Annex 1, lit. B. 386 Para. 1 of Commission Notice on the application of the State aid rules to measures relating to direct business taxation 98/C 384/03 (oj C 384 10.12.1998 p. 3). 387 The Commission also used to exclude taxation from state aid control before the completion phase of the internal market establishment. Luja, pp. 113–115. 388 See e.g. C-30/59, C-173/73, C-387/92 Banco Exterior de España 1994 ecr I-887.

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tfeu extends to “aid in any form.”389 A tax subsidy is composed of the same elements as direct state aid, although the judicial and executive practice developed specific particularities for state aid granted through favourable taxation. First of all, it should be mentioned that benefits for recipients may be conferred by reducing a firm’s tax burden in various ways,390 i.a. through the non-creation of tax liability (benefit as a diversion from the normative tax regime);391 income exclusion (if this exclusion is not a part of the normative tax system);392 tax deferral (if no appropriate interest charges are levied)393 etc. By the same token, the European regulator explicitly deals with transfer pricing as with a benefit in the sense of Art. 107(1) of the tfeu.394 For this purpose, the “at arm’s length principle” was elaborated which postulates that related companies should charge prices at the level equal to that which unrelated companies would use. The price below an “at arm’s length” level could result in a benefit inasmuch as a part of company’s activities remains untaxed. Under the eu approach, a benefit is supposed to be conferred only by crossborder transactions.395 Another specific case is remitting tax debt for insolvent companies. That means that the state does not take legal measures as a creditor in order to prohibit an insolvent company, which is not able to comply with its tax liabilities, from continuing its activities.396 Even when insolvency is not filed for, the failure of tax authorities to collect taxes may still confer a benefit.397 The amount of benefit shall be determined by a comparison between the general and preferential measures.398 All kinds of incentives may potentially 389 Benefits for producers may be conferred not only through a positive aid, but also through an exemption from their obligations. C-143/99 Adria-Wien Pipeline 2001 ecr I-8365, para. 38. 390 Para. 9 of Commission Notice 98/C 384/03. 391 E.g. C-53/00 Ferring 2001 ecr I-9067, para. 15; C-200/97 Ecotrade 1998 ecr I-7909, para. 34; Luja, p. 29. 392 Luja, p. 30. 393 Ibid., pp. 32–33. 394 This eu approach somehow differs from the wto practice where this issue is normally discussed in the context of customs valuation. See e.g. Bastin L. Transfer Pricing and the wto. In: Journal of World Trade, 48(1), 2014, pp. 59–80. 395 Luja, p. 30. See also Commission Press Release IP/02/1236 of 26.8.2002 which advocates use of cost-plus method of taxation to find a proper transfer price. 396 C-480/98 Spain v. Commission 2000 ecr I-8717, para. 20. See Luja, p. 35. 397 Commission Decision 91/144/EEC Halkis Cement (oj L 73 20.3.1991 p. 27), Section vi. 398 T-308/00 Salzgitter v. Commission 2004 ecr II-1941, para. 81: “to determine the reference point in the scheme of question against which the advantage is to be compared.”

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fall under the notion of aid.399 The Commission tends to examine the overall effect of a measure;400 the common eu practice is to assess both direct and indirect beneficiaries.401 The second state aid element, a charge on the public account, is deemed present when tax exemptions reduce fiscal revenues and debit the budget, at least in an indirect manner. For instance, this element is present if a state’s actual tax revenues are lower due to the measure’s implementation in comparison to the revenues it would have received had the enterprise in question not received an advantage.402 By the same token, indirect transfers, namely, fiscal benefits that influence the decisions of consumers and private investors, and that may financially benefit a specific sector indirectly, are seen as imposing a charge on the public account, too.403 Speaking of tax measures, the required link between a state origin of resources and a benefit conferred is not always evident. The ecj interpretation is not homogenous on that point. In any case, creating incentives for private actors to invest in certain companies should constitute a benefit inasmuch as the state is underpaid of revenues it would have received.404 The element of trade and competition distortion is applied in line with the general scheme, while the approach to selectivity is somehow different. Taken into consideration that governments tend to limit the circle of tax beneficiaries due to a budget constraint and control concerns,405 the application of Art. 107(1) of the tfeu to a tax measure is conditional on its exception from the general tax system. Thus, the only justification for a differentiated tax measure would be its exception “by the nature or general scheme of the tax system,”406 namely, whether the economic rationale or objective differences between taxpayers make the measure necessary for functioning and effectiveness of the tax system.407 This criterion is interpreted restrictively: commonly, a tax measure whose main effect is to promote certain activities would constitute state 399 “Disincentives” do not normally constitute state aid. Micheau, p. 198. 400 Commission Decision 2000/735/EC Technolease (oj L 297 24.11.2000), p.13, para. 22. See Luja, p. 44. 401 E.g. C-102/87 France v. Commission 1988 ecr 4067, para. 5. 402 Heidenhain, pp. 120 seq. 403 C-156/98 Germany v. Commission 2000 ecr I-6857, paras. 26–28: “an alternation of the market conditions which give the rise to the advantage is the consequence of the public ­authorities’ loss of tax revenue.” See Luja, p. 42. 404 C-156/98. Micheau, p. 197. Differently, C-379/98 Preussen Elektra, see Sub-chapter 4.2.3. 405 Luja, p. 49. 406 Para. 16 of Commission Notice 98/C 384/03. 407 Para. 23 of Commission Notice 98/C 384/03.

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aid.408 Nevertheless, unless they contain discretionary elements, fixed base schemes (e.g. in the agricultural sector) may be justified by the sector’s nature where, for example, they consider specific accounting requirements or the importance of land in beneficiaries’ assets.409 On the other hand, the selectivity criterion is considered fulfilled for tax incentives for entrants,410 e.g. exceptions from the general insolvency rules,411 as well as for the de facto selectivity where a generally applicable intra-group scheme benefits only a limited number of companies.412 The eu does not explicitly notify tax exemptions for agricultural producers to the wto.413 The Guidelines 2007 provided that tax exemptions, tax reductions, tax differentiations and refunds for fuels and electricity may constitute state aid.414 When these measures are applied equally for the whole agricultural sector, the Commission believes they can contribute to the development of the entire sector and thereby be exempted in accordance with Art. 107(3)(c) of the tfeu.415 In the light of the wto subsidy disciplines, this kind of tax benefit conferred to farmers may constitute revenue foregone in the sense of Art. 1.1(a)(1)(ii) of the scma and fall within the scope of the “amber box.” 6.6.5.3 eu vat Directive Because taxation does not fall within the scope of the exclusive Union competence as provided in Art. 3(1) of the tfeu, and is explicitly excluded from the obligation to approximate national regulations imposed by Art. 114 of the tfeu (in conjunction with Art. 26 of the tfeu), Council Directive 2006/112/ EC (further the vat Directive) represents perhaps the only binding European instrument in the field of taxation. This set of rules is awaiting reform under the framework of the Europe 2020 objectives in response to concerns about the fragmentation of the common eu vat system.416 408 Para. 18 of Commission Notice 98/C 384/03. There is certain critic in the legal literature on the Commission’s application of the test of “nature or general scheme of the system” and the “derogation test.” Luja, pp. 53–54, 67 seq. 409 Para. 27 of Commission Notice 98/C 384/03. 410 Joined cases T-92/00 and T-103/00 de Álava 2002 ecr II-1390, para. 49. 411 Ecotrade, paras. 41–45. See also Luja, p. 65. 412 E.g. Commission Decision 2009/809/EC Groepsrentebox (oj L 288 4.11.2009 p. 26), paras. 119–121. 413 National tax measures may be, however, covered by the sub-line “Other” non-product specific ams. See G/AG/N/EU/10; G/AG/N/EEC/68. 414 Para. 163 of Guidelines 2007. 415 Ibid. 416 Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee on the future of vat “Towards a simpler,

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The transactions covered by the vat Directive encompass supply of goods or services.417 In contrast, export operations are not taxable with vat.418 The vat Directive underlines that simplicity and neutrality of a vat system may be achieved only if “the tax is levied in as general a manner as possible” and covers all stages of production and distribution.419 While generally a single vat rate is applicable, reduced rates for things like foodstuffs (including ingredients and seeds)420 are also eligible under certain conditions.421 Some special vat schemes, for example, a common flat-rate scheme for farmers,422 are also justified.423 The flat-rate scheme for farmers is authorised when aimed at offsetting the vat charged on input purchases provided that the application of the normal vat scheme to farmers “is likely to give rise to difficulties.”424 This taxation method is usually operated in a way that allows farmers to bill the vat paid for inputs to their contractors.425 It may be conceded that the option for special taxation as laid down in Chapter ii Title xii of the vat Directive may result in the government’s revenue foregone if implemented when farmers do not in fact pay the vat charged for inputs. As long as farmers obtain a right to bill the vat already paid for inputs to their contractors, the contractors are charged,

417

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more robust and efficient vat system tailored to the single market” com(2011) 851 final of 6.12.2011, pp. 3, 5 seq. Supply of goods is determined in a general sense as transfer of the right to dispose of tangible property as owner. Art. 14(1) of vat Directive. vat becomes due when goods or services are supplied. Art. 63 of vat Directive. Art. 2 of vat Directive. Rec. 5 of vat Directive. Art. 98(2) in conjunction of Annex iii to the vat Directive. Member States may not use more than two reduced rates which may not be less than 5 per cent each. Art. 98(1) and 99(1) of vat Directive. Farmers are defined as “any taxable person whose activity is carried out in an agricultural undertaking.” Art. 295(1)(a) of vat Directive. A taxable person is any person who independently carries out any economic activity. Art. 9(1) of vat Directive. Therefore, individual producers may also be taxable persons under the eu law (functional approach to undertaking). Chapter 2 Title xii (“Special schemes”) of vat Directive. Art. 296(1) of vat Directive. At the same time, each Member State may exclude from the flat-rate scheme certain categories of farmers. Art. 296(2) of vat Directive. This approach is followed in Germany and in the Netherlands. See also Betliy O. vat in Agriculture: Ukrainian Experience and International Evidence. German-Ukrainian ­Agricultural Policy Dialogue. Agricultural Policy Report APD/APR/07/2014, October 2014, pp. 13–14.

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but not the public account. Still, in the sense of Art. 1.1. (a)(iv) of the scma, the input suppliers might find themselves being “directed” by the state to execute the fiscal functions of the state. 6.6.5.4

Ukraine’s Agricultural Taxation and Approximation to Acquis Communautaire 6.6.5.4(a) Qualification as State Aid Ukraine’s commitment to adapt its legislation to the eu Code of Conduct for business taxation would be not efficient without consideration of the Commission Notice to the Code as the interpretation instrument. Both documents do not exclude the agricultural sector and thus, the Commission’s approach to the state aid nature of tax measures should be taken into account when designing Ukrainian agricultural policies. However, harmonisation of agricultural regulation is voluntary because prior to the implementation of the eu-Ukraine aa, both the Code of Conduct for business taxation and Ukraine’s respective commitments were of a soft law nature. Even if those instruments were effectively enforceable, it would be debatable whether any of the agricultural taxation schemes operated in Ukraine would be at odds with the principles of the Code of Conduct (Section B). Both the vat and the fat regimes were applied to Ukrainian residents and were not “ring-fenced from the domestic market.” The prerequisite for obtaining the tax advantages was agricultural production within the territory of Ukraine. The only concern, from the point of view of the Code of Conduct, may be a lack of transparency associated with the tax administration mechanisms in Ukraine. In spite of the non-obligatory character of state aid harmonisation for agricultural subsidies pursuant to Art. 266 of the eu-Ukraine aa, the fact that ­enterprises – which are eligible for special agricultural taxation – may also carry out up to 25 per cent of non-agricultural activities would set the fat and the special vat regimes in focus of the state aid disciplines. Therefore, along with the pure agricultural schemes the state aid rules of eu-Ukraine aa may also apply to other taxation practices, primarily transfer pricing which is largely used by integrated structures. Accordingly, in-land acquired profits of agriholdings are not taxed in Ukraine and are exported to the low tax jurisdictions, e.g. to Cyprus, through a chain of subsidiary companies. Failure to cope with these consequences of transfer pricing schemes may lead to noncompliance with the Code of Conduct principle concerning the effect on the domestic tax base.426 426 Code of Conduct, Annex 1, lit. B.

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The recently adopted Art. 39 of the Tax Code427 tackles transfer pricing within interconnected structures (entities)428 by cross-border transactions with low tax jurisdictions.429 The corresponding transactions shall be controlled in their conformity to commercial conditions through juxtaposition to “comparable” operations with persons who are not interconnected. Another issue that may arise in regard to the eu-Ukraine aa implementation concerns the special insolvency procedure for agricultural enterprises in Ukraine,430 including the particularities of potential future revenues calculation, the consideration of natural conditions, an extended readjustment period for agricultural enterprises, as well as participation of the local governments in the insolvency procedure, which may make it vulnerable to administrative pressure. By the same token, due to the moratorium on the sale of agricultural land, the enforcement of bankruptcy procedures could be very complicated in practice.431 For the above reasons, it may be determined that there are informal barriers for bankruptcies of agricultural enterprises in Ukraine. In this respect, chances are that the special bankruptcy rules in Ukraine contain state aid elements under the eu definition. Speaking generally, both the fat and the special vat regime for the agricultural sector possessed features of state aid as defined in Art. 262 of the eu-Ukraine aa. First, they originated in state resources (revenue foregone). Second, the measures granted benefits for agricultural producers in the form of income exclusion (fat) and de facto non-creation of tax liability in comparison to the taxation of other sectors of the economy (vat). Specifically for the vat and the scheme for livestock producers, the selectivity criterion should be fulfilled because the only policy rationale was the promotion of agricultural (animal) production.432 With the fat, the justification foreseen under para. 27 of Commission Notice may be applicable inasmuch as the scheme was based the on land in use by a producer. Nonetheless, the passage in the notice that referred to the fixed-rate schemes “unless containing discretionary elements” needs to be further clarified. There may be two interpretations of discretion in 427 The provision was introduced by Law No. 408-VII of 4.7.2013. 428 Art. 14.1.159. of Tax Code introduced by Law No. 408-VII of 4.7.2013. 429 Only transactions which annual amount exceeds 50 million uah are subject of control (in 2013 around 5 million eur). 430 Art. 86 of Law on Bankruptcy No. 2343-XII of 14.5.1992 (with further amendments) establishes a special bankruptcy procedure for enterprises which share of agricultural production is not lower than 50 per cent. 431 German Advisory Group for Economic Reforms. Implicit Bankruptcy Ban in the Farm Sector, Consulting work S31, 2003, p. 5; Audit Chamber of Ukraine. Report for 2002. 432 See para. 18 of Commission Notice 98/C 384/03.

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this context: the approval of eligible entities by authorities on a case-by-case basis, or setting far-reaching limits for farmers’ eligibility, i.a. through recognising only particular groups as eligible producers or by fixing minimal production requirements. The fat had features of the second type of discretion. However, it would be reasonable to suggest that the eu legislator actually had the discretion by approval in mind when drafting the notice. That is why, unless certain practice of discretionary decisions for the fat eligibility may be effectively proven, the measure was non-selective in the light of the state aid disciplines. But selectivity might be still found, providing there is evidence that the fat was only beneficial to a limited number of eligible entities. So far, this could hardly be the case due to the broad coverage of the measure. The fact that the fat was substantially more beneficial for large-scale producers and poultry producers would not constitute selectivity seeing as the aid for other producers was also bestowed. Concerning the temporary vat ban imposed on grain and oilseed ­exports,   the eu-Ukraine aa state aid rules would be able to target this issue because the measure covered only agricultural products. Even if it were feasible and the vat allocated to producers after the first in-land delivery of goods could be recognised as aid to producers, it may be argued that the Preussen Elektra approach would not allow establishing the presence of a charge on the public account. 6.6.5.4(b) Prospective Approximation of Ukrainian Law to the vat Directive Harmonisation of Ukraine’s rules on indirect taxation with the majority of vat Directive provisions is mandatory as per Art. 353 and Annex xxviii to the ­e u-Ukraine aa. The vat schemes specified in Chapter 2 Title xii of the vat Directive are excluded from the approximation scope. Thus, the eu-Ukraine aa does not impose any obligations on Ukraine to adjust its vat regime for agricultural producers, though several observations should be made in this context. First of all, the obligatory harmonisation with Art. 9(1) of the vat Directive stipulating that all participants in economic activities433 are vat payers434 may lead to the inclusion of small agricultural producers into the special vat scheme. Thereby, their input constraints may be released. On the other hand, further expansion of Ukraine’s non-product specific ams would be inevitable 433 Agricultural activities are explicitly included into the scope of economic activities. 434 According to Art. 181.1., 182 and 183 of Tax Code, producers (enterprises or individual entrepreneurs) are free to register as vat payers, when their annual turnover does not ­exceed specific amount. If it does, the registration is mandatory.

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unless the vat scheme for agriculture is abolished. Ukraine’s voluntary implementation of the rules on the special vat scheme for smes and farmers may exempt the preferential vat schemes from calculation into the Current ams. The approximation of Ukrainian tax law to the vat Directive would not be an obstacle in the possible reduction of vat rates for agricultural producers. However, reduced vat rates for foodstuffs eligible in the eu (non-actionable and non-specific consumer subsidies) may not be equalised with the vat cuts for agricultural producers. Alternatively, farmers’ vat “billing” practices may be voluntarily incorporated into Ukrainian regulation. However, as already established in Sub-chapter 6.6.5.3., they could potentially constitute domestic support. The vat harmonisation with the eu does not seem to impact taxation of export operations since exportation to third countries is not included in the taxable operations in accordance with Art. 2 of the vat Directive, and is directly exempted from the vat scope by means of Art. 146(1)(a) and (b) of the vat ­Directive. The Union applies vat zero-rating, which is the deduction of the vat paid for inputs by the exportation outside the eu.435 Accordingly, exporters receive either tax credit for the deducted vat or a refund. Similarly in Ukraine, vat paid for exported products is generally bound to zero436 where exporters are entitled to get a vat refund for the domestic purchase of goods.437 As specified in Annex xxviii to the eu-Ukraine aa, the approximation to Art. 146(1)(a) and 169(b) of the vat Directive will become obligatory. Yet the overall situation should not dramatically change since the corresponding legal provisions are already compatible. The temporary vat exemption, maintained in the grain and oilseed sector in 2010–2015, would not have been in conformity with Art. 169(b) of the vat Directive. Even if exporter paid the vat for in-land supplies, i.e. goods purchased directly from producers, he did not obtain a right to vat deduction by exportation. 6.6.6 General Summary on Agricultural Taxation in Ukraine The Ukrainian government used taxation as the main source of agricultural support for almost two decades. Allegedly, it was calculated that the tax measure would result in a lower burden on the state budget compared to direct aid. The fat (direct tax) released agricultural producers from a tax burden, while the vat allocation scheme quasi-forced producers to use their income for development (investment into production). Due to the extremely low tax 435 Art. 169(b) of vat Directive. 436 Art. 185(g) and 195.1.1. (a) of Tax Code. 437 Art. 200 of Tax Code.

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burden within the sector, its contribution to the state’s fiscal returns was lower than the budget expenditures and the revenue foregone resulted from tax benefits for agricultural producers.438 In addition to high public costs, the agricultural tax schemes did not cover all agricultural producers. This is ascribed to the red tape for obtaining eligibility status, the requirement for general taxation during certain periods before entering the favourable schemes, as well as to the exclusion of individual producers from the scope of the measure. The tax incentives for agriculture also tended to favour large-scale production439 and livestock production. The tax incentives could be inaccessible to small and mid-size farmers and most individual producers who made large contributions to agricultural outputs were not eligible for them. On the other hand, this category of small producers is not taxed at all. At the end of the day, while being quite efficient as provisional instruments, the special regimes for agricultural taxation in Ukraine created inequality. Observing the situation externally, due to a quick growth in the non-product specific Current ams that is fast approaching the ceiling of the eligible de minimis exemption, the abolishment of the special tax regimes for agriculture was also expected. Moreover, the special regime for livestock producers – in addition to its high possibility of exceeding de minimis levels of product-specific support440 – was controversial under the disciplines of Art. III:4 of the gatt. Livestock producers received subsidies from processing enterprises, while imported animal products are not covered by this measure (as it was concluded based on the dsb ruling, the escape clause of Art. III:8(b) of the gatt would be non-operable in the present case). However, without a shift to other public or private support, taxation of agricultural enterprises under common rules may impose economic difficulties for domestic agricultural producers, particularly small-scale producers. This negative effect may be rectified through movement towards direct farm ­subsidies. This approach could be a compromise between international agricultural ­disciplines and the farm income problem, provided that direct s­ upport schemes are designed in compliance with criteria of Annex 2 of the AoA. It is unclear, however, whether budget constraints to guarantee substantial direct support would be acceptable for Ukraine.

438 be Berlin Economics, pp. 22, 24. 439 The vat and the fat regimes may be perceived as lacunae to stimulate rise of agriholdings. 440 In 2010 indirect support for milk and meat producers in Ukraine fell within the de minimis level but almost reached the eligible ceiling for milk and cattle production. G/AG/N/ UKR/13.

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Another alternative could be the introduction of a national tax for agricultural development.441 Yet it may be assumed that shifting fiscal burden to taxpayers (consumers) could not release the support measure from the wto rules on subsidies insofar as the financial contribution would most probably be found under Art.1.1. (a)(iv) of the scma. It may be contended that the individuals will be “entrusted or directed” by the government to provide agricultural support. The mandatory link between the financial contribution and the benefit conferred may be established, as well as the fact that the direct transfer of funds to producers442 “in no real sense, differs from practices normally followed by governments.” The government basically executes its fiscal function. The final result would be the same, if the government levied a non-agricultural tax and then redirected it through the budget funds to producers. 6.7

Legal Changes of Domestic Support after Ukraine’s wto Accession

6.7.1 The Factor of Economic Crisis In 2006, the government of Ukraine had already taken steps towards harmonising domestic agricultural support with the wto provisions through the lens of the eu law and implementation of wto disciplines within it.443 In October 2008, the legislation was adopted444 proclaiming the goal of adapting the Ukrainian economy to the wto regime. Most of the tasks indicated in the ­legal act concerned the agricultural sector and its adaptation to the AoA/gatt regime. However, the document was rather declarative; it asserted the assistance to rural development, expansion of domestic support, and promotion of exports. Given the fact that Ukraine’s accession to the wto coincided with the beginning of the world economic crisis, external trade liberalisation faced internal resistance. For instance, de jure government’s evaluation of the first year 441 Programme on Rural Development until 2015 proposed to establish the National Agricultural Development Fund and to impose a tax on all legal entities in Ukraine to fill the fund in. 442 It is suggested that the proposed policy shall constitute financial contribution in the sense of Art. 1.1. (a)(i) of the scma, and not revenue foregone otherwise due (Art. 1.1. (a) (ii) of the scma) since the tax for agricultural development would not be “otherwise due” in the absence of the measure. 443 Art. ii(2)(2) of Law No. 401-V of 30.11.2006 amending the Law on State Support foresaw harmonisation of agricultural policies with “the conditions and mechanisms functioning in the eu states – wto members.” 444 cmu Order No. 1381 of 30.10.2008.

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in the wto was de facto a protectionist response to the world financial crisis. Criticizing the government’s protectionist approach, the president instructed the government to develop more targeted measures to respond to the challenges associated with wto accession, i.a. state aid for specific branches of the economy in compliance with the wto provisions; stimulation of in-land demand for domestic production; export development, including export credits and insurance.445 In 2009, Ukraine continued imposing protective measures for agriculture, i.a. fixing maximum price caps for agricultural services, expanding the scope of the products eligible for state price regulation, limiting retail price surcharges, including a producers’ profitability criterion into calculation of maximum and minimum intervention prices, setting minimum intervention fund volumes, introducing credit subsidies to long-term credits, launching output subsidies, and augmenting forward purchases.446 By the same token, the producers’ stipulation for domestic support during a period of hard budget constraints pushed the state to search for alternative ways to accumulate funds for the budget. For that reason, public stocks were allowed to be put up for commercial sales to ensure additional costs to special budget funds.447 These outlays had to be nominally spent on direct state interventions on agricultural markets. At the end of the day, it may be concluded that Ukraine’s wto accession, accompanied by the outburst of the economic crisis, forced authorities to expand regulation of agricultural activities. The government tends to remedy farmers’ problems through direct interventions. 6.7.2 Changes in the Structure of Agricultural Support The years preceding Ukraine’s wto accession were characterised by a level of high domestic support and ambitious plans to expand it further.448 The awaiting constraints of wto rules were not reflected in the national regulation on agricultural subsidies. Thus, before the financial crisis, the amount of agricultural support in Ukraine rose in both the “amber” and “green” boxes. The share of the most distortive subsidies had a strong tendency to increase and 445 Decision of National Security Council of Ukraine of 26.6.2009 (came into force by President Order No. 713/2009 of 4.9.2009). 446 Law No. 422-VI of 4.2.2009; Law No. 1447-VI of 4.6.2009. 447 Art. i(1)(1) of Law No. 422-VI of 4.2.2009. 448 In 2007 by preparing the Programme for Agricultural Development the budget costs for agricultural support required were calculated at the level exceeding the already negotiated Bound ams in five times. Annex 5 of Programme on Rural Development until 2015.

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a­ mounted to up to 40 per cent of the total agricultural budget.449 The financing of the measures exempted under Annex 2 of the AoA showed a surging trend too, but their growth was much slower in comparison to the ams.450 Regardless of the negative impact imposed by the economic crisis on public finances, Ukraine’s Current ams rose quickly after 2008 and exclusively in the product-specific category.451 The product-specific ams is highly concentrated on sugar beets, where grain and oilseed received either no special “amber” support or a negligible part in the course of the recent years.452 The non-product specific ams, although multiplied and exceeding the Bound ams level,453 still falls within the de minimis exemption due to a steady rise of both agricultural production and its value.454 The situation changed notably compared to 2004–2006 where the non-product specific ams was provided at a zero level, and the ams for wheat and barley exceeded their de minimis ceilings.455 The “green box” notified by Ukraine was also increasing, but its extent is rather narrow and is concentrated mostly on inspection services (para. 2(e) of Annex 2 of the AoA) and training (para. 2(g) of Annex 2 of the AoA).456 449 Strubenhoff, Movchan, Buriakovski, p. 55. The planned “amber box” for 2008 showed ­further growth, especially for credit and leasing subsidies, direct farm support, livestock subsidies, as well as insurance subsidies. Conclusion based on the statistics provided by Audit Chamber of Ukraine. Report for 2010. 450 The planned “green box” for 2008 composed of predominantly general services. Audit Chamber of Ukraine. Report for 2010. 451 Current ams in 2009 was notified at the level about 1.1 billion uah (1/3 of the Bound ams) and in 2010–2011 at about 2.2 billion uah (over 2/3 of the Bound ams). G/AG/N/UKR/9; G/AG/N/UKR/13; G/AG/N/UKR/18. 452 Ukraine did not provide any ams for cereals in 2010–2011 (in 2009 price support for cereals granted through plant selection programme was scarce). 95 per cent of the ams in 2010–2011 fell on sugar beet production support. G/AG/N/UKR/9; G/AG/N/UKR/13; G/ AG/N/UKR/18. 453 Non-product specific ams notified by Ukraine constituted 3.7 billion uah in 2006, 3.8 billion uah in 2009, 8.2 billion uah in 2010, and 12.2 billion uah in 2011. WT/ACC/SPEC/ UKR/1/Rev/2; G/AG/N/UKR/9; G/AG/N/UKR/13; G/AG/N/UKR/18. 454 The reported value of Ukraine’s agricultural production grew from 94 billion uah in 2006 to 253 billion uah in 2011 (price inflation was not considered in the calculations). WT/ ACC/SPEC/UKR/1/Rev/2; G/AG/N/UKR/18. 455 Nonetheless, the rise of the eligible de minimis (from 359 million uah for wheat and 265 million uah for barley in 2006 up to respectively 855 million uah and 390 million uah in 2010) must have “annihilated” product-specific support if it had been still provided at the comparable levels. WT/ACC/SPEC/UKR/1/Rev/2; G/AG/N/UKR/9; G/AG/N/UKR/13. 456 According to Ukraine’s notifications to the wto, the “green box” amount equalled to 1.9 billion uah in 2004, 2.5 billion uah in 2006, almost 3 billion uah in 2009, 3.5 billion uah

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­ enerally speaking, it seems that Ukrainian agricultural policy has certain G internal conflict with the wto “green box” concept, particularly the decoupling element, since increasing agricultural production is a major goal of the ­Ukrainian government. Moreover, the predominately direct provision of “green” subsidies will increase budget transparency and control over producers’ compliance. The traditional focus on “amber” measures tolerates partial ad-hoc ­decisions. It may be concluded that the country follows most other developing countries in its emphasis on the “amber box” and in offsetting a large part of the Current ams by means of agricultural output growth. In opposition to that, developed countries tend to replace their “amber” policies with measures exempted from the ams calculation (as demonstrated for the eu in Sub-chapters 5.2.2.–5.2.3.). All in all, a shift to measures exempted from ams calculation should lead to a reform of the entire agricultural system in Ukraine. Economic Impact of the wto Accession on the Ukrainian Agricultural Sector Evaluating the economic impact of wto accession on the Ukrainian agricultural sector could be complicated because of the interplay of other factors, namely, the economic crisis, inflation of commodity prices and the abundance of export restrictions. Nevertheless, it cannot be denied that the agricultural sector is the only branch of the national economy where exports rose over the last decade.457 Accession to the wto lead to a general external tariff reduction of more than 10 per cent from 2007 to 2009.458 The average bound tariff for agricultural products is currently 11 per cent, which is comparable to 13.7 per cent in the eu and 11.2 per cent in Russia. At the same time, this rate is much lower than import tariffs in most developing countries that are agricultural exporters.459 6.7.3

in 2010, and over 5.5 billion uah in 2011. WT/ACC/SPEC/UKR/1/Rev/2; G/AG/N/UKR/9; G/AG/N/UKR/13; G/AG/N/UKR/18. Assessing on oecd methodology, a largest part of Ukraine’s agricultural support is distortive. The percentage of the most distortive support in the pse in 2008–2010 made up 84 per cent. oecd. Agricultural Policy Monitoring and Evaluation: oecd Countries and Emerging Economies, Paris, 2011, pp. 272, 274. The level of input subsidies is extremely high, and the rate of general services in the general expenditures is rather low. Butault, Bureau and others, pp. 20, 81. 457 The general terms of trade are mostly negative for Ukraine, although they remain positive for agriculture. Kobuta 2012, p. 2. 458 Kiselev, Romashkin, pp. 36–37. 459 For instance, Argentina – 32.6 per cent, Brazil – 35.4 per cent, China – 15.8 per cent. www .wto.org (Tariff Profiles 2012).

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The average gap between Ukraine’s bound and applied tariffs is small (1.5 per cent in 2012), and is similar to that of developed states,460 while Ukrainian agricultural tariffs show a lesser degree of escalation than the profiles of developed countries.461 The difference between the applied and bound tariffs is usually used as a legitimate option to increase import duties in times of low prices (so-called tariff regulation space) and to protect domestic producers. Correspondingly, since Ukraine does not possess this policy space, the relatively low import tariffs after the accession substantially increased competition in domestic agricultural branches with low profitability – with livestock seeing the greatest surge in competition. Allegedly for that reason, Ukraine initiated negotiations on Art. xxiii of the gatt to review its bound tariffs in September 2012. Based on the above arguments, one could reach the conclusion that market access liberalisation in Ukraine as a consequence of wto accession has caused domestic pressure for further expansion of support for less competitive sectors. At the same time, export-oriented branches are subject to higher taxation. The government tends to use them as a source of fiscal revenues (this phenomenon will be studied in Chapter 7). In this regard, the government is interested in ­being involved in export distribution of internationally demanded food supplies. 6.8

The Case of “External Domestic Support”: Co-operation with China

6.8.1 China’s Agricultural Credits Faced with budget constraints from providing direct support for agricultural producers and a lack of policy space for the extension of indirect farm support, 460 Average tariff gaps for agricultural products vary between 0.5 per cent in the eu, 0 per cent in the us and around 1 per cent in Canada. The difference between bound and applied agricultural tariffs in developing countries acceded to the wto in 1995 is high: for Argentina it reaches 22 per cent, for Brazil, 25.3 per cent. But for countries that acceded after the Uruguay round the situation is completely different, e.g. this gap for China is only 0.2 per cent and for Vietnam, 2.5 per cent. www.wto.org (Tariff Profiles 2012). 461 Ukraine applies 10 per cent import tariff on wheat, which is equivalent to the eu in-quota 8 per cent import tariff (before 2013). At the same time, Ukraine’s bound average tariff for cereals is fixed at 12.7 per cent with a peak of 20 per cent, while the corresponding eu tariff makes up 22 per cent at the average bound level with a peak of 61 per cent (as compared to Canada, which mains a gigantic tariff escalation of up to 299 per cent; in the us the average bound and applied tariffs do not exceed 3.5 per cent with peaks of up to 51 per cent). ebrd, fao, 2009, p. 11; www.stat.wto.org.

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the Ukrainian government took the first steps to ensure external assistance with domestic agricultural production through co-operation with China. The launch of agricultural co-operation between Ukraine and China was declared already in 2007, but was originally formally directed to scientific exchange and elaboration of subsidy mechanisms in conformity with the wto requirements.462 The Inter-governmental Agreement was signed on 25 January 2013 and provided for non-repayable support from China to Ukraine in the amount of 80 million cny (about 12.9 million usd). The financial assistance was intended for projects elaborated in subsequent inter-state agreements. Thereby, the agreement of January 2013 created the framework for further ­bilateral instruments. The first Chinese-Ukrainian agricultural project had been prepared before 2013 and was initiated by the signature of a Memorandum of Understanding (MoU) dated 28 June 2012 between the Ministry for Agriculture of Ukraine and the Export Import Bank of China (a state-owned entity “under the direct leadership” of the State Council). The MoU envisaged Ukraine’s purchase of Chinese plant protection products, seed, machines, and other agricultural production inputs; and reciprocally, purchase of Ukrainian cereals, cultivation of Ukrainian agricultural land and performance of certain construction contracts in Ukraine by the Chinese. The document was not published.463 Before turning to the MoU effect, its legal nature will be examined. On the one hand, this bilateral act may be defined as a framework treaty.464 On the other hand, the blanket subordination of MoUs to the treaty ­definition is ­mostly denied by the scholars.465 This question is to be decided on a ­case-by-case 462 Agreement of Agricultural Co-operation between the Ministry for Agricultural Policy of Ukraine and Ministry for Agriculture of People’s Republic of China of 12.4.2007. Actually, specific inter-state agreements for agriculture are very unusual in Ukraine’s practice. The only other example of that type may be Agreement between the Government of Ukraine and the State of Israel on Co-operation in the Agricultural Area of 12.1.1993. 463 Due to missing public access to the text, this sub-chapter is based on the information officially announced by the involved authorities. 464 Art. 2 of the Law on International Treaties of Ukraine transmitted Art. 2(1)(a) of the vclt: international treaty is a treaty concluded with a foreign state or another subject of international law in a written form, no matter whether it constitutes one document or several documents connected with each other, and no matter which name it has (treaty, protocol, convention, agreement etc.). See also icj Judgment on Jurisdiction and Admissibility Qatar v. Bahrain of 1.7.1994, paras. 22–23. 465 E.g. Aust’s critics towards Klabbers’s theory. See Klabbers J. The Concept of Treaty in ­International Law, The Hague, 1996 and Aust A. Modern Treaty Law and Practice, 3rd ed., London, 2013, pp. 47–49.

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­basis by scrutinizing the text of arrangements (intention of parties) and circumstances of the signature and implementation (e.g. registration in accordance to Art. 102 of un Charter, fulfilling formalities within national orders, as well as practice of particular states).466 In any case, it is claimed that even formally non-binding MoUs may have legal consequences for signatories due to the fundamental principle of good faith and the doctrine of estoppel.467 Turning back to the instrument in focus, since the MoU wording is not disclosed, the parties’ intentions to take binding or non-binding obligations can hardly be distinguished. However, it could be argued that if Ukraine had perceived the MoU as an international treaty, the act would have been published in accordance with the special procedure set up in Ukrainian legislation.468 The fact that the MoU is not published allows the conclusion that the government of Ukraine does not consider it be an international treaty in the sense of the vclt and the domestic legislation. Even assuming that Ukraine intended to enter into an international treaty, it must be still established whether the Export Import Bank of China (further Bank) has the legal capacity to conclude international agreements in the name of the Chinese Republic, and if that is not the case, whether the entity was delegated the required competence to conclude the agreement.469 For this purpose, the general procedure of loan granting by the Bank should be scrutinised. It is reported that this organisation is largely involved in concessional loans to particular sectors of the economy in developing countries on behalf of the government of China (these agreements are usually referred to as economic co-operation agreements or development loan agreements).470 These loan schemes are normally accompanied by bilateral framework a­ greements 466 Ibid., pp. 29–40. 467 Ibid., pp. 51–52. 468 Art. 21 of Law on International Treaties requires publication of every international treaty in specified official journals. Art. 22 thereof demands inclusion of international treaties into the Single Normative Acts Register. 469 The question may arise whether the Chinese State Bank may be regarded as representative of the state of China according to Art. 7.1. of the vclt. This may be the case if it appears in Chinese practice and under the factual circumstances that the intention of Ukraine and China was to consider the Bank representing the Chinese state in this matter. The attribution would be easy to establish under Art. 8 of ilc Articles on Internationally Wrongful Acts, but the Articles are applicable only for breach of international obligations by a State. Art. 1–3 of the ilc Articles. 470 Hubbard made this conclusion after the analysis of China’s legal rules. Hubbard P. Aiding Transparency: What We Can Learn About China ExIm Bank’s Concessional Loans, Working Paper of the Center for Global Development, 126, 2007, pp. 4–6.

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between the government of China and that of a borrowing state that are ­concluded after the approval of the borrowing state’s application to the Bank. The inter-governmental agreements are followed by conclusion of project-byproject loan agreements between the Bank and borrowing states. The loans are normally disbursed by the Bank to Chinese contracting agencies (Chinese firms applying for participation into concessional loans).471 The Bank also offers import credit to Chinese importers. The following outline of this procedure will be used to interpret the loans granted to the Ukrainian agricultural sector. Based on the description of the Bank’s loan practice, unless the agreement with Ukraine differed from the normal co-operation pattern, it is not difficult to find attribution of the Bank to the Chinese state given the conclusion of the bilateral inter-governmental agreement between China and Ukraine. Moreover, following its examination of Chinese regulations, the Appellate Body found that the country’s state banks constituted public bodies under wto anti-dumping disciplines.472 In August 2012, shortly after the MoU was signed, the government of Ukraine accepted the Bank’s credit proposal for 24 billion uah (3 billion usd) and ­issued the state credit guarantee.473 It is not clear, however, whether the MoU text contains any commitments on providing state guarantees for the envisaged projects. The next step was the appointment of the public stock company, State Grain and Food Corporation of Ukraine (gcu), to perform the credit agreements with the state guarantee under the MoU framework.474 Within the p ­ roject the gcu and Chinese contracting agency, China National Complete Engineering Corporation, signed a general agreement dated 24 October 2012 (also unpublished). The contract was concluded for fifteen years starting from 2013. ­According to the contract, Ukraine was to deliver specified sorts and volumes of grain to China and to purchase agricultural inputs from China. The cereals delivery was negotiated at the level of 4–6 million t per year, except for the first year at 2 million t.475 The prices are to be calculated as cif on the basis of international commodity exchange contract prices, and thus, 471 Ibid. 472 Appellate Body Report us-ad & cvd (China), para. 348 seq. 473 Para. 2 of cmu Regulation No. 857 of 13.8.2012; Guarantee agreement between the Government of Ukraine and State Grain Corporation of Ukraine N15010–03/148 of 27.12.2012. 474 Para. 1 of cmu Regulation No. 857 of 13.8.2012. 475 See Letter from the President of China National Complete Engineering Corporation to the Minister for Agriculture of Ukraine dated on 23.10.2013.

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should mostly correspond to world prices. In 2013/2014 it was reported that the Chinese party paid 1.5 billion usd for the grain purchases in Ukraine.476 At the same time, it was announced that Ukraine was to buy Chinese goods and services for the total amount of 1.5 billion usd (+/-5 per cent),477 but not less than 300 million usd per year.478 The gcu committed to presenting annually a list of grain to be exported; the Chinese party is to choose the products it has interest in. Since access to China’s agricultural market is extremely restricted due to severe sps measures, the specification of grain sorts shall depend on bilateral sps agreements.479 Due to the sps restrictions, the agricultural production must be originated exclusively in Ukraine. The Chinese party, in its turn, reserved a right to re-export Ukrainian cereals.480 The start of the grain purchase programme was officially announced in March 2013, but only for maize.481 It was reported that the purchase prices offered by the gcu were 30–50 usd below the market price. Additionally, the procuring contracts were subject to a fee of about 10 usd per t. The first set of grain was delivered in 2013/2014. However, the parties differed in their evaluation of the supplied volumes. Thus, the buyer referred to 0.18 million t cereals of the agreed 2 million t allegedly delivered by the end of October 2013. Conversely, the seller stated that by February 2014 about 2.6 million t of the agreed 4 million t of grain were exported, although only 0.3 million t directly to the Chinese market.482 These figures might be interpreted 476 Information from the gcu published by the information agency Interfax Ukraine on 20.12.2012. 477 This sum should constitute the first half of the credit. 478 The initial list of the goods and services (allegedly amended later) included i.a. plant protection means, fertilisers, agricultural equipment, seeds, construction of capacities for plant protection means and fertiliser production, and construction of a port elevator. ­Information of Forbes Ukraine published on 15.4.2013. 479 See e.g. Protocol signed between Ministry for Agriculture of Ukraine and General Food Safety Control and Inspection Administration of People’s Republic of China on phytosanitary and inspection requirements for maize exports from Ukraine to China of 9.11.2012; Protocols for barley and soya exports from Ukraine to China of 5.12.2013. 480 The parties agreed on gafta quality standards. gmo containing goods were not authorised. In case of goods non-conformity with the agreed conditions, the Chinese party was entitled to review the prices and/or to return the goods at the gcu costs. Information of Forbes Ukraine of 15.4.2013. 481 4 billion uah were planned to be spent on forward and spot maize purchases. Press conference of Minister for Agriculture of Ukraine, published by Liga Business Inform on 20.2.2013. 482 gcu press release of 26.2.2014. http://www.pzcu.gov.ua/.

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in a way that the largest part of the goods was de facto re-exported by China, allegedly, as a consequence of trq protection on the China’s maize market.483 Before 2011, the trqs were largely underfilled.484 However, since 2011 intensive expansion of grain imports could be observed in China.485 The rise of imports must be accompanied by the expansion of the trqs. Hence, the delayed acceptance of deliveries from Ukraine might be explained by the pending procedure of trq adjustment. But this assumption could easily be rebutted because the Chinese corporation brought up its concerns about very low exports and filed an arbitration suit against the gcu in the early 2014. 6.8.2 Assessment of Chinese Credits in the Light of wto Law 6.8.2.1 Application of the gatt Provisions The first concern regarding the Chinese credit line for Ukrainian agriculture is its possible contradiction to the mfn principle underpinned in Art. I:1 of the gatt. It requires that any advantage, favour, or privilege granted486 by any contracting party to any product originating in or destined for any other country shall be accorded “immediately and unconditionally” to like products originating in or destined for other wto members. The measure of consistency with the provisions of Art. I:1 of the gatt is evaluated by the four-tier test.487 The first two questions of the test provide prerequisites for application of Art. I:1 of the gatt. They are whether the measure is covered by Art. I:1 of the gatt and whether it grants an advantage. The second part of the test concerns the identification of like products, and immediate and unconditional accordance of the measure to all like products, i.e. it constitutes the procedural dimension of the mfn principle. Since Ukraine does not provide the same treatment to grain going to other wto members as it secures for China, establishing non-compliance with the

483 China’s trqs for grain and maize were notified for 2009–2011. tpr WT/TPR/S/264, para. 31, p. 32. 484 E.g. in 2011 the trq for maize was filled to 1.75 million t from the possible 7.2 million t. In 2009 the filling rate was even lower – under 0.1 million t (similar in 2004 and 2006). G/ AG/N/CHN/25; G/AG/N/CHN/19; G/AG/N/CHN/11; G/AG/N/CHN/7. 485 China’s maize imports have been growing since 2008/2009 (between 2004 and 2011 they were below 3 million t, in 2011–2013 – around 8.5 million t, and in 2013/2014 – up to 11.8 million t). Information of the amis database http://statistics.amis-outlook.org/. 486 This provision is also applied to all rules and formalities in connection with importation and exportation. 487 Van den Bossche, Zdouc, pp. 320–321; Appellate Body Report EC-Seal Products WT/DS400/ AB/R, WT/DS401/AB/R, para. 5.86.

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procedural criterion of the four-tier test would not be difficult. However, the applicability of Art. I:1 of the gatt to the reciprocal obligations of a Ukrainian public company towards the specific Chinese public company must be thoroughly examined. Art. I:1 of the gatt covers a broad range of internal measures including internal regulations affecting sale, distribution, or use of products; although the scope of application of the provision is not unlimited.488 Above all, it must be recalled that a measure constitutes a mandatory legal rule.489 The credit agreement under examination was signed by a state-owned entity (gcu), but the framework credit conditions were established in the MoU. The latter was signed by a Ukrainian governmental body and confirmed by cmu Regulation No 857 of 13.8.2012, which accepted proposals of the Ministry for Agriculture on the general credit conditions. The credit framework is an enforceable domestic legal norm and thus, it may constitute a measure under the wto law. In a different way, the supply contract itself is not a law. Nevertheless, the Appellate Body approach to the definition of a measure is broad enough to encompass any act or omission of a state (both legally binding and not).490 It could be expected that de facto binding rules491 – for instance, administrative guidance492 – may be challengeable measures (“as applied”) in the gatt/wto system. The burden of proof for attribution of these kinds of measures to the Ukrainian government through the gcu would require convincing evidence of interconnection. The mere fact of state ownership may not be considered sufficient enough to establish the attribution. As for the Chinese measure, the practice of loan-for-goods arrangements, while financed from state resources and approved by the government, may be identified as a measure (at least as de facto binding administrative practice, even if there are no mandatory legal norms on this matter). As for the scope of the mfn principle, the text of Art. I:1 of the gatt imposes the obligation “with respect to…all rules and formalities in connection with importation and exportation” which is normally interpreted broadly and include 488 E.g. the measures exempted from the disciplines of Art. III:2 and III:4 of the gatt, i.a. Art. III:8(b) are not included in to the scope of the mfn principle. Panel Report EC-­ Commercial Vessels, paras. 7.81–7.84. 489 See Chapter 3.1.1. 490 Appellate Body Report US-Corrosion Resistant Steel Sunset Review, para. 82; Appellate Body Report Guatemala-Cement, para. 69, footnote 47. 491 Appellate Body Report US-Corrosion-Resistant Steel Sunset Review, para. 87. Yanovich, Voon, p. 133. 492 Appellate Body Report Guatemala-Cement, para. 69, footnote 47.

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i.a. measures having impact on importation.493 In the author’s view, it should be viable in this context to extend the dsb arguments regarding importation to exportation. Then the very fact that the Ukrainian government granted special conditions to grain exports to China (state guarantees) would make it a covered measure. In respect to the existence of an advantage (favour or privilege) resulting from the measure, Mavroidis is right that the gatt drafters’ intention for the purpose of Art. I:1 was not to concentrate on the type of measure or its effect, but on the difference in treatment between wto trade partners.494 This conclusion has been confirmed by the dsb several times.495 Thus, an advantage was found in EC-Bananas iii (Ecuador) for providing more favourable competitive opportunities or affecting the commercial relationship between p ­ roducts of different origins.496 The dsb further developed this idea in US-Poultry, ­establishing that an opportunity to export to the us could qualify as a measure under circumstances that create market access opportunities and affects the commercial relationship of the products of different origins.497 Thereby, Art. I:1 of the gatt protects importers’ expectations by prohibiting discrimination among wto members.498 In that vein, the advantage criterion seems to be satisfied by the relevant grain supply scheme because of access to the Chinese market, acquired by Ukraine and otherwise restricted, and due to Ukraine’s high level of guaranteed supply. That may at least threaten to affect trade in grain in other destinations. Thereby, both China and Ukraine may be beneficiaries of the ­arrangement. Furthermore, the difference in treatment may be established both for China and Ukraine, but it may be potentially justified. The buyer’s side may recall sps concerns and argue that Ukrainian cereals became acceptable after the recognition of the in-land quality control procedures.499 Ukraine may contend that 493 The scope of “rules and formalities” extends to “measures which directly relate to the process of importation but could also include those measures,… which relate to other aspects of the importation of a product or have an impact on actual importation.” Panel Report U ­ S-Poultry, para. 7.410. 494 Mavroidis, p. 135. 495 See e.g. Appellate Body Reports EC-Seal WT/DS400/AB/R WT/DS401/AB/R, para. 5.87. (Not a non-contingency on factual trade effects matters, but equality of competitive opportunities). 496 Panel Report EC-Bananas iii WT/DS27/R/ECU, para. 7.239. 497 Panel Report US-Poultry WT/DS392/R, paras. 7.416–7.417. 498 Appellate Body Report EC-Seal, para. 5.87.; Panel Report Argentina-Bovine Hides, para. 11.20. 499 See footnote 479 to this Chapter.

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the obligation to supply grain products to China is a payment for the credit based on the market conditions (the grain price is calculated using the market rate). In that way, interpreting the text of Art. I:1 of the gatt, application of similar conditions for grain exports to other wto states would not be required unless those states afford conditions similar to those offered by China. On the other hand, seeing as Ukraine guarantees the fixed and high grain supply volumes to China, application of Art. I:1 of the gatt should be secured if this limitation could suspend other grain importers of their expectations.500 At the end of the day, there is still no clear answer on what the mfn principle, in fact, protects: equitability per se or equitability on similar conditions? Taking the first position, the violation of the mfn principle by the UkraineChina grain supply contract could be found effortlessly. In the second case, it would not be as easy to establish an advantage in the sense of Art. I:1 of the gatt since all countries are basically free to apply for the Chinese governmental loans or to make comparable proposals to Ukraine.501 The outcome of the recent EC-Seal case supports the argument that the conditionality of granting an advantage must be observed from the perspective of competitive opportunities.502 It means that evidence of any detrimental effect of the deliveries to China on competitive opportunities of other grain importers may allow the conclusion that conditionality of pre-payment (loans) could not be authorised under Art. I:1 of the gatt. Non-compliance with the mfn principle may be excused by only two exemptions: formation of regional integration structures compatible to Art. xxiv of the gatt, and the general exceptions under Art. xx–xxi of the gatt.503 The agreement in focus does not deal with customary duties, but only determines export volumes; it does not fall within the scope of Art. xxiv of the gatt as

500 The dsb found that creating “more favourable import opportunities” would be inconsistent with the provisions of Art. I:1 of the gatt. Panel Report EC-Bananas iii, para. 7.239. It may be argued that ensuring more favourable exportation would fall within the definition of “advantage” in the sense of the mfn principle. 501 This conclusion is in line with the approach of Art. 12–13 of the Draft ilc Articles on mfn Clauses 1978. 502 The Appellate Body examined the term “unconditionality” in the sense of the procedural requirement of Art. I:1 of the gatt and found out that wto members were not generally precluded from attaching conditions to the granting of advantage, except for those conditions having a detrimental impact on the competitive opportunities. Appellate Body Report EC-Seal, para. 5.88. 503 Art. xviii of the gatt which authorises deviation of the gatt provisions by countries of the early stage of development may evidently not be applied to both China and Ukraine.

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the parties did not aim for economic integration. The only general exception provision that may potentially be applicable to the analysed trade instrument could be Art. xx(h) of the gatt. However, given a lack of practice for ­inter-governmental commodity agreements, the application of Art. xx(h) of the gatt is practically impossible. Even if such practice existed, it would not change much because this agreement is not exclusively related to the supply of agricultural commodities, but also envisages the provision of other goods and services. Hence, the loan-for-goods agreement between China and Ukraine may not qualify as a commodity agreement. Furthermore, the chances are high that the justification of the measure would fail in the course of examination under the chapeau of Art. xx of the gatt. From another point of view, the government of Ukraine explains the rationale of the credit scheme with China on the basis of a balance-of-payments ­issue. This argument can be rebutted easily since Art. xii of the gatt authorises only import restrictions directed to safeguard its balance of payments as deviation from the general disciplines under Art. xi of the gatt. Because Ukraine does not restrict importation of Chinese goods, but conversely expands the purchase, measures in the sense of Art. xii of the gatt could not be identified on Ukraine’s side.504 By the same token, China also multiplies agricultural imports from Ukraine and the high grain volumes agreed on by the parties may hardly be characterised as an import restriction. In summary, the guaranteed grain sales to China may potentially constitute a violation of the mfn principle under Art. I:1 of the gatt that may not be justified by the gatt general exceptions. Moreover, it may be claimed that the shift of Ukrainian grain supply to China nullifies or impairs the benefits of other food-importing states. Thus, they may consider making use of a ­non-violation claim under Art. XXIII:1(b) of the gatt. Allegedly, grain importers may claim that the restricted supply of cereals due to the expanding preferential exportation from Ukraine to China constitutes impaired benefits on their side. Due to a high degree of ambiguity, the gatt/wto judiciary typically restrains the scope of the non-violation claim505 and imposes additional requirements, namely, non-anticipation of the measure during the time commitments are negotiated,506 clear damage to the competitive position of other members’ 504 The notifications on balance-of-payments measures applied by Ukraine are limited to import duties. See e.g. WT/BOP/N/66, WT/BOP/N/71. 505 Sung-joon Cho. gatt Non-violation Issues in the wto Framework: Are They the Achilles’ Heel of the Dispute Settlement Process? In: Harvard International Law Journal, 39(2), 1998, pp. 311–356 (further Sung-joon Cho), p. 313, 316. 506 Panel Report EC-Oilseed i, paras. 149–150.

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goods,507 as well as a detailed justification provided by the claimant (evidence of causal relationship between the measure and nullification or impairment of benefits508). Compliance with the above requirements could be difficult in this case. While the introduction of preferential access for Ukrainian grain to China must not have been anticipated by the time of Ukraine’s wto accession, the disadvantages for other importing members can hardly be proved until the global grain exports from Ukraine have noticeably increased. However, this may change in the bad harvest years. A similar claim against China would be even less successful since the ­restricted market access could have been anticipated by the time of China’s ­accession to the wto. 6.8.2.2 Elements of Subsidy Besides the gatt concerns, the expansion of public grain procurement after implementing China’s credit scheme may potentially lead to benefits for Ukrainian agricultural producers. For that reason, the fixed grain purchases by China may be considered from the perspective of the wto disciplines on subsidies. First, it must be established whether the scheme involving extraterritorial transfer of public costs falls within the wto subsidy concept. It has already been concluded that the coverage of Art. 1.1. (a)(1) of the scma extends to subsidies for production granted by one wto member to a­ nother.509 At the same time, Art. 3.2. of the AoA stipulates that wto members are responsible only for support in favour of domestic producers within the limits committed in their schedules. Differently, the obligation for domestic support calculation extends to support in favour of agricultural producers (without any link to their nationality).510 On the one hand, the lack of an explicit reference to in-land farmers within the monitoring obligation may be interpreted as a potential inclusion of extraterritorial support. On the other hand, the mere notion “domestic support” suggests that wto members intended to take ­responsibility exclusively for subsidies granted to national producers. Thus, if the agricultural credit issued by China to Ukraine could grant a subsidy in the sense of Art. 1 of the scma, there is little chance that it can fall under the AoA disciplines. Nevertheless, identification of possible subsidies could be recommendable to forecast further development of multilateral co-operation in this dimension. 507 508 509 510

Panel Report EEC-Canned Fruits L/5778, para. 19. Sung-joon Cho, p. 318. See Sub-chapter 4.1.2. Art. 6.5. of the AoA. Annex 3 of the AoA does not specify the subjects of support.

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While the fact that a financial contribution in the form of a transfer of funds does not seem to be disputable in this particular case, the attribution of the measure to the government or “any public body” may require further evidence. The loan was issued by the Export Import Bank of China, a state-owned commercial bank. This kind of entity was found by the dsb to be a “public body” within the meaning of Art. 1.1. (a) of the scma for the purpose of a specific case.511 Given the full governmental control over the Bank and the state’s involvement in the bilateral loan agreement, finding the attribution should not be complicated in that case. However, based on the above conclusion negating the extraterritorial action of domestic support, the “governmental element” must be sought in Ukraine, not in China. The credit amount was transferred to the gcu so possible benefits for producers, if any, would be provided by the gcu, not by the state. The adhesion of the gcu to a public body should therefore be established. Although owned by the state, the structure is partially controlled by certain private companies. Therefore, the conclusion about government control over gcu requires further examination.512 Even if the gcu is found to be a private body for the ­purpose of Art. 1 of the scma, gcu actions may still be attributable to the government in the light of Art.1.1. (a)(iv) of the scma, since the entity was directly entrusted by the governmental act to perform the credit agreement with the Bank.513 Obviously the government would have executed the contract by itself if no entrustment had taken place. Nonetheless, this conduct would go beyond governmental functions and acquire features of commercial activities. The decisive question is whether a benefit was conferred by the scheme. Grain forward purchases for allocation of grain supplies to China were evidently offered at dumped farm-gate prices. Unwillingness of producers to participate in the forward programme triggered hard administrative pressure. Thus, benefits on the producer side are hardly detectable. If the purchases had been executed on a voluntary basis and at least at market prices, the benefit 511 The Appellate Body in us-ad&cvd (China) upheld the conclusion of the us authorities that Chinese state-owned commercial bank in concern was a “public body” in the sense of Art. 1.1. of the scma. However, this conclusion was based on the scope of the investigation exercised by the us authorities. It means that, in fact, prospective investigations or disputes concerning the activities of these banks must pursue the “public body” analysis again. WT/DS379/AB/R11, para. 348 seq. The outcome of the above dispute was highly criticised. Ding R. “Public Body” or Not: Chinese State-Owned Enterprise. In: Journal of World Trade, 48(1), 2014, pp. 167–190, p. 182. 512 Appellate Body Report us-ad&cvd (China), paras. 320 seq. 513 It may be assumed that the grain supply scheme had already been, in general, agreed on by that moment.

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for producers may have been conferred by means of ensuring sales at stable prices. A clear beneficiary of the measure is the gcu as a recipient of the state credit guarantee.514 As previously explained, state guarantees may constitute financial contribution by the state under Art. 1.1. (a)(i) of the scma, since transfer of funds also encompasses financial claims.515 The sum of the contribution must be fees that the gcu would have paid on the market for a credit guarantee under comparable credit conditions.516 An advantage may be present because the state passed through the credit agreement without any tender procedure and secured the gcu obligations before the Chinese party through state guarantees on the entire body of credits. The benefit amount would be the corporation’s profits as a result of the credit line performance. It may be summarised that although the financial contribution was provided by Chinese authorities and could have resulted in benefits for Ukrainian entities, this kind of domestic support will not be calculated into the China’s Current ams. However, it may give rise to subsidies granted by the Ukrainian government. Thus, at the end of the day, the performance of the agricultural arrangement with China caused a charge on Ukraine’s public account owing to provision of state guarantees for the credit performance. 6.8.2.3 Elements of Investment The China-Ukraine agricultural programme may also have some investment features. The provisions of the bilateral investment treaty (bit) concluded between Ukraine and China on 31.10.1992 support this argument. The treaty does not provide an exhaustive list of the covered investment, but identifies that “all types of assets ventured (invested, provided for) in the territory of a contracting party” may constitute an investment, i.a. chose in action for money assets or any other obligations which have economic value.517 The term “investor” for the purposes of this bit encompasses enterprises and companies registered in the territories of the contracting states, unless they are not open to foreign 514 The credit guarantee in concern is not a normal state guarantee scheme because the state itself negotiated the credit agreement and appointed the borrower. 515 Appellate Body Report Japan-DRAMs, para. 250; Appellate Body Report US-Large Civil A ­ ircraft, paras. 615. See also Van den Bossche, Zdouc, pp. 751–752 and Sub-chapter 4.1.2. 516 The charge of guarantee fees at the market level would have presumably extinguished the costs on the public account. 517 In terms of international investment arbitration, reference to “assets” and “monetary receivables or claims” were found to clearly encompass loans. icsid Decision on Jurisdiction of 24.5.1999 Ceskoslovenska Obchodni Banka v. Slovak Republic ARB/97/4, paras. 77–78, 88.

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investment pursuant to their domestic legislation. Thus, the credits issued by China’s public corporation active in external economic activities will likely fall within the bit definition of investment. In addition to the bit, the icsid Convention also governs investment relations of the parties.518 The icsid practice developed specific investment criteria (the so-called Salini test519) that includes the existence of contributions, a certain time period of contract performance, participation in the transaction’s risks, as well as an optional contribution to the economic development of a host state.520 It should not take much effort to establish the first two components within the China-Ukraine agricultural credit scheme inasmuch as the investor transfers financial injections during the course of fifteen years. Compliance with the third criterion may be hardly found since the Chinese party does not ­directly participate in risks covered by credit guarantees provided by the Ukrainian government. The risks of the credit line on China’s side may be associated with the contract conditions regarding the supply of grain and/or purchase of Chinese goods and services. However, the icsid judicial practice emphasises that investment risks are higher than normal commercial risks.521 For instance, in the Joy Mining case that dealt with a supply agreement under bank guarantees (it was claimed the guarantees constituted an investment) the icsid tribunal ruled that the risk was not “different from that involved in any commercial contract.”522 On this ground, the relationship between the disputing parties was not recognised as investment. Furthermore, the same icsid tribunal made a general remark that a distinction should be drawn between ordinary (complex) sales contracts and an investment to exclude the situation where

518 Pursuant to Art. 10 of the bit, investment disputes between the parties are to be decided in ad-hoc arbitration. However, both countries are icsid signatories. 519 icsid Decision on Jurisdiction Salini Construtorri S.p.a. and Italstrade S.p.a. v. Kingdom of Morocco ARB/00/4, para. 52 seq. 520 A loan may constitute an investment if it contributes substantially to the economic ­development of the state. icsid Decision on Jurisdiction Ceskoslovenska Obchodni ­Banka v. S­ lovak Republic ARB/97/4, paras. 76 seq. See also icsid Decision on Jurisdiction of 11.7.1997 Fedax v. Venezuela ARB/96/3, paras. 22–29. 521 In the same vein, the icsid tribunal rejected the investment status of the marine salvage company’s contract with the Malaysian government to recover artefacts due to insufficient risk, but did not provide any explanations for this refusal. icsid Decision on Jurisdiction Malaysian Histrical Salvors v. Government of Malaysia ARB/05/10, para. 112. 522 icsid Decision on Jurisdiction Joy Mining v. Egypt ARB/03/11, para. 57.

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“any sales or procurement contract involving a State agency“ is qualified as an investment.523 Hence, investment in the sense of the icsid Convention may not be established for the Ukraine-China agricultural loan project. Given the fact that credits are regarded as a protected investment under the bit between Ukraine and China, non-application of the icsid Convention should not prohibit searching for legal assistance in national courts and/or in other international arbitration fora.

Intermediary Summary

The performance of the Ukraine-China agricultural co-operation project ­developed a new instrument in Ukrainian public procurement practice. From the gatt/wto point of view, this grain purchase scheme may be associated with two issues. First of all, there is a concern regarding unjustified violation of the mfn principle. In addition, the enforcement of the instrument may have features of distortive product-specific domestic support. The credit offered by the Chinese public bank to the Ukrainian ­agricultural sector may also fall within the scope of the parties’ bit. However, the arrangement does not acquire all the characteristics of international investment required by the icsid Convention. This trade instrument should be considered in the light of the International Grain Council Grains Trade Convention (gtc), of which Ukraine is a signatory. The loan-for-grain arrangement could be classified for the purpose of the gtc as an obligation for reporting a special transaction524 in opposition to normal commercial purchases.525 The fact that China is not a gtc contracting member does not release Ukraine from the obligation to report on these special transactions. Nevertheless, the lax gtc regulation may not particularly restrict Ukraine’s policy space in the context of agricultural co-operation with China or any other country.

523 Ibid., para. 58. Among others, Mortenson strongly criticised this approach based on the travaux preparatoires of the icsid Convention. Mortenson J. The Meaning of “Investment”: icsid’s Travaux and the Domain of International Investment Law. In: Harvard International Law Journal, 51(1), 2010, pp. 257–318, pp. 298–301. 524 Art. 5(2)(a), (b) and 7(1) of igc Convention. 525 Art. 5(1) of the igc Convention.

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Proposals for Agricultural Policy Reform in Ukraine

6.9.1 Promotion of Private Investment The Food and Agriculture Organisation of the United Nations (fao) reiterates that the factor of investment is more important for agriculture than for other sectors of the economy; it must be the major instrument to attain world food security.526 According to the fao, the structure of agricultural investment matters: the largest share should be spent on infrastructure, while investment into production should be comparatively small.527 The World Bank articulated a somewhat different consideration, suggesting that the impact of developing countries’ macroeconomic policies on agricultural price building is larger than the effect of agricultural investment.528 In any case, the goal for attracting foreign direct investment (fdi), i.a. into the food and agricultural sectors, seems to be on the agenda of developing countries due to a constant lack of spare domestic capital.529 The statistics show that the fdi stock growth doubled in developing countries (with a high degree of variability among host countries) in comparison to the world average.530 In spite of a possible negative impact,531 fdi is supposed to be a key factor in promoting economic growth and development. Investment into Ukrainian agriculture, i.a. fdi, is growing532 and is composed almost entirely of private investment. Large-scale production acquires a 526 fao. How to Feed the World in 2050: Expert paper, Rome, 2009, p. 17. 527 Ibid., pp. 16–19. 528 Conclusion of the World Bank Project on the Political Economy of Agricultural Pricing Policy. See Bilal, p. 2. 529 There is an overall trend in developed countries to reduce investment incentives, where developing countries use them abundantly. Bora B. Incentives, Performance, Requirements and the International Policy Architecture. In: Streatfeild J.; Lacey S. (eds.) New Reflections on International Trade: Essays on Agriculture, wto Accession and Systemic Issues, London, 2008, pp. 101–120 (further Bora), p. 119. 530 Grosse R.; Trevino L. New Institutional Economics and fdi location in cee. In: Sachs L.; Sauvant K. (eds.) The Effect of Treaties on Foreign Direct Investment: bits, Double Taxation Treaties, and Investment Flows, Oxford, 2009, pp. 273–294 (further Grosse, Trevino), p. 276. 531 I.a. danger of domestic production reduction, balance-of-payments distortion. See Bora, p. 102. 532 On 1.1.2011 the fdi stocks in Ukrainian agriculture constituted 650 million usd and around 800 million usd in 2013. oecd. Review of Agricultural Investment Policies of Ukraine: oecd Eurasia Competitiveness Programme, Project Report, December 2015, p. 19. Nevertheless, the fdi stocks in Ukraine are substantially smaller compared to other ceecs. unctad. World Investment Report 2011, Geneva, 2011, p. 190.

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disproportionately large share of the investment.533 There is also a substantial inter-branch discrepancy: investment in the Ukrainian food industry is higher than investment in primary production.534 This may be explained by tight agricultural regulations, the lack of a land market, as well as the prevalence of market-seeking over factor-seeking investor motives in Ukraine.535 On the other hand, today the weight of the host country’s competitiveness (for production and exports) in investment decision-making is growing.536 In this context, common challenges for investors in transitional economies might include high fdi establishment costs,537 and particularly for Ukraine, a weak reputation for investment protection and regulatory administration.538 Interestingly, legal regulation on foreign investment in Ukraine is per  se not restrictive,539 but its enforcement is prone to rule of law problems and over regulation.540 That is why stimulating fdi inflows into the Ukrainian ­agricultural sector should not purely be a task of investment incentives or agricultural policies, but could also be attained by reforming the entire r­ egulatory 533 Finding investors on one’s own, i.a. through ipos, international investment organisations, may be objectively possible only for big players. By the same token, using the state as an intermediary, e.g. National investment agency of Ukraine, is normally eligible only for large business structures. In the end, the only option attainable for small and middlesized producers may be attracting investment through public development agencies, i.a. usaid, ifc, ebrd. The coverage of these investment schemes remains rather limited. 534 In 2005, fdi inflows into Ukraine’s food industry made up 1 169 million usd comparing to 299 million usd for agricultural production and to over 5 000 million usd for the industrial sector. Ukraine-Canada Grain Project, 2007, p. 22. Similar disproportions in the fdi stocks structure were documented in 2010–2011. State Statistics Service of Ukraine. Ukraine and the cis 2010, Kiev, 2011, p. 94. 535 Marinova S.; Marinov M. Foreign Direct Investment in cee, Aldershot, 2003, p. 93. 536 Grosse, Trevino, p. 275. 537 In addition to the normal costs associated with conducting business in a foreign country, investment into transitional economies may face an increased level of uncertainty resulting from inflation, opaque regulatory environments, underdeveloped judicial and financial systems and corruption. Ibid., p. 275. 538 In the World Bank Doing Business 2017 rating evaluating 190 countries Ukraine held 20th place for getting credit (in 2013, 24th), 70th – for protecting investors (in 2013, 127th), 84th – for paying taxes (in 2013, the 168th), and 115th – trading across borders (in 2013, 148th). According to the overall rank 2017, Ukraine held the 80th position (in 2013, Ukraine was the 112th). www.doingbusiness.org. 539 Law on the Foreign Investment Regime No. 93/96 of 19.3.1996 guarantees national treatment (Art. 7), prohibition of nationalisation (Art. 9) and provides a non-exhaustive list of eligible investment (Art. 3). 540 That is why, the reductions of corporate tax and vat in Ukraine after 2010 did not result in a release from the high tax burden.

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­environment.541 Thus, improving land law and corporate law, eliminating trade-related restrictions,542 and last but not least, combating corruption on all levels, should contribute to the rise of transparency, and correspondingly, a more attractive investment climate. Compared to general trade law, external legal influence on domestic investment policies is rather limited since there is no comprehensive set of multilateral rules on fdi.543 The multilateral wto Agreement on trims could not be characterised as an efficient instrument as it basically interprets the provisions of the gatt.544 Moreover, wto members are entitled to make waivers for the trims Agreement. Ukraine also made use of this right at accession and turned down the national treatment requirement by restricting the purchase of land by foreigners.545 Theoretically, this step was taken to prevent the land-grabbing phenomenon, as investment in land remains an effective hedge against inflation. In fact, it may also be argued that Ukraine’s waiver was solely an attempt to legally exclude foreign actors from massive domestic acquisition of land. Until recently, international legal investment tools for Ukraine had mainly been concentrated on bits546 and the icsid. Regional integration agreements concluded by the country were limited to trade in goods. The fta with the efta states of 2011 touched upon investment issues, although in a rather restrictive way. Only direct investment, i.e. investor’s participation in an ­enterprise 541 In that vein, the icc Guidelines for International Investment 2012 envisage eleven fields of state obligations, which go far beyond the narrow understanding of investment policies, i.a. ownership, fiscal policies, and legal framework. 542 Import regulation for seeds, agricultural equipment, and fertilisers is essential for agricultural investment. Strubenhoff, Movchan, Buriakovski, pp. 169 seq. 543 After several unsuccessful attempts to set up international investment regulation (the most known example was Multilateral Agreement on Investment (mai) under the auspices of the oecd) there was a shift to bilateral investment treaties (bits) which have been increasing in number for the last two decades. As a result, the incumbent international investment law is supposed to be fragmented and imperfect. See Wolf S. The Regulation of fdi under Selected wto Agreements – Is There Still a Case for a Multilateral Agreement on Investment? In: Tietje C. (ed.) International Investment Protection and Arbitration: Theoretical and Practical Perspectives, Berlin, 2008, pp. 71–107, p. 71. 544 Initially, it was expected that further wto investment rules would be elaborated during the Doha reform process and with this in mind the mandate for negotiations on multilateral agreement on investment was included into the text of Doha Ministerial Declaration 2001. Nevertheless, in July 2004 the topic was removed from the agenda due to unwillingness of most developing countries to launch investment negotiations within the wto. 545 Annex XVI-D to WT/ACC/UKR/152. 546 By December 2017, Ukraine had concluded 78 bits, i.a. with all cis states and the eu Member States and eight treaties with investment provisions. url: http://investmentpo licyhub.unctad.org/IIA/CountryOtherIias/219#iiaInnerMenu.

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­consisting of at least 10 per cent ownership, or an investment related to it,547 falls within the scope of the free trade zone. The covered investment is subject to the national treatment and the mfn regimes and the transparency obligation.548 Nonetheless, the effect of the EFTA-Ukraine fta on investment should remain limited owing to permitted reservations under Art. 4.11. of the EFTAUkraine fta and the authorisation of a so-called right to regulate concerning any “measure that is in the public interest, such as measures to meet health, safety or environmental concerns or reasonable measures for prudential purposes.”549 Furthermore, the parties also reiterated their commitments under the trims Agreement by incorporating those into the fta obligations.550 It means that they did not opt out of Art. 3 of trims, which allows making use of the general gatt exceptions. If a signatory state introduces a restriction based on a right to regulate, that should allegedly be examined in the light of Art. xx of the gatt, and correspondingly, the chapeau test. In a situation where the public interest of concern is not reflected in the Art. XX-objectives, the gatt proportionality test may not be invoked. Thus, the policy space given by Art. 4.8.1. of EFTA-Ukraine fta could be restricted exclusively when Art. xx of the gatt could be applicable. In the end, because the EFTA-Ukraine bits remain in force in parallel with the fta provisions and may not be influenced by the latter,551 the fta role in the area of investment is not apparent and might be marginal. Another fta agreement involving Ukraine that deals with investment promotion activities is the Association Agreement with the eu. The preceding pca addressed the investment issue exclusively from a development position by seeking to establish favourable regulative and legal conditions for fdi in Ukraine.552 The eu-Ukraine aa does not provide a single framework for investment, but targets it within other sets of rules, i.a. for agriculture and rural development.553 Unlike the EFTA-Ukraine fta, the text of the eu-Ukraine aa 547 Art. 4.1.1. and 4.2. (a) of EFTA-Ukraine fta. Art. 4.2. (c) of the agreement provides a nonexhaustive list of the covered investment. The fta is retroactive for investment, but not for disputes. Art. 4.1.2. of EFTA-Ukraine fta. 548 Art. 4.3.-4.7., 4.9. of EFTA-Ukraine fta. 549 Art. 4.8.1. of EFTA-Ukraine fta. 550 Art. 4.10. and 4.2(e) of EFTA-Ukraine fta. 551 Art. 4.1.3. of EFTA-Ukraine fta. 552 Art. 52(2) and 54(2) of pca, as well as European Neighbourhood and Partnership Instrument. Ukraine: Country Strategy Paper 2007–2013, para.2.2. 553 Art. 404(e) of eu-Ukraine aa. The other examples of fostering investment are granting national treatment in trade in services (Art. 88, footnote 16 of eu-Ukraine aa with reservations in Annex XVI-A), facilitation and promotion of trade favouring sustainable

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focuses on co-operation to promote investment rather than on a reiteration of rights and obligations under the trims Agreement and the bits. Owing to a high potential for private investment – especially infrastructure support to offset the budget burden associated with agricultural s­ ubsidies – one of the key points of the Ukrainian reform agenda must be the improvement of the investment climate. Hypothetically, under the conditions of regulatory transparency, large producers should not be in need of any governmental support when access to investment is still an obstacle for small and mid-size producers. In respect to this, it could be recommended that the state concentrate on promoting investment in general infrastructure accessible to small and medium producers, particularly through participation in ppps. Onfarm investment may potentially be supported by the state too, but launching the land market should alleviate concerns on this matter by improving farmer access to credit facilities, so they are able to cover their investment expenses. Therefore, investment may at least to some extent replace credit subsidies and state support for general services (para. 2 of Annex 2 of the AoA). Furthermore, a decline of production and infrastructure costs may be expected. That should have a positive effect on farm income. Supposedly international investment instruments show a rather limited significance for agricultural investment because foreigners are barred, now and in the future, from accessing agricultural land in Ukraine, subject to the Land Code 2001 and the trims waiver. Notwithstanding this fact, the importance of the eu-Ukraine aa for the promotion of agricultural investment cannot be overlooked since the treaty concentrates on regulatory handicaps. Its effective implementation may contribute to the improvement of the country’s general investment climate. 6.9.2 Direct Tackling of Farm Income Problem Given the required balance of ams measures as part of Ukraine’s membership in the wto, together with the country’s overall inefficiency in granting direct support and the distortive nature of its indirect support, it may be advisable to move towards a system of direct decoupled income support for agricultural producers (compatible with para. 6 of Annex 2 of the AoA). This policy should address the issue of low income in the sector. Furthermore, direct income support will most likely make the system of financial interventions unnecessary, as it will prevent traditional farm income from falling during supply boom development (Art. 293 of eu-Ukraine aa), mediation mechanism (Art. 327 seq. of euUkraine aa), energy co-operation (Art. 338 of eu-Ukraine aa), and taxation (Art. 339 of eu-Ukraine aa).

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­ eriods. By the same token, this mechanism should make all kinds of input-­ p related subsidies, including insurance subsidies, abundant since producers will be able to mitigate their losses, in particular, to pay for insurance.554 To fall within the “green box,” direct payments to producers should be decoupled and not conditional on production as prescribed in para. 6(e) of A ­ nnex 2 of the AoA. Though compliance with this provision could make ­financial support non-efficient from the economic point of view inasmuch as it could lead to misuse as the eu experience shows.555 Likewise, Ukraine’s concept of “active farmer,” which is different from the eu definition based on the requirement to produce agricultural goods, cannot be reconciled with the provisions of paras. 6(b) and (e) of Annex 2 of the AoA. On the other hand, the implementation of the eu cross-compliance model in Ukraine (“good agricultural condition”) would boost budget outlays given the huge agricultural area of the country. A similar concern arises in relation to a decoupling element since the ­Ukrainian government would prefer to support only less competitive branches. The question of funding is also topical. For now, Ukrainian authorities ­favour indirect support. The revenue foregone is also, in principle, eligible as exempt direct payments (para. 5 of Annex 2 of the AoA) under the condition that the respective programme must be publicly financed (pursuant to para. 1 of Annex 2 of the AoA). The only way to secure an ams exemption for indirect support and avoid direct budget transfers would be to adjust the current ­agricultural taxation regimes by assessing the level of the beneficiaries’ agricultural production prior to launching the measure (in a basic period) and by eliminating any further production requirement. That would mean that all entities owning or leasing agricultural land would be eligible for support. Under these circumstances, financial transfers for urban inhabitants who acquired the land in the course of privatisation may not be excluded. In this regard, a smart solution could be to restrict eligible beneficiaries to certain producer categories.556 That is authorised under para. 6(a) of Annex 2 of the AoA. In this context, taking into consideration the disproportionate income distribution as a result of implementing decoupled payments in the eu, it could 554 Nevertheless, the moving towards agricultural insurance support in the eu might be evidence that income support is not sufficient enough to resolve the market failure. It seems that the market imperfection in this context is rather the systemic risk problem on the insurers’ side. 555 See Sub-chapter 5.2.2. 556 For instance, decoupled income support is granted only for smallholders in Argentina (G/AG/N/ARG/24) and the eu has launched a special support scheme for small producers.

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be recommended to avoid inclusion of a land factor into decoupled schemes in Ukraine due to the specificity of land distribution in the country. It could be argued that the criteria of income and production level, taken separately or cumulatively, may be more efficient for the purpose of determining payment rates. Thereby, aid for high-income producers could be completely excluded. Anyhow, the government of Ukraine may be unwilling to refuse the requirement on production. In this situation, an alternative decoupled support model could be based on farmers’ provision of public goods. However, the criteria of cross-compliance of European law could not be implemented one by one in Ukraine, but the essence of this instrument, namely, the farmer’s responsibility to the state to maintain the good condition of the land (as a compensation for budget support) should be upheld. Regarding a model for direct payment implementation,557 it is suggested that because of the novelty of the policy in Ukraine, only the regional model be selected. The rate of direct payments would depend on the region where the land plots are situated and on that region’s average income compared to the national level. Besides the compliance issues, the experience of the ceecs has given a clear sign that institutions matter. On that ground, a shift to direct farm support should be merely a mid- or long-term goal, but rural development measures should be launched as soon as possible to get ready for direct payments. In particular, support for land improvement and re-parcelling, establishing and updating land registers, etc.558 will be primarily needed.

Conclusions on Chapter 6

As concluded in Chapter 2, the persisting demand for state agricultural support in Ukraine is, predominantly, a result of the incomplete transition process (first and foremost, the unfinished land reform). In addition, undeveloped agricultural infrastructure hampers the progress of the market institutions, which may at least partially replace the government in the sector. By addressing the producer income issue, the Ukrainian government chose the common approach for developing the country’s income redistribution strategy within the sector, i.e. the state taxes the most profitable sectors (cereals and oilseed production in the present case) by means of price regulation policy and, as an aftermath of this policy, tends to impose export restrictions 557 There are three basic models: regional, historic and hybrid. WT/TPR/S/248, pp. 105–106. 558 Cardwell M. The European Model of Agriculture, Oxford, 2004, p. 395.

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on these markets. At the same time, the regulator also pursued income re-­ distribution between agricultural and non-agricultural sectors by means of tax subsidies for the former. To date, Ukraine’s notifications on domestic support submitted to the wto do not imply any breach of the country’s Bound ams commitments. However, the rising product-specific and non-product specific ams may put the compliance at risk in the near future unless policy changes are made. This predominantly concerns the vat regime. Non-efficiency and inequality concerns regarding the state support mechanisms together with the wto factor leave basically three options for Ukraine: – The reduction of government interventions and use of market-based instruments to tackle agricultural goals and/or – shifting to less trade-distortive and more efficient domestic support instruments and/or – expansion of state-to-state contracts or international ppps. The experience of collaborating with Chinese state-owned entities suggests that the last scenario may potentially be disputable under the general gatt provisions, although it is a safe haven in regard to domestic support disciplines, if implemented accordingly. Nonetheless, it is the second option that may be of particular importance for Ukraine, especially if the country decides to enter the wto Cairns group of agricultural exporters.559 The membership may open new horizons for expansion of the country’s agricultural exports, but will, at least officially, require more liberal domestic policies.560 In respect to that, the promoted approximation to European agricultural policies must be accomplished very carefully since the European model of expansive agricultural support represents the ­opposite concept to the Cairns approach. 559 The speculations on Ukraine’s application to the Cairns group seem to be groundless. Supposedly Ukraine is simply not interested since Vietnam, which acceded to the wto at approximately the same time as Ukraine, has already entered the group. 560 Nevertheless, the policies of some Cairns members, such as Argentina, Brazil and Canada, are often under concern of the wto community. WT/TPR/S/212, pp. 97, 99; Notification of Brazil for domestic support in 2004/2005 and 2005/2006 G/AG/N/BRA/26.

chapter 7

Export Measures for Foodstuffs: Rationale, Forms, and Impact

Scope of the Chapter

The conclusion of the preceding chapter pointed to the method of Ukraine’s governmental support for agriculture as not being efficient for solving the farm income problem. The interconnection of this problem with the emerging issue of food security creates additional challenges for domestic agricultural policies. The purpose of Chapter 7 is to analyse Ukraine’s measures that are capable of influencing grain exports – their general impact, and primarily, their compliance with international trade regulations. Since international disciplines on the export of goods may be imposed on multilateral (wto), regional (e.g. eu common market), and bilateral1 dimensions, all these levels will be examined. wto trade policy review documents distinguish between export-­restrictive measures (including export duties, charges, and levies; registration and documentation; restrictions and controls) and export-incentive measures (i.e. ­official support and related fiscal measures; finance, insurance guarantees).2 The structure of this chapter will be divided in accordance to this classification. Sub-chapter 7.1. will be devoted to regulation of export restrictions and ­duties at the multilateral level, followed by an examination of its implementation at the national level in Ukraine (Sub-chapters 7.2.–7.3.). Further, the alternatives to export restrictions available at domestic, regional and global levels must be identified (Sub-chapter 7.4.). The subsequent part of the chapter will deal with export-incentive measures (Sub-chapter 7.5.), where the agricultural export promotion in Ukraine and certain European practices will be scrutinised. The last step will be the examination of the state-trading phenomenon (Sub-chapter 7.6.), which may be difficult to categorise as a strictly restrictive or incentivizing measure. The activities of Ukrainian state-owned enterprises 1 Certain rtas (e.g. nafta, Australia-New Zealand fta (anzcer), and Japan-Singapore fta (jsepa)), in principle, prohibit export duties. Other rtas include disciplines similar to those under the wto. Kim J. Recent Trends in Export Restrictions, oecd Trade Policy Working Paper101, 2010 (further Kim), p. 19. 2 Both fall within the category “Measures Directly Affecting Export.” See e.g. WT/TPR/S/284; WT/TPR/S/283.

© koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004353695_009

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occupied with grain trade will be studied in the light of the wto provisions and regional integration of Ukraine. 7.1

Export Restrictions

7.1.1 Rationale of Export Restrictions in Agricultural Trade The major policy objectives of export restrictions on agricultural products may be to protect and promote domestic processing industries through reduced ­input prices (by means of taxes or quantitative restrictions), to decrease inflation and ensure a strong food supply, and to improve terms-of-trade and counteract tariff escalation.3 By imposing export duties, a government usually also seeks to multiply its fiscal revenues.4 A general surge of trade restrictions (applied to both imports and exports) and their asymmetrically high use in agriculture5 is observed. Among other factors, the food price crisis of 2007–2008 triggered a chain of export restrictions, mostly for cereals.6 While it was political issues that used to influence grain policies in the preceding decades,7 the current boom of export restrictions on foodstuffs is predominantly a direct consequence of the growth in food prices.8 In spite of the good intentions behind these measures, their application hides pitfalls that lay beyond the regulator’s control and may even aggravate food price concerns. First, the market may restrict itself to a greater e­ xtent than foreseen by the government.9 Second, turning to the international ­dimension, 3 Kim, pp. 9–11. 4 That is why export duties tend to be imposed in periods of high prices. 5 See e.g. wto. Report on G20 Trade Measures (Mid-October 2010 to April 2011), Geneva, 2011, pp. 1, 10. 6 Fifteen countries restricted to some extent their wheat exports in 2008. The most radical restrictions took place in India, Kazakhstan (export bans) and Argentina (since 2009 ad v­ alorem export duty at 32.5 per cent). Mitra S.; Josling, T. Agricultural Export Restrictions: Welfare Implications and Trade Disciplines, ipc Position Paper, 2009 (further Mitra, Josling), pp. 5–6. 7 On political use of export restrictions see Oki K. u.s. Food Export Control Policy: Three Cases from 1973 to 1981, usjp Occasional Paper 08–13, Cambridge ma, 2008, pp. 18 seq. 8 Food security is not limited to availability of food, but also encompasses its accessibility and stability (according to the 1996 World Food Summit definition). 9 If restrictive quotas are applied, exporters tend to purchase grain and store it by expecting elimination of export restrictions. In this context, the grain may not be consumed on internal market.

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export restrictive agricultural measures tend to have a “contagious” character since an increasing demand by importers may force other exporting countries to limit their exportation volumes with a view to ensure domestic food supply.10 To summarise the potential economic impact of agricultural export restrictions, it may be determined that they tend to reduce the global food supply and could trigger price increases. That, in turn, would predominantly hurt consumers in developing countries who spend a large share of income on food.11 Moreover, adjustment of agricultural supply is not expected to reduce the prices to the level before the application of export restrictions.12 Besides the rather harsh economic effect, export restrictions are not regarded as the first-best policy option for promoting food security inasmuch as the desired decrease in domestic prices is attainable through alternative and less distortive measures, i.a. import tariff reduction for agricultural products or food subsidies for the poor.13 Factors Contributing to the Emerging Significance of Export Restrictions One of the drivers expanding export restrictions is the imbalance in SouthNorth trade seeing as raw materials, abundant in developing countries, face a higher demand in developed economies than from their own in-land processors. Even so, it may be stipulated that the original problem of developing countries is not surging exports, but agricultural inflation associated with a low level of domestic processing and a bad macroeconomic situation. Apart from export restraints in any form, both developed and developing countries use import tariffs to protect their processors.14 The tariff escalation (restrictively high tariffs for processed products) by developed states might be, among others, a cause of the extensive use of export restrictions and duties by their counterparts. Thereby, there is certain interdependence between market access issues and export restrictions.

7.1.2

10

An illustration of this feature may be consequent grain export restrictions in the neighbouring Ukraine, Russia and Kazakhstan in 2007–2008 and 2010. Kim, p. 12; Tangermann 2011, p. 24. 11 Although high prices should support producers, it is believed that the disadvantages for consumers would be higher than the benefits for producers. Mitra, Josling, p. 11. 12 Ibid. 13 Hence, introduction of export restrictions would most likely fail the proportionality test. 14 Albeit supporting domestic producers, import protection increases consumers’ costs. WT/TPR/S/71, p. 77.

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Developing countries tend to produce export-oriented crops (so-called cash crops, e.g. cereals, oilseed) in large-scale production units. High world prices on cash crops leading to little or no domestic processing and resulting in negligible added value in these exporting countries may make it tempting to promote their underdeveloped processing industries (so-called infant industries). Besides the concern that these measures may support inefficient domestic food production,15 export restrictions in one agricultural sub-sector are prone to impose indirect support on interrelated sectors. One of the most prominent examples of such a linkage is dumped feed prices for livestock producers for the duration of grain export restrictions. Although the practice suggests that food importers are affected by agricultural supply insecurity to a lesser extent than food exporting states,16 domestic agricultural policies of the latter may still contribute to food insecurity in importing, developing countries by influencing upward price dynamics.17 In this regard, one could find arguments supporting the conclusion that the recent export restrictions on national grain markets could have contributed to the price spikes of the 2000s. Where price spikes are, in principle, immanent to grain markets,18 a steep increase in food prices during 2006–2008, and a quick growth in grain price during the second part of 2010, had an exceptionally dramatic character.19 In a nutshell, the algorithm of the latest price spike is supposed to be as follows: ­agricultural policies of certain countries caused price fluctuations resulting in a surge of demand on international markets; depletion of grain stocks 15

16 17

18

19

Ya Qin J. Reforming wto Discipline on Export Duties: Sovereignty over Natural Resources, Economic Development and Environmental Protection, Wayne State University Law School Research Paper 2012–04, 2012 (further Ya Qin), pp. 11–13. Cheong, Jansen, Peters, p. 9. Smith F. Food Security and International Agricultural Trade Regulation: Old Problems, New Perspectives. In: McMahon J.; Desta M. G. (eds.) Research Book on wto Agreement on Agriculture: New and Emerging Issues in International Agricultural Trade Law, ­Cheltenham, pp. 45–70, 2012 (further Smith), p. 49. Multilateral liberalisation of ­agricultural trade is deemed to “export” price volatility and thereby to aggravate its effect. Tangermann 2011, pp. 38–39. The grain market can be classified as a “thin” market (only 18 per cent of wheat production is exported). The thinner a market is, the larger price adjustments are required to re-establish the equilibrium. See Tangermann 2011, p. 15. See for details Tangermann 2011, pp. 1–2. On the history of the food spikes phenomenon see also Diaz-Bonilla E. Globalisation of Agriculture and Food Crisis: Then and Now. In: Karapinar B.; Häberli C. (eds.). Food Crisis and the wto: World Trade Forum, Cambridge, 2010, pp. 49–80.

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i­ ncreased market volatility, while further export restrictions and a very limited supply led to panic on grain markets.20 Even though additional factors may also have contributed to the market bubble,21 the more frequent use of export restrictions in the grain sector is considered to be the main cause of the market hysteria of the second half of the 2000s.22 Hence, export restrictions are expected to create uncertainty on agricultural markets. Under these circumstances, the exporters may try to further insulate their markets in order to keep domestic prices low.23 The resulting perception of market instability may lead to additional state interventions and a surge of government support.24 So, at the end of the day, it will not be not to escape from the vicious circle of reciprocal protectionist policies. All in all, it seems that developing countries are more inclined to respond to price spikes with large interventions. The survey about agricultural policies in 2008–2010 showed that developed countries hardly adjusted their food policies in the short-term following the recent food crisis.25 There was a broad range of 20 21

22

23 24 25

Tangermann 2011, p. 28. The food crisis of the 2000s was accompanied by additional factors capable of influencing price building, such as the financialisation of commodity markets and expansion of biofuels production. Where there is no evidence that speculations with commodity derivatives could have significantly contributed to increase in food prices, the factor of biofuels could indeed stimulate physical demand, but was not decisive in price building for cereals. Moreover, some cyclical factors, for instance, weather conditions in 2005–2006, the eu increase of feed imports, us dollar fluctuations, and structural factors, such as growth of input prices, must have aggravated the situation. Jones W.; Elasri A. Rising Food Prices: Causes, Consequences and Policy Responses. In: Karapinar B.; Häberli C. (eds.). Food Crisis and the wto: World Trade Forum, Cambridge, 2010, pp. 109–135, pp. 110–115; Tangermann 2011, pp. 11–17, 37–38. Also on the causes of price spikes see Valdes A.; Foster W. Net Food-Importing Development Countries, ictsd Issue Paper 43, 2012 (further Valdes, Foster), p. 3. Although it is not possible to restore the situation before the food crisis 2008 in all details, the development of the price spike of 2010 appears to have been closely related to announcements of government-imposed export restrictions. Tangermann 2011, p. 24. On the impact of the recent grain exports restrictions on international trade see e.g. Götz L.; Glauben T.; Brümmer B. Impacts of Export Controls on Wheat Markets During the Food Crisis 2007/2008 in Russia and Ukraine, Agricultural & Applied Economics Association 2010 aaea, caes, & waea Joint Annual Meeting, Denver, July 25–27, 2010. Valdes, Foster, p. 2; Smith, p. 46. Valdes, Foster, p. 11. Developed countries simply continued direct support policies. The eu launched the “Health Check” procedure that was concentrated on direct payments to producers. The us, in its turn, triggered the farm income support mechanism. High prices favoured agricultural producers and consumers did not feel the price increase as domestic food prices

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the reactions among developing countries that were seeking to stabilise internal prices. The predominant strategy was the introduction of trade restrictions on the export side, while some countries also initiated import tariff reduction, increased direct farm support, expanded public stocks, and introduced target payments for the poor.26 The tactics of individual countries had a focus on either consumers or producers, where the win-win solutions were rather rare.27

Intermediary Summary

The development of agricultural markets in the second half of the 2000s must have created some additional prerequisites for export restriction policies. Such policies are supposed to be the triggering element of price spikes on cereal markets that cause the growth of all agricultural prices. In this regard, the wto legal norms that impose disciplines on export restrictions will be examined for their ability to efficiently solve the food price issue. 7.1.3 Regulation of Export Restrictions within the wto/gatt System 7.1.3.1 General Lax Prohibition of Export Restrictions Where the influence of policy instruments on imports was always a focal point within the gatt/wto system, restrictive export policies did not draw much attention from the international community, mostly due to the belief that expanding exports is one of the greatest interests of all national economies. As a consequence, the wto’s “relatively permissive”28 regime on export restrictions created a regulatory environment that may endanger other wto concessions in trade liberalisation. Nevertheless, while disputes concerning export restrictions used to be rather rare,29 the latest development reveals great concerns within the wto community regarding their imbalanced use.30

in developed countries are usually higher than the world prices. Tangermann 2011, pp. 31–34; Valdes, Foster, p. 12. 26 Ibid. 27 Tangermann 2011, pp. 31–32. 28 See on the term “relatively permissive” Switzer, p. 258. 29 One of the several examples of the dsb disputes concerning export restrictions was Canada-Salmon. Panel Report Canada-Measures Affecting the Export of Unprocessed Herring and Salmon bisd 35S/98. 30 The joined cases about China’s export restrictions on non-agricultural commodities was the first attempt to examine wto member’s export restrictions (China-Raw Materials WT/DS394/, WT/DS395/, WT/DS398/).

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Art. XI:1 of the gatt generally prohibits quantitative export restrictions31 in the form of quotas, import or export licenses and others, but explicitly excludes export taxes and other duties from the scope of the disciplines.32 ­Furthermore, Art. XI:2 of the gatt provides a list of possible exceptions from the obligation under Art. XI:1 of the gatt, i.a. temporal export restrictions for foodstuffs aimed at preventing or relieving critical shortages in these products (Art. XI:2(a) of the gatt). Apparently, the vague formulation of the exception under Art. XI:2(a) of the gatt33 makes this provision flexible and prone to abuse.34 In response to this ambiguity, the gatt Panel in Oilseed i narrowed the broad concept of “preventing critical shortages” and pointed to the additional task of Art. xi of the gatt “to protect expectations” of trade partners “as to the competitive relationship between their products and those of other contracting parties,” where such expectations are secured with a view “not only to protect current trade but also create the predictability needed to plan future trade.”35 The AoA, not being as ambitious as this ruling of the pre-WTO era, however, provides some additional disciplines on the exception under Art. XI:2(a) of the gatt.36 Correspondingly, Art. 12.1. (a)-(b) of the AoA imposes an obligation to “give due consideration to the effects” of export measures on food security in wto member states-importers, as well as to consult members “­having a substantial interest as an importer” before imposing an export restriction. Nonetheless, these obligations are not, in fact, able to confine the scope of Art. XI:2(a) of the gatt since they do not modify the prerequisite for its application, which is the prevention or relief of critical shortages for foodstuffs. Art. 12 of the AoA may rather impose moral obligations for the mitigation of damages to wto members who are agricultural exporters, and as a result may barely have an impact on the way export restrictions are applied. Moreover, exempting developing countries that are not net-food exporters from the disciplines

31 Art. xi of the gatt deals with restrictions “on the exportation or sale for export” of any product. 32 This fact may be explained by the mercantilist assumption that exports must be more desirable than imports. Ya Qin, p. 5. 33 There is no definition of the notion “critical shortages” in the wto law. Moreover, it is not clear how far the scope of “prevention” of such shortages extends. 34 For instance, during the high-price period in the 1970s following the so-called “great grain robbery” the gatt could not resist highly restrictive eu export measures. 35 Panel Report eec-Oilseed i L/6627–37S/86, para. 149. 36 The disciplines of Art. 12 of the AoA are applicable to developed countries and developing countries net-food exporters of the specific foodstuff.

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of Art. 12 of the AoA might lead to misconceptions, as it may be rather tricky to calculate exports of a country whose exports are restricted. The certain predictability of the measure justified under Art. XI:2(a) of the gatt should be conferred by mandatory notification “as far in advance as practicable” required by Art. 12.1. (b) of the AoA. However, since the given legal norm does not provide any time limit for the notification and does not impose any sanctions for non-compliance, its provisions may be characterised as rather lax and can hardly strengthen the general terms of Art. XI:2(a) of the gatt.37 Besides direct quantitative export restrictions and duties, other policy means may impose similar effects on outward trade flows. Such instruments include abusive and selective administrative measures and red tape. That is why it is accepted by the dsb that the scope of Art. xi of the gatt is not ­limited to “classical” export restrictions and also encompasses, in principle, the non-exhaustive area of “other measures.” Thus, the disciplines of Art. XI:1 of the gatt may extend to restrictions of a de facto nature.38 De facto restrictions must be results of exclusively governmental measures because the actions of private parties do not typically fall within the ambit of Article XI:1 of the gatt.39 However, it could not be excluded that governmental measures may enable private parties to restrict exportation, even if the measures are not trade-restrictive per se.40 Moreover, the mere provision of producer incentives to restrict exports – even if these incentives did not affect the private parties’ behaviour, but potentially could – may be considered a violation of Art. XI:1 of the gatt.41 Nevertheless, the dsb also opined that the actual trade impact of a measure had to play a key role.42 Then a thorough examination of de facto restrictions allegedly violating Art. XI:1 of the gatt should avoid an expansive reading of the legal provision.43 Therefore, only measures that factually reduce 37

According to the wto, none of the countries that imposed restrictions in 2008 complied with the requirement to notify under Art. 12 of the AoA. Mitra, Josling, p. 15. 38 E.g. Panel Report Argentina-Bovine Hides, part 11.17. 39 “The fact that an action is taken by private parties does not rule out the possibility that it may be deemed governmental if there is sufficient governmental involvement with it. … that possibility will need to be examined on a case-by-case basis.” Panel Report Japan-Film WT/DS44/R, para. 10.56. Similarly, Panel Report Argentina-Bovine Hides, para. XI.A.3. 40 Panel Report Argentina-Bovine Hides, para. 11.18. 41 Panel Report US-Japan Semiconductors L/6309–35S/116, paras. 109–111. 42 Panel Report Argentina-Bovine Hides, Part XI.A.6: “The evidence is insufficient to prove that there is an export restriction made effective by the mere presence of tanners’ representatives within the meaning of Article xi of the gatt.” 43 Thus, the Panel found that “uncontrolled, unlawful conduct” by Argentina’s customs officials could not be the ground of violation of Art. XI:1 of the gatt. Panel Report A ­ rgentina-Bovine Hides, para. 11.31.

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exports may potentially constitute a violation of Art. xi of the gatt. In this regard, the concept of de facto export restrictions may be an effective instrument for combating abusive state regulation, but it could not be used against corrupt practices and red tape. 7.1.3.2

Export Restrictions and rtas: Relationship between Art. XI:2(a) and XXIV:8 of the gatt Art. XXIV:8 of the gatt requires the elimination of duties and other restrictive regulations of commerce within regional integration structures for substantially all trade, while permitting specific exemptions for Art. xi and xx of the gatt, among others. Therefore, rta members are free to use or not use the specified exceptions. Imagine a situation where a wto member has critical shortages in the sense of Art. XI:2(a) of the gatt and is eager to implement export restrictions, i.a. to trade within its rtas. Apparently, if a rta is concluded exclusively between wto members, the exemption of Art. XI:2(a) of the gatt remains generally valid and enforceable within the rta, unless the parties opted out in the text of the agreement.44 The non-enforcement of Art. XI:2(a) of the gatt between rta partners should generally be allowed due to the following considerations. First, Art. xxiv of the gatt, as already reiterated in Sub-chapter 3.2.1.1., basically authorises discrimination between wto members under the approved conditions. The extent of the permitted external influence through rtas must be measured the moment the rta is formed with the criterion of being a “more restrictive regulation” compared to regulations in the pre-formation stage.45 Since recourse to Art. XI:2(a) of the gatt is normally eligible for all wto members, exclusion of this right in a rta would not lead to more external restrictiveness in comparison to the status quo before the institution of the rta. By the same token, Art. XI:2(a) of the gatt does not directly require proportionate distribution of exported goods among trade partners. Therefore, when a wto member does not change its export restriction policies in the external dimension in front of wto members that are non-RTA partners (if it would be so, that rta would not be eligible under Art. XXIV:5 of the gatt), the 44

45

In the case of rta parties – wto members incorporate the provisions of Art. xi of the gatt into the rta text, it may be argued that they opted in for non-exemption of intraRTA trade from the respective general disciplines. For example, Art. XXIV:5(b) of the gatt provides for the ftas: “The duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free-trade area or the adoption of such interim agreement… shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area” (highlighted by the author). Similar formulation for cus is contained in Art. XXIV:5(a) of the gatt.

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discrimination in favour of rtas partners is basically permitted for measures adopted under Art. XI:2(a) of the gatt. The gatt Panel required the protection of trade partner expectations, the competitive relationship between their products and those of other contracting parties by applying Art. XI:2(a) of the gatt.46 Arguably, that may not be applied to disproportions between rta partners and other wto members since the indicative list of the exceptions eligible under Art. XXIV:5 of the gatt was evidently intended to widen free trade and should not preclude rta partners from refusing the application of trade restrictions. Similarly, trqs agreed upon within rtas (Art. xiii of the gatt), are deemed to have prevalence over the exemption for critical shortage applied for other members. Following this approach, trade flows may become rather distortive supposing that a wto state that is inclined to use export restrictions has a broad net of rtas. In that way, the use of Art. XI:2(a) of the gatt for preventing “critical shortages” may be jeopardised if export volumes are secured (predominantly) to preferential partners. At the end of the day, this issue does not appear to have any clear solution. Thus, the gatt contains the conflict norm for dealing with rta provisions inconsistent with the gatt, especially in the event that gatt provisions make the formation of a rta impossible in the sense of gatt Art. XXIV:8 (Art. XXIV:5 of the gatt),47 but it does not provide any guidance for further co-existence of multilateralism and bilateralism. In Brazil-Tyres, the Appellate Body ruled that obligations under a rta (in that case, a binding decision within the mercosur) were not able per se to justify discriminatory treatment between wto members in the context of Art. xx of the gatt, but only when the reason for discrimination would bear a rational connection to the objective covered by Art. xx of the gatt and would not go against this objective.48 However, this analysis was made on the ground of the chapeau test, and thus could be useful only in examining the non-­ application of Art. XI:2 of the gatt within a rta in the sense of Art. xx of the gatt general exceptions. It may be argued that in the circumstances where no recourse to Art. xx of the gatt is taken, the situation is completely different. While enforcement of Art. xx objectives is examined under the concept of “arbitrary and unjustifiable discrimination between the countries where the same conditions prevail,” the manner of applying the exception under Art. XI:2 of the gatt should be scrutinised in the light of the general mfn requirement for non-discrimination underpinned in gatt Art. I:1. Given the fact that the

46 47 48

See footnote 35 to this Chapter. Appellate Body Report Turkey-Textiles, para. 58, as well as Sub-chapter 3.2.1. Appellate Body Report Brazil-Retreaded Tyres WT/DS332/AB/R, paras. 227–228.

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relationship between the disciplines of gatt Art. xi and non-discrimination under Art. I:1 has never been examined by the dsb, one can only guess what the outcome of such an examination could be. However, some observations can be made. First, the scope of discrimination under Art. I:1 of the gatt would not automatically coincide with that of Art. xx of the gatt. The latter provision more precisely targets measures affecting countries where the same conditions prevail, compared to measures affecting any wto member embraced by the mfn principle. The wording of Art. I:1 of the gatt does not provide any hints regarding the possibility of justifying an advantage granted, but it does not, by itself, exclude the option for such justification by means of other gatt ­provisions. Thus, compliance with Art. XI:2 of the gatt may excuse the mfn violation, as well as conformity with the disciplines of Art. xxiv. Second, it would be reasonable to concede that the exceptions eligible ­under Art. XI:2 and Art. xx of the gatt have a similar rationale, namely, they were designed to provide members certain policy space with a view to protect specific public interests. The difference between the above provisions is ­essentially their scope: Art. xx of the gatt concerns all obligations under the gatt and arguably also those under Annex A multilateral, where Art. XI:2 of the gatt is an escape clause solely for the obligations from Art. XI:1 of the gatt. Furthermore, unlike Art. XI:2 of the gatt, Art. xx incorporates the ­special standard for justification. As for rtas between a wto member and a non-member state concluded prior to the wto member’s accession, the conflict of norms may not formally emerge, even if the parties agree not to apply Art. XI:2 of the gatt or they de facto do not make use of this provision. The reason for that is the non-­applicability of the mfn principle for treatment between members and non-members. Even in a situation when the parties incorporate the provisions of gatt Art. xi into the rta text, the contracting party (wto member) would not be restricted to make discretionary decisions about whether or not to ­apply a measure taken under Art. XI:2(a) of the gatt towards the rta partner. 7.1.3.3

Possible Justification of Export Restrictions under Art. xx of the gatt Besides a broad policy space conferred by Art. XI:2(a) of the gatt, it may be argued that the general exemptions of Art. xx of the gatt could be used to justify a violation of Art. xi.49 Advocating the rightness of excess under Art. XI:2, a wto member may try and refer to Art. xx of the gatt. 49 Art. xx of the gatt may be applied only if a measure is inconsistent with another gatt provision. Panel Report US-Section 337 Tariff Act 1989 L/6439–36S/345, para. 5.9.

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According to that, subject to compliance with the chapeau criteria, “nothing in this Agreement shall be construed to prevent” measures from pursuing one of the legitimate objectives of Art. xx of the gatt. However, this approach would mean that a challenged measure should be examined in the light of both Art. XI:2 (examining that fact of the violation) and Art. xx of the gatt (concluding on justification of the violation). This double-checking may be burdensome or even redundant. Hence, as it was found by the Appellate Body, where the requirements of Art. XI:2(a) of the gatt are met, Art. xx of the gatt shall not be applied, “because no obligation exists.”50 Allegedly, in a case where there is a clear non-compliance with Art. XI:2(a) of the gatt, examination of the export restrictions under gatt general exceptions cannot be excluded. It could be argued that export restrictions for agricultural goods may potentially be justified under lit. (b), (g), (i), (j) of Art. xx of the gatt.51 Following the dsb two-tier analysis,52 it will first be analysed whether any of these objectives may be used effectively for the justification of measures taken to combat critical shortages of foodstuffs. To start with, it should be admitted that Art. xx(b) authorizing gatt noncompliance for the protection of human health could not be taken into consideration. The malnutrition concern would be rather unfounded in the present case because foodstuffs may normally be imported to avoid domestic undersupply. This exception may potentially be used only in the situation where importation is objectively not possible (due to the measures of other exporters or drastic increase in import prices) or may be dangerous (in the context of sps measures).53 The justification under Art. xx(g) of the gatt relating to conservation of exhaustible natural resources, presuming that soil may be regarded as such a resource,54 is also improbable. This may be triggered only if accompanied

50 51 52 53

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Appellate Body Report China-Raw Materials WT/DS/394/AB/R, WT/DS/395/AB, WT/ DS/398/AB, para. 334. The practical non-applicability of lit. (h) Art. xx of the gatt was established in Subchapter 6.8.2. Appellate Body Report US-Gasoline WT/DS2/AB/R, p. 22. In this case, the measure in question is to satisfy the criterion of “necessity” by comparing it with possible alternatives “which may be less trade restrictive while providing an equivalent contribution to the achievement of the objective.” Appellate Body Report BrazilRetreaded Tyres, para. 178. Appellate Body in US-Shrimp found that “renewable” resources may be “exhaustible” under certain circumstances, i.a. as a result of human activities. Appellate Body Report U ­ S-Shrimp, para. 128.

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by restrictions on domestic production or consumption.55 Furthermore, this objective was obviously not predetermined for agricultural goods as Art. xx(g) does not cover measures of a provisional character, but exclusively those ­“imposed until the point when the resource is fully depleted.”56 Any final doubts were removed by the dsb in the China-Raw Materials decision that made a clear distinction between Art. xx(g) and Art. XI:2(a) of the gatt as these provisions “intended to address different situations and thus must mean different things.”57 Support for in-land processing industry as a restriction for exports of domestically produced inputs can be justified under Art. xx(i) of the gatt, when domestic prices are held below the world price “as part of a governmental s­ tabilisation plan” and must not be applied with a view to increase exports or protect the respective processing industry. Since governmental stabilisation plans are hardly used today, this provision seems to be outdated.58 Even if other prerequisites could be met, it would be rather complicated from an economic perspective to provide evidence that artificially holding prices for agricultural primary products at a level below world prices would not protect domestic processors. Assuming that some agricultural goods may be regarded as products in general or as local short supply59 in the years of yield loss,60 it could be ­attempted to justify the measures that are “essential” for acquisition or distribution of agricultural goods concerned under Art. xx(j) of the gatt.61 It is questionable whether export restrictions on agricultural goods could be found e­ ssential 55 56 57 58 59

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Appellate Body Report China-Raw Materials, paras. 356–361. Unlike lit. (g) Art. xx of the gatt, Art. XI:2(a) of the gatt does not require restrictions for domestic use of foodstuffs. Appellate Body Report China-Raw Materials, para. 311. Panel Report China-Raw Materials, para. 7.300. This finding was upheld in the Appellate Body report, para. 337. Mavroidis, p. 354. The term “short supply” used in Art. xx(j) of the gatt is broader than “critical shortages” in the sense of Art. XI:2(a) of the gatt. The Appellate Body Report China-Raw Materials, para. 325. The rationale of this provision extends to natural disasters. bisd 3S/249, para. 42. See on this matter Mavroidis, p. 355. In this regard, it may be argued that a shortage caused by simple underproduction of agricultural goods may not be a sufficient ground for justification under the provision in focus. At the same time, Art. xx(j) of the gatt persists that “all contracting parties are entitled to an equitable share of the international supply of such products” which is basically an extension of the discrimination approach under the chapeau of Art. xx of the gatt to the general concept of discrimination laid down in Art. III:4 of the gatt.

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for distribution of goods. Export measures do not per se ensure sufficient food supply for the population since the foodstuffs may alternatively be stored. Moreover, since a tight supply of agricultural goods may be exclusively seasonal in character, the restrictions may only be imposed temporally until “the conditions giving rise to them have ceased to exist.” In this regard, Art. xx(j) of the gatt is not able to justify long-term export restrictions. Thus, basically none of the gatt Art. xx objectives seem to have a chance for successfully justifying export restrictions on foodstuffs utilised in excess of Art. XI:2 of the gatt. Assuming that the objectives of lit. (b) and (j) Art. xx of the gatt might be applicable under certain conditions, the export restriction measure will still sustain the second part of the Art. xx test. In that vein, the respective measure must be found to be non-discriminative and to not constitute a “disguised restriction on international trade” (chapeau of Art. xx of the gatt).62 A measure would be discriminative in the sense of Art. xx of the gatt if arbitrary or unjustifiable discrimination “between the countries where the same conditions prevail” takes place.63 Such discrimination must be foreseen by a state introducing the measure and must not be unavoidable.64 It was ­underlined by the Appellate Body that members should make serious efforts in good faith to negotiate a multilateral solution before resorting to unilateral measures.65 Although regulatory exceptions may not be based on the volume of trade,66 the approach “between the countries where the same conditions prevail” theoretically allows for the exclusion of rta partners from the scope of export restrictions.67 However, the analysis must be based on the cause and the rationale

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The opening clauses of Art. xx of the gatt concern merely not a measure as such but a manner of its application. Appellate Body Report US-Gasoline, p. 22; Appellate Body Report US-Shrimp WT/DS58/AB/R, para. 118. Therefore, the standard of discrimination under Art. xx of the gatt is different from that of Art. III:4 of the gatt as the former does not prohibit discrimination per se. See ­Appellate Body Report US-Gasoline, pp. 22–23; Appellate Body Report US-Shrimp, para. 118; Mavroidis, pp. 360–362, 356. The Appellate Body Report US-Gasoline, pp. 28–29. Ibid. See also Van den Bossche, Zdouc, pp. 576–577. The Appellate Body underlined that the assessment of discrimination should be concentrated on its cause, not the effects. Appellate Body Report Brazil-Retreaded Tyres, paras. 228–229. Again, similarly to Art. xi of the gatt, Art. XXIV:8 of the gatt allows application of Art. xx of the gatt between rta parties, but does not demand that.

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of the discrimination, i.e. in the light of the objective of the measure.68 Thus, if several rtas partners enjoy trade in goods that are otherwise restricted by Art. XI:2(a) of the gatt, the objective of the measure – preventing a critical shortage – may not be pursued. Therefore, excluding rta partners from the scope of restrictions taken in excess of Art. XI:2(a) of the gatt would be highly controversial from the point of view of the chapeau. In assessing the second condition under the chapeau of gatt Art. xx, what may constitute a “disguised restriction on international trade” must be clarified. The Appellate Body sees a strong bond between the criteria of discrimination and a disguised character of restriction.69 Nevertheless, “disguised restrictions”70 should not be limited to concealed or unannounced measures or discrimination, but should be extended to measures of abuse or illegitimate use of the exceptions available under Art. xx of the gatt.71 Hence, a particular export restriction should be thoroughly examined on its proportionality to the sought goal. The above analysis of the possible recourse to Art. xx of the gatt to excuse export restrictions of foodstuffs, as well as evidence of unsuccessful attempts of justification under gatt Art. xx in the wto jurisprudence72 allows a conclusion that the imposition of export restrictions in violation of Art. xi of the gatt has a slight chance of being successfully defended under the gatt ­general exceptions. Because the objectives of gatt Art. xx may be not suitable for the purpose of Art. XI:2(a) of the gatt, which has its own objective, it could be alternatively proposed that a measure taken under Art. XI:2(a) be examined directly by means of the proportionality test.73 This approach would be similar to the 68 69

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Appellate Body Report Brazil-Retreaded Tyres, paras. 225, 227, 232. Appellate Body Report US-Gasoline, p. 25. Another point of view could be that “‘arbitrary and unjustifiable discrimination’ should be seen as a loosely drafted mfn requirement” and the disguised restrictions “as a loosely drafted national treatment requirement.” ChangFa Lo. The Proper Interpretation of “Disguised Restriction on International Trade” under the wto: The Need to Look at the Protective Effect. In: Journal of International Dispute Settlement, 4(1), 2013, pp. 111–137, p. 126. The Panel in EC-Asbestos understood the word “disguised” as implication of intention, i.e. intention to conceal or to misinterpret. Panel Report EC-Asbestos WT/DS135/R, para. 8.236. Appellate Body Report US-Gasoline, p. 25. See also Mavroidis, p. 359. There was only one successful case of application of Art. xx of the GATT-the US-Shrimps dispute. The concept of proportionality is normally used to examine the measures under Art. xx of the gatt, as well as some obligations under tbt and sps Agreements. Shan W.; Simons P.; Singh D. (eds.) Redefining Sovereignty in International Economic Law, Oxford, 2007 (fur-

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second part of the Art. xx chapeau test, but based on the objective of Art. XI:2 of the gatt. In this context, the measure taken under Art. XI:2(a) will be ana­ lysed in the light of the elements of the proportionality principle: – Suitability, i.e. the capability of a measure to achieve a set goal, therefore, the goal to cut or eliminate “critical shortages” of foodstuffs. – Necessity, i.e. the lack of alternative, less restrictive measures to attain the goal. In this context, it should be scrutinised whether the degree of restriction (e.g. a de jure or de facto ban, volumes and accessibility of the quotas) was adequate enough to face existing or threatening shortages. – Proportionality stricto sensu, i.e. an assessment of the measure and its impact on affected interests.74 This element is basically incorporated into the scope of Art. 12.1. of the AoA.

Intermediary Summary

It appears that there is no mechanism within the incumbent wto regulation to tighten a policy space resulting from the broad wording of Art. XI:2(a) of the gatt (“prevent or relieve critical shortages”). Developed countries and ­developing countries – agricultural net-exporters – are bound by the procedural rules of Art. 12 of the AoA. The questions on substantive law (whether a critical shortage exists or is a threat, as well as whether and under which conditions the measure is sufficiently justifiable) may be clarified only when export restrictions are challenged before the wto judicial body. Although the objectives of Art. xx of the gatt may be revoked in this context only to a very limited extent, it may be proposed that the proportionality test be utilised for examining the compliance with the disciplines of Art. XI:2(a) of the gatt. Besides a general positive effect, this should reduce distortions resulting from non-application of export restrictions between rta partners who are wto members, which may not be effectively challenged under Art. I:1 of the gatt, but only by means of the chapeau test of Art. xx. 7.1.4 The Case of Export Duty Being excluded from the disciplines of gatt Art. xi, export duties are not specifically regulated within the wto regime and may be applied by wto

74

ther Shan, Simons, Singh), pp. 178 seq. See also the Appellate Body Report US-Shrimp WT/ DS58/AB/R, para. 156. Shan, Simons, Singh, pp. 178 seq.

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­ embers in compliance with their accession commitments, provided that the m mfn treatment obligation under Art. I:1 of the gatt is respected.75 In circumstances where export duties are not subject to any notification under the wto rules, the extent of their application is expanding,76 even though this instrument is deemed not only trade distortive but also harmful for national welfare.77 The dimensions and manner of application of export taxes and duties differ among the states. Developed countries usually do not use export duties for agricultural products,78 while developing countries that are agricultural exporters, including some members of the Cairns group, levy export taxes for some of their most export-orientated primary products on a continuous basis.79 This strategy is a direct consequence of the low level of processing in developing countries.80 That creates major disadvantages for the agricultural sectors in developing states because the prices for unprocessed 75

Specific export duty disciplines may be included into the accession protocols. See Van den Bossche, Zdouc, pp. 472–474. 76 According to the oecd, in the period between 2003 and 2009 one half of the wto ­members (mostly developing and at least developed countries) imposed export duties comparing to about one third of the members in 1997–2002. More than a half of these countries maintained export duties for agricultural products. Kim, p. 6. 77 Export duties transfer a part of on grain producers’ income to processors and livestock producers, while consumers and the state also benefit at producers’ cost. Therefore, in the long run, domestic producers tend to decrease their supply in response to lower prices that should lead to further export reduction. Kim, p. 6; Scholefield R.; Gaisford J. Export Taxes: How They Work and Why They Are Used. In: Kerr W.; Gaisford J. (eds.) Handbook on International Trade Policy, Cheltenham, 2007, pp. 237–245 (further Scholefield, Gaisford), pp. 237, 241; Mitra, Josling, p. 9. 78 The us Constitution prohibits export taxes. The ec used to levy export tax on wheat, but refused from this practice. Nowadays the eu does not collect any export charges. Nevertheless, agricultural goods are excluded from the principle of freedom on exports and are subject to special rules. See WT/TPR/S/284, para. 3.2.2.; Mitra, Josling, p. 9; Council Regulation No. 1061/2009 of 19.10.2009 establishing common rules for exports (with further amendments) (oj l 291 7.11.2009 p. 25). 79 For example, Argentina has been levying high export taxes on wheat, wheat products and unprocessed oilseed since 2002 (up to 45 per cent in 2006). See WT/TPR/S/176, p. 104; WT/ TPR/S/277, p. 96; Butault, Bureau and others, pp. 26–29. 80 According to the unido, the level of food processing in developing countries amounts to less than 40 per cent, where developed countries process almost all in-land produced agricultural primary goods. As a result of a high level of processing, developed countries do not face the problem of post-harvest losses. oecd; wto. Aid for Trade and Value Chains in Agrifood, 2013, pp. 14–15. See also Cheong, Jansen, Peters, pp. 7–8.

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products are usually the lowest in the food chain and are exposed to a higher degree of volatility.81 Uncontrolled use of export taxes and duties by developing countries forced the wto to tighten up the policy space. Thus, nine out of 21 recently accessed countries made commitments to eliminate82 or reduce83 export duties and thereby extend their obligations beyond those established by the gatt. The imposition of the so-called “WTO-plus obligation”84 raises a logical question about whether a member making additional commitments may later utilise the general gatt exceptions to justify non-compliance with these supplementary obligations. The Appellate Body examined this matter in China-Raw Materials. It ruled that because each accession protocol is a self-contained agreement, independent from the rest of the wto Agreement, the relationship between a specific accession commitment and the covered agreements could only be established through an express reference in the text of that specific accession commitment.85 As for Ukraine, it did include an express reference to the gatt in the text of the accession commitments on export duties.86 The practice of WTO-plus obligations may create inequality between wto members.87 The only way to rectify this unfairness seems to be tariffication of export measures following the procedure set in Art. xxviii bis of the gatt.88 Yet it would be not as efficient as expected since wto members may use the tactics practised today for import tariffs by imposing a high gap between bound and applied tariffs, which maintains the border protection effect. 81 82 83 84

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European Commission. International Aspects of Agricultural Policy: Background Doc­ ument for the Advisory Group on International Aspects of Agriculture, 2012, p. 33. E.g. para. 11.3. of China’s wto accession protocol WT/L/432. E.g. Report of Working Party on the Accession of the Russian Federation to the World Trade Organisation, WT/ACC/RUS/70, para. 638. Ya Qin, p. 8. The WTO-plus obligations are duly legitimated pursuant to Art. xii of the wto Agreement postulating that a country may accede to the wto Agreement on terms to be agreed between this country and the wto. Panel Report China-Raw Materials WT/DS394, WT/DS395, WT/DS398, paras. 7.119., 7.158.7.160.; Appellate Body Report China-Raw Materials, para. 291. This approach is criticised by the scholars. See e.g. Kennedy M. The Integration of Accession Protocols into the wto Agreement. In: Journal of World Trade, 47(1), 2013, pp. 45–76. WT/ACC/UKR/152, para. 240: “Ukraine would not increase export duties, nor apply other measures having an equivalent effect, unless justified under the exceptions of the gatt 1994.” Ya Qin, pp. 14–15. Since export taxes are perceived as a “valid development tool,” the procedure under Art. XXVIII:7 of the gatt may be also appropriate. Ibid., pp. 21–22, 31.

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Therefore, the regulation of export duties within the wto system is being outsourced to the individual members’ commitments. The gatt and the multilateral agreements hardly influence it directly. The following Sub-chapters will examine export duties and export restrictions in the sense of Art. xi of the gatt through the lens of related wto legal norms as the members’ compliance with their commitments does not invalidate the obligation not to circumvent the wto law.89 7.1.5 Export Restrictions and Investment Measures The manner of applying export restrictions to agricultural goods, including ­export duties, together with their impact on trade flows may strongly support arguments that these measures fall within the scope of the trims Agreement.90 Since the wto agreements do not define trade-related investment measures, the interpretation of this notion can be based solely on the dsb findings. The wto judiciary body prefers the broad term “investment measures.” For ­instance, the argument that measures relating to internal taxes or subsidies cannot constitute a trim was found to be “without textual support in the trims Agreement.”91 Although the analysis of whether a measure is regarded as an investment at the national level is indispensable,92 the dsb did not agree that the trims Agreement necessarily suggested that a measure can constitute a trim as long as a wto member characterises it as an investment measure, or adopts the measure as an investment regulation.93 On the contrary, the dsb felt that the characterisation of the measure as a trim should be based “on an examination of the manner in which the measures at issue in this case relate to ­investment,” as well as on “relation to investment in different manner.”94 For example, in Canada-Wheat, Canada’s regulation regarding some aspects of ­access to infrastructure for domestic and foreign grain products was found to constitute a trim.95 For that reason, it may be argued that export restrictions and export taxes for agricultural products may be linked to trims on the 89 90 91

Appellate Body Report EC-Export Subsidies on Sugar, paras. 215–220. It is reported that trims in food processing industries are very common. Bora, p. 114. According to the dsb, the scope of the trims Agreement is broader than the domain of foreign investment, thus, it is to be examined on a case-by-case basis what constitutes a trims measure. Panel Report Indonesia-Automobiles WT/DS54/R, WT/DS/55/R, WT/ DS59/R, WT/DS64/R, para. 14.73. 92 Panel Report Canada-Feed-in Tariff WT/DS412/R WT/DS426/R, para. 7.109. 93 Panel Report Indonesia-Autos, paras. 14.80.–14.81. 94 Ibid. 95 Panel Report Canada-Wheat WT/DS276/R, paras. 6.152.-6.153. Responding to the Canada’s concern regarding the trims nature of the disputed regulation, the Panel decided that

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condition that they may affect investment activities, i.a. food processing and investment into agricultural infrastructure. Assuming that export restraints in the grain sector may, with a high degree of certainty, affect investment, it should be established as to whether the measures under consideration may violate the trims Agreement; Art. 2.1. thereof prohibits trims that are inconsistent with the provisions of Art. iii or Art. xi of the gatt.96 Consequently, the trims Agreement cannot apply to export duties as they are excluded from the disciplines of Art. xi of the gatt,97 while Art. iii of the gatt sets up discipline on taxation only for imported goods. In respect to other types of export restrictions for agricultural goods (in ­particular, de jure and de facto bans and quotas), they may arguendo fall within the scope of the trims Agreement since the chapeau of Art. 2 of Annex of the trims Agreement requires inconsistency of the measure with Art. XI:1 of the gatt,98 not with the entire text of Art. xi. However, since Art. 2 of the trims Agreement prohibits measures that are incompatible with gatt Art. xi “without prejudice to other rights and obligations under the gatt,” and that the trims Illustrative List refers solely to the general obligation under Art. XI:1 of the gatt, there is a loop left for trims which are applied in excess of the rights given by gatt Art. XI:2. In that vein, pursuant to Art. 2 of trims Agreement, those measures may be successfully challenged under the trims Agreement only if they are found incompatible with Art. xi of the gatt. In light of that, the lax wording of gatt Art. XI:2(a) may be a big problem. The violation of Art. XI:2 could be only established on the condition that threatening critical shortages of foodstuffs cannot be proven by a

96

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the us was in compliance with its obligation under Art. 6.2. of the dsu to identify the measure. Panel Report Canada-Wheat, para. 6.10., nn. 50–51. Possible inconsistency may be justified under general exception of Art. xx of the gatt (Art. 3 of the trims Agreement). But the conclusions of Sub-chapter 7.1.3.3. do not identify chances for successful application of Art. xx of the gatt to export restrictions for agricultural products. Therefore, it may be claimed that the position of the wto member during the Ukraine’s accession negotiations which regarded the use of export duties in Ukraine as a trim in the meaning of para. 2(c) of the Annex of trims Agreement was not correct. WT/ACC/ UKR/152, para. 229. The common dsu practice in scrutinizing the compliance of a trim to a respective gatt provision is examination of the gatt as a first step. When inconsistency with gatt is found, no examination under trims Agreement deems to be needed (principle of ­judicial economy). See e.g. Penal Report Canada-Autos WT/DS139/R WT/DS142/R, paras. 10.61.–10.63.; Panel Report Canada-Wheat, para. 6.378.

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defendant or/and the measure in dispute is demonstrably not temporal.99 Under these circumstances export prohibitions and restrictive export quotas applied under Art. XI:2(a) of the gatt will satisfy the requirements of Annex Art. 2(c) of the trims Agreement, given the fact that they are “mandatory and enforceable under domestic law”100 and limit exportation or sale for export in terms of specified products and the volume of products. When considering trims, the dsb typically begins by analysing a measure’s compliance with Art. xi of the gatt and continues with its examination under the multilateral agreement. Usually, if a non-compliance with the gatt provision is found, analysis under the trims Agreement is not pursued.101 Up to now, all trims disputes concerned violations of gatt Art. iii. In the situation where there were also claims under Art. xi of the gatt, the dsb started the examination with Art. iii. When a violation of Art. III:4 was found, no further analysis under Art. xi of the gatt followed.102 Thus, it remains unknown which method of analysis would be preferred by the dsb for trims challenging under Art. xi of the gatt, i.e. whether and to what extent the examination of the exceptions authorised by Art. XI:2 of the gatt will be executed. 7.1.6 Interplay of Export Restrictions and Subsidies From an economic perspective, export restrictions may constitute a subsidy for processors because domestic prices tend to fall in periods of limited e­ xports and producers are usually forced to sell their goods at lower prices.103 As already established in Sub-chapter 4.1., the term “subsidy” is determined by the wto in a rather narrow sense. Thereby, export restrictions do not generally fall within the subsidy definition of Art. 1 of the scma inasmuch as they do not constitute a financial contribution in the sense of Article 1.1. (a) of the ­s cma.104 On the 99

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104

The violation of obligations under Art. 12 of the AoA, although directly related to application of Art. XI:2(a) of the gatt, could not be taken into account by assessing whether a measure is compatible with Art. xi of the gatt since it is linked to the AoA rather than to Art. xi of the gatt. In case of de facto bans the issue of the blurred distinction between mandatory and discretionary measures may emerge. E.g. Panel Report Canada-Wheat, para. 6.381.; Panel Report EC-Bananas iii (ecu) WT/ DS27/R/ECU, para. 7.123. Panel Report India-Autos WT/DS146/R, WT/DS175/R, para. 7.208.; Panel Report TurkeyImportation of Rice WT/DS334/R, para. 7.259. (trq provisions). For instance, Argentina’s differential export duty on wheat and processed products, where the first is taxed at a much lower level than the latter, resulted in a rapid increase of domestic flour production. See Mitra, Josling, p. 9. Panel Report US-Exports Restraints, paras. 8.75.–8.76., 9.1.

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other side, the outcome of the US-Export Restraints dispute may be interpreted as meaning that the decision of whether an export restriction constitutes a subsidy under Art. 1 of the scma should be decided on a case-by-case basis.105 Nevertheless, after the analysis of Art. 1.1. (a)(iv) of the scma in Sub-chapter 4.1.3. it was concluded that private parties may not transfer financial contributions as required by that legal norm unless they are entrusted or directed by a government to execute the functions otherwise vested by the government, and this practice excludes complex regulatory mechanisms.106 Thus, export restrictions, as well as export taxes do not look as if they have major potential to be covered by the wto regulation on subsidies seeing that the scheme of financial contributions through voluntary sales by private parties at market-based prices, which are lower than they would be in instances of the non-application of export measures, seems to be too complex. The alternative element of price support, as defined in Art. xvi of the gatt, can hardly be found either inasmuch as a government imposing export restraints in absence of other support mechanisms does not operate any kind of targeted prices.107 Yet, supposedly, export restrictions may still be qualified as subsidies in ­bilateral and plurilateral relations, i.a. under eu law.108 In this regard, one could mention the procedure against foreign subsidies granted through high export duties for soybean processing in Argentina and for palm oil production in Indonesia initiated in 2012 in the eu.109 Assuming that a high export tax effectively obliges input producers in these countries to sell on the domestic market,110 it was claimed that because in-land prices for biodiesel inputs were depressed that artificially reduced costs of biodiesel producers and, thereby, conferred financial contribution in the sense of Art. 1.1. (a)(iv) of the scma or

105 The Panel took a definition of export restraint, which was specially designed for the case and decided on the applicability of Art. 1.1. (a)(iv) of the scma only for this definition. Ibid., paras. 8.16.–8.17. 106 Panel Report Korea-Commercial Vessels, para. 7.30. 107 The situation may change if the state price regulation for sunflower seeds and oil dumping domestic prices for processors will be operated. 108 Protection against subsidies is a part of the eu common commercial policy. Art. 207(1) of the tfeu. 109 Paras. 1 and 3 of Commission’s Notice of initiation of an anti-subsidy proceeding concerning imports of biodiesel originating in Argentina and Indonesia (2012/C 342/03) of 10.11.2012 (oj c 342 10.11.2012 p. 12) (based on Art. 10 of Council Regulation No. 597/2009 of 11.6.2009). 110 As for Argentina, the export duty rates for soybean, soybean oil and biodiesel amounted respectively to 27.5 per cent, 24.5 per cent, and 5 per cent in 2007. Tangermann 2011, p. 23.

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Art. 1.1. (b) of the scma.111 In this case the European Commission attempted to interpret the scope of Art. 1.1. (a)(iv) of the scma more broadly than the dsb, and to involve Art. 1.1. (b) of the scma with a view to shift the examination away from the criterion of “financial contribution by government.” The outcome of the proceedings remained indistinct as representatives of the European biodiesel industry withdrew their complaint in October 2013.112 The Commission shifted the procedure to the anti-dumping area, as the broad interpretation of the notion “subsidy” (capable of including export taxes) could not have been implemented in the external dimension of the eu common commercial policy.113 It is not quite clear whether the eu approach on state aid, if integrated in the regional trade agreements, could apply to export restrictions because the rationale of the eu concept is wider than a border protection, which in general, was eliminated during the earlier stages of integration. However, the fact that state aid provision may be established under the eu law on the ground of its effects, not just the intention of the state (differently from the wto)114 together with the extended eu approach to subsidies granted through private parties, could likely expand the reach of eu rtas with state aid disciplines to at least some export restrictive measures. As for the eu-Ukraine aa, since the state aid disciplines are not extended to agricultural goods, this option will not be relevant to the bilateral trade between the partners.

Intermediary Summary

After examining the wto legal provisions that may have a bond with agricultural export restraints and the corresponding judicial practice, it may be ­reckoned that both export restrictions and duties are not supposed to fall ­within the scope of the trims Agreement and the scma. Adding an earlier 111 Para. 3 of Commission’s Notice 2012/C 342/03. 112 Commission Regulation No. 1198/2013. 113 Parallel anti-dumping proceedings on a similar matter resulted in imposition of anti-dumping duty on biofuel exports from Argentina and Indonesia from May 2013. ­Commission Regulation No. 490/2013 (oj l 141 28.5.2015 p. 5) and Council Implementing Regulation No. 1194/2013 of 19.11.2013 imposing a definitive anti-dumping duty and ­collecting definitively the provisional duty imposed on imports of biodiesel originating in Argentina and Indonesia (oj l 315 26.11.2013 p. 2). In response, Argentina opened consultations in the wto in December 2013. The Panel and the Appellate Body partially upheld its claims under the Anti-Dumping Agreement in 2016. See WT/DS473/R; WT/DS473/AB/R. 114 See Sub-chapter 4.2. and C-310/85 Deufil.

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established weakness of general disciplines in Art. xi of the gatt and Art. 12 of the AoA, the only reasonable solution to balance the interests of importing and exporting members seems to be a review of the rules, at least concerning the compliance of export quotas and bans with the exceptions authorised ­under Art. XI:2 of the gatt (the proportionality test). 7.1.7 Export Restrictions in the Doha Process The issue of export restrictions is among the topics included in the Doha agricultural agenda. Due to the major concerns on this matter, the working Draft Modalities 2008 (unlike the Modalities 1993, which are silent on export restrictions) developed some procedural disciplines on implementing Art. XI:2(a) of the gatt. The predictability concern must be tackled with the introduction of the 90 days notification deadline for imposing export restrictions on foodstuffs.115 Moreover, it is expected that existing export prohibitions and restrictions for foodstuffs and feed, which are maintained with a reference to Art. XI:2 (a) of the gatt, will be eliminated by the end of the first year of the reviewed AoA implementation,116 while any new export measure “should not normally” be longer than 12 months, and “shall only be longer than 18 months” when affected importing members agree thereto.117 Thus, the “temporality” criterion will take shape more if the text of Modalities 2008 is upheld. But since the draft’s future is uncertain because of the stalled Doha reform process, there should be no expectation that the drawbacks associated with wto regulation on e­ xport restrictions will be eliminated any time soon. Under these circumstances, ­owing to rising concerns within the international society, it may be reasonable to find other negotiations fora to deal with export restraints policies.118

115 It is also underlined that any member may report about restrictions not notified as per Art. 18.7. of the AoA. Modalities 2008, paras. 171–175. 116 Modalities 2008, para. 178. 117 Modalities 2008, para. 179. 118 E.g. wto. Report on G-20 Trade Measures (Mid-October 2010 to April 2011), Geneva, 2011, pp. 2, 9, 16 seq. The Report was published by the wto, but referred to as “purely factual report” that “has no legal effect on the rights and obligations of wto Members.” Final Declaration at the G-8 Agriculture Ministers Meeting in Rome of 2009 underlined the “crucial importance of rejecting protectionism and encouraging the development of local, regional and international integrated agricultural markets.” By the same token, the G-20 Declaration of Cannes 2011 promoted obligations aimed at eliminating export restrictions in spite of opposition from developing countries. In Mexico 2012, the obligation of elimination of export restriction was repeated.

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Intermediary Summary

Today the extended use of export restrictions by developing states for agricultural goods cannot effectively be addressed by the wto disciplines. Furthermore, the application of export duties is not governed by the gatt/wto rules at all, and thereby may solely be regulated by unilateral commitments taken by the acceding members. Nevertheless, some wto members that took such additional obligations remain entitled to use the general gatt exceptions to overcome their commitments on export duties. As for other export restrictions, their use may be disputed either under Art. xi of the gatt or Art. 12 of the AoA. Nonetheless, the vague formulation of the critical shortage exception in Art. XI:2(a) of the gatt broadens the scope of the exception and practically allows for challenging only harsh, long-term restrictions. All in all, the wto regulation on export restraints may be considered rather lax. The implementation of the Modalities 2008 could contribute to more procedural discipline, but it will not be able to eliminate the unpredictability of short-term measures. Still, the wto remains the most important global ­forum for regulating export policies. Beyond the wto, the international community may tackle export restrictions multilaterally only by means of soft law instruments. 7.2

Agricultural Export Policies in Ukraine

7.2.1 General Legal Framework Ukrainian legislation guarantees agricultural producers free disposal over their production,119 freedom of trade,120 a free choice of trade partners, i.a. foreign economic actors,121 and the right to export.122 The lex specialis for trade in grain confirms the abovementioned rights and freedoms,123 and establishes the obligation of the government to take measures to increase the country’s grain exports.124 119 The Ukrainian Constitution provides a legal guarantee for property rights: everyone has a right to possess, use and dispose over his property. Art. 41 of the Constitution of Ukraine. 120 Art. 12, 15 of ComC. 121 Art. 17 of Law on Priority of Rural Social Development and the Agricultural Development; Art. 24(2)–(3) of Law on Farming. 122 Art. 32.1. of Law on Farming. 123 Art. 18 of Law on Grain. 124 Art. 9.2. of Law on Grain.

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At the same time, the Law on External Economic Activities recognises export restrictions in the form of export quotas (as a type of export license) and justifies their application in exceptional cases identified by the Law.125 One such case is the occurrence of a substantial imbalance of supply and demand for specific goods on the domestic market. This exception is considered harmonised with the requirements of Art. XI:2(a) of the gatt only if such ­“substantial imbalance” constitutes a “critical shortage” and export licenses are applied temporarily. Most other grounds for application of an export quota are compatible with the general gatt exceptions of Art. xx. Yet the quota authorisation for the sake of “necessity to perform under international treaties” appears to be much broader than the scope of Art. xx(h) of the gatt and may be justifiable under the wto law only for a member’s performance under intergovernmental commodity agreements. On the contrary, introduction of export licenses to ensure sufficient quantity of goods for exportation under rtas could not be covered by the general gatt exception and may even be disputable under Art. XXIV:5(a)-(b) of the gatt.126 7.2.2 Ukraine’s Sunflower Export Policies The second half of the 1990s was a time of agricultural protectionism in Ukraine with a view to defend its infant processing industry. Where importoriented branches were protected by high import duties, the export-oriented sunflower sector127 became subject to high export duties.128 Duty-free trade in oilseeds was flowing only with the cis under the bilateral ftas.129 In parallel, local governments controlled consumer prices on vegetable oils by fixing limits for trade surcharges on producers’ gross prices.130 125 Art. 16 of Law No. 959-XII of 6.4.1991 with amendments. See also WT/ACC/UKR/152, para. 241. 126 In this regard, cus have higher chances to avoid the qualification of export restrictions to guarantee intra-RTA supply as a violation of Art. XXIV:5(a) of the gatt, since in opposite to ftas (Art. XXIV:5(b) of the gatt) only “on the whole” more restrictive regulations of commerce are not eligible. 127 In 1998/1999 about 35 per cent sunflower seeds harvested in Ukraine were exported. fao; ebrd. fao, ebrd 2002, p. xxii. 128 Initially, the duty was set at 23 per cent in 1999 and reduced to 17 per cent in 2001, allegedly in response to the pressure of international donors. Besides supporting domestic vegetable oils production, this relatively high tax rate must have sought certain fiscal revenues for the state. See Law No. 1033 of 10.9.1999; Law No. 2555-III of 21.6.2001; fao, ebrd 2002, p. vi. 129 fao, ebrd 2002, p. vi. 130 cmu Regulation No. 1548 of 25.12.1996.

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From an economic point of view, the government export strategy for s­unflower seeds may seem to be moderately successful as both the state budget and processors won.131 At the same time, domestic oilseed producers could not benefit from high world prices.132 Furthermore, since Ukraine is a major producer and exporter of sunflower products, and the world market of this product is very concentrated,133 export tax imposed at too high a level may produce international price distortions. The optimum duty rate was calculated at 10–15 per cent for Ukraine,134 or even 5 per cent with the full elimination on a long-term basis.135 In response to this concern, Ukraine agreed to reduce export duties for sunflower seeds to 16 per cent upon the wto accession and to 10 per cent in the course of the following six years (with one per cent annual reduction).136 In addition to that, Ukraine committed to the wto not to increase sunflower seed duties in the future and not to apply any measures of equivalent effect (presumably export restrictions) unless authorised by the gatt.137 Thus, export restrictions on the ground of Art. XI:2(a) of the gatt remain permitted for sunflower seeds originating from Ukraine.138 The current export duty rate does not show dumping tendencies for domestic sunflower seed prices.139 Apparently the in-land production of sunflower 131 Export duty and simultaneous high import tariffs on vegetable oils, except for palm oil, stimulated expansion of vegetable oil production in Ukraine. See e.g. fao, ebrd 2002, pp. xxii, xxv–xxvii; State Statistics Service of Ukraine. Ukraine and the cis 2010, Kiev, 2011 (in Ukrainian), p. 50. 132 Similarly to the cereals sector, high storage costs produce the situation where large quantities of oilseeds are sold after harvesting during the period of the lowest demand and the highest supply, thus drastically reducing producers’ prices and creating export pressures. fao, ebrd 2002, p. xxxii. 133 The five largest exporting countries (Ukraine, Russia, Serbia, Romania, and Bulgaria) contribute over 90 per cent of the world trade in sunflower seeds. Information taken from http://www.eastagri.org; www.ukrexport.gov.ua. The analysis of the faostat data, however, does not confirm such high level of concentration. 134 Scholefield, Gaisford, p. 243. 135 fao, ebrd 2002, pp. xi, xxxix. 136 WT/ACC/UKR/152, para. 240 and Table 20(b); Law No. 2773-IV of 7.7.2005. 137 WT/ACC/UKR/152, para. 240. 138 The government of Ukraine attempted without success to switch to very restrictive export quotas for sunflower seeds in 2008 that could not have been justified under Art. XI:2(a) of the gatt. cmu Regulation No. 189 of 12.3.2008 suspended by the Order of the President No. 478/2008 of 26.5.2008 and repealed by cmu Regulation No. 397 of 2.6.2010. 139 The fob prices for sunflower seeds in Ukraine made up 365–385 usd/t in August 2013 (including export duty at 39–42 usd/t). The exw prices made up respectively 330–360 usd/t and tended to reduction. Thus, the margin between the export prices and world prices was rather high. The futures contracts for October 2013 in bce (Hungary) were

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seed is not sufficient to meet the capacities of in-land processing enterprises.140 And the latter are competitive with the exporters seeing that the margin for exportation of vegetable oils is higher than that for primary commodities. As a result, domestic purchase prices for both seeds and oils increased. Thus, the post-accession reduction of export duties on sunflower seeds did not seem to trigger a long-term export growth of this product.141 The most viable explanation for this phenomenon seems to be the general profitability of sunflower oil production in Ukraine142 and very lucrative export prices for sunflower oil.143 The sunflower oil exports from Ukraine have been steadily growing.144 Nowadays about 90 per cent of domestically produced sunflower oil is exported.145 Since the in-land processing is supported by means of the export duty and the largest part of the production volumes is sold abroad, it may be argued that the export duty constitutes an export subsidy in the sense of Art. 9.1. (c) of the AoA. It may be suggested that the export duty on sunflower seeds falls within payments on the export by private entities (agricultural producers) to processors “financed by virtue of governmental action.” This scheme

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traded at around 400 usd/t (the margin may vary between 15 and 35 usd/t). In June 2014 the fob in Ukraine were slightly higher than the bce futures prices. Information of http://www.auu.org.ua. Vegetable oil processing capacities in Ukraine made up about 11.5 million t in 2012 and reached 16.5 million t in 2016. The capacities, which are largely concentrated by largescale processors, exceed domestic sunflower seed supply which normally varies between 8.7 and 9.5 million t. Information provided by www.delo.ua on 31.5.2012 with a reference to the Ukrainian vegetable oil association “Ukroliya”; usda. Ukraine: Oliseeds and Products Annual, Washington, 2016. In 2007 about 370 000 t oilseed produced in Ukraine was exported, in 2008–99 200 t, and in 2009–728 000 t (the total production corresponded to approximately 6.4 million t). In 2011/2012 the sunflower yields made up 9.5 million t where only 280 000 t were exported (according to fao, in 2011 400 000 t were exported). In 2014/2015 only 45 000 t of over 10 million t produced. www.ukrexport.gov.ua; www.faostat.org; usda. Ukraine: Oliseeds and Products Annual, Washington, 2016. In 2003/2004 the profitability of vegetable oil production in Ukraine was calculated at 64 per cent, in 2005/2006 – at 24.3 per cent, in 2007/2008 – at 75.9 per cent, and in 2008/2009 – at 18.4 per cent. www.ukrexport.gov.ua. The average oilseed price in Ukraine made up around 3 500 uah/t (around 330 eur/t) in 2012. The purchase price for sunflower oils offered by large-scale producers corresponded to 9 100–9 200 uah/t (approximately 827 eur/t). The world futures price reached 1 270 eur/t. Own calculations and www.faostat.org. The exports volumes grew from 174 000 t in 1999 to 870 000 t in 2004, and attained the level 2.3–2.6 million t in 2009–2011 and 4.1 million in 2015. www.faostat.org; usda. Ukraine: Oliseeds and Products Annual, Washington, 2016. In 2015/2016 around 4.6 million t sunflower oil were produced in Ukraine whilst 4.1 ­million t were exported. usda. Ukraine: Oliseeds and Products Annual, Washington, 2016.

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does not necessary require a charge on the public account,146 and thereby the examination under Art.1.1. (a)(iv) of the scma could be overcome. However, inasmuch as the alleged transfer of costs from producers to processors is not executed directly as a payment of export duty, but though a possible in-land price reduction caused by the export duty collection, it does not seem that a direct link between the governmental action (the duty) and the payment (a possible price decrease) could be successfully established in this case. The conclusion that the governmental action under concern is “indispensable to the transfer of resources”147 would be too frivolous. Even if that were the case, this scheme would still hardly meet the hard export contingency standard as defined in Art. 3.1. (a) of the scma in conjunction with Art. 1(e) of the AoA. The former is clear on the point that “the mere fact that a subsidy is granted to enterprises which export shall not for that reason alone be considered to be an export subsidy.”148 Furthermore, the required conditionality and close connection (“tied to”149) between the payments, if any, and exportation could not be established. ­Finally, since the i­ mposition of export duty on sunflower seed, on a certain level, was “authorised” as an exception at the time of Ukraine’s wto accession and was included into the country’s commitments, it may hardly be challenged as inconsistent with the wto agreements and other commitments taken by Ukraine. 7.2.3 Export Measures in the Cereals Sector 7.2.3.1 Summary for Grain Export Policy Export restrictions for grain products were held in Ukraine in 2006/2007, 2007/2008, 2010/2011 and 2011/2012, mainly in the form of quotas (in 2011 by taxes).150 The measures introduced after the wto accession were not formally 146 By examining the claims about the violation of Art. 9.1. (c) of the AoA, the dsb has never considered the measures in their compliance with the criteria of Art. 1 of the scma, but solely under the AoA provisions. Panel Report EC-Export Subsidies on Sugar (Australia) WT/DS265/R, para. 7.251. seq.;, Appellate Body Report EC-Export Subsidies on Sugar, paras. 227 seq.; Appellate Body Report Canada-Dairy, paras.103 seq. 147 Interpreting the Appellate Body’s ruling in Canada-Dairy (paras. 116, 120), a governmental action must not be simply involved, but must be indispensable to enable the supply of product to processors for export, i.e. must enable the transfer of resources to take place. 148 Footnote 4 to Art. 3.1. of the scma. 149 Appellate Body Report Canada-Aircraft, paras. 169–172. 150 For a detailed overview of export measures in Ukraine during 2005–2010 see Chauffour J.P.; Ivanic M. and others. Impact of a Free Trade Agreement between Ukraine and the European Union on Ukraine’s Agricultural Sector, Conference Paper Presented at the 14th Annual Conference on Global Economic Analysis, Venice, 2011, p. 8; Cramon-Taubadel, Nivyevski, pp. 175–218.

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challenged by other members, even though a number of discussions were reported to have taken place.151 In general, the manner of quota allocations in Ukraine raised multiple concerns among national and international players. First, the grain quota regimes were supposed to be highly unpredictable for producers and exporters because the quota volumes tended to be reviewed several times in the course of their imposition.152 Second, a short deadline established for the application (registration)153 made the quotas, in fact, accessible only to exporters who had been aware of their introduction prior to the official publication of the respective regulations. Furthermore, the access to and the quantity of the allocated grain quotas were restricted by specific requirements for the applicants, i.a. export activities in the previous periods and a particular share in the total grain exports.154 The practise of exporters’ rent-seeking, however, was reported.155 In May 2011 the Parliament of Ukraine introduced temporary export duties for three export-oriented cereals: common wheat, maize, and barley.156 ­However, already by autumn of 2011, the legislature was forced to eliminate the duties for wheat and maize, though those for barley were preserved until the end of the calendar year.157 The wto legal provisions could not influence this decision since the gatt does not preclude imposition of export duties and

151 Information taken from the wto Agricultural Management Database, www.wto.org. 152 See, for example, cmu Regulation No. 1701 of 8.12.2006; cmu Regulation No. 185 of 13.2.2007; cmu Regulation No. 290 of 22.2.2007; cmu Regulation No. 844 of 20.6.2007; cmu Regulation No. 1179 of 26.6.2007; cmu Regulation No. 1418 of 23.4.2008; cmu Regulation No. 470 of 21.5.2008. 153 The quotas were allocated within seven calendar days after the publication of the registration notice. cmu Regulation No. 938 of 4.10.2010. 154 In the 2006/2007 marketing year 80 per cent of the quota volumes were to be shared among applicants who had been exporting agricultural production in the course of the preceding three years, proportionally to their factual exports in that period. cmu Regulation No. 1701 of 8.12.2006. 155 For example, in January 2011 a subsidiary of the state-owned State Grain Purchase Corporation of Ukraine (gcu) received one half of the wheat tender (around 220 000 t of 500 000 t), where the shares of other export traders made up less than 60 000 t. The largest exporter Nibulon did not obtain any export quota at all. Information of www.zn.ua dated on 14.1.2011 with a reference to the press service of Ukrainian Agrarian Association. 156 The export duty rates were set at 9 per cent for wheat (but not lower than 17 eur/t), 12 per cent for maize (but not lower than 20 eur/t) and 14 per cent for barley (but not lower than 17 eur/t). Law No. 3387–17 of 19.5.2011. 157 Law No. 3906-VI of 7.10.2011.

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Ukraine’s wto commitments contain the respective obligations exclusively for the goods subject to export duties at the time of accession.158 Hence, Ukraine’s imposition of export duties on cereals may not qualify as a violation of the wto rules. Nevertheless, some wto members expressed concerns in the Committee on Agriculture about these charges.159 Since the end of 2011 there have been no de jure export restrictions for ­cereals in Ukraine. 7.2.3.2

Internal Economic Implications of 2006–2011 Export Measures on Grain The government of Ukraine normally justifies export protection measures for grain products by referring to their crucial role for meeting the needs of food security. State authorities believe that real exports could exceed a rational export potential, i.e. the difference between total grain supply and domestic consumption. Grain producers, however, do not agree with the government on this point and opine that exports could not threaten the supply for domestic needs under free market conditions inasmuch as domestic processors will not purchase imported cereals at prices higher than in-land grain prices. In this regard, processors should raise their prices to compete with grain exporters for domestic purchases. Yet that mechanism cannot function in the Ukrainian regulatory environment where bakery and milling industries are not competitive due to the state bread price controls.160 However, export restrictions proved inefficient in stopping bread price inflation.161 Although flour production by exporters and its exportation grew, grain exporters mostly chose a storage strategy.162 From an economic standpoint, export restrictions for grain products do not bring any advantages for the producers either. Inasmuch as a restrictive policy reduces domestic prices below the world level,163 the exporters may increase 158 It was agreed that the commitments were not to “constitute reinterpretation of the gatt.” WT/ACC/UKR/152, para. 240. 159 The eu questioned Ukraine on imposition of the export restrictions in June and September 2011. Ukraine responded that no export restrictions were in place, but only a temporary export tax. Agricultural Management Database, www.wto.org. 160 See for details Ukraine-Canada Grain Project 2007, p. 66. 161 After the introduction of grain export quotas in autumn 2006 the prices for bread and flour in Ukraine grew. Strubenhoff, Movchan, Buriakovski, p. 275. 162 fao, ebrd 2010, p. 9. 163 Theoretically this gap is designed to bring certain revenue to the state, if quotas are ­allocated in a transparent manner. be Berlin Economics, pp. 10–13.

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their profits164 where producers suffer losses. In fact, export restrictions as a form of additional taxation tend to neutralise the effect of budget support, and the resulting non-profitability of grain production diminishes incentives for further activities in the sector. As a consequence of Ukraine’s grain export restrictions in the second part of the 2000s, a portion of farms switched to the oilseed sector, associated with higher profits and lower production costs, or started producing less costly coarse grain (primarily maize).165 Further reduction in the grain supply (particularly in the wheat segment166) may lead to ­additional price surges for processors and consumers.167 Therefore, it seems that Ukrainian grain policy does not provide a win situation to any group of actors on the grain market. The export restrictions did not manage to protect the domestic market from world price spikes and the resulting increase in consumer prices.168 By the same token, producers were not able to make use of high world prices at the time of restrictive export quotas.169 Furthermore, the state also failed to increase its fiscal revenues through export tax collection as export levels fell below government forecasts.170 Adding various corruption schemes, an increase in producers’ debts, and declining grain quality (as a result of a long-term grain storage);171 it may be concluded that the export measures for Ukrainian grain were not a successful instrument to

164 In this regard, export duty seems to be fairer than quotas since a larger number of entities could be involved into the trade. 165 fao, ebrd 2010, p. 9. 166 The wheat production in Ukraine is rather volatile with a trend to reduction starting from 2008 in spite of the world price rise. oecd; fao. Agricultural Outlook: Highlights 2011 url: http://dx.doi.org/10.1787/wheat-table-2011-1-en. 167 fao, ebrd 2010, p. 9. 168 In March 2011 Ukraine confirmed that the in-land grain prices raised on 50 per cent ­despite the export quotas applied. G/AG/N/UKR/5/Add.2 and Add.3. 169 Tangermann 2011, pp. 31–32. 170 According to the plan of the Ministry of Agriculture, the wheat exports in 2011/2012 should have equalled to around 7.7 million t for wheat and 14.9 million t for maize. In the period of the export duty application (July-November 2011 which normally corresponds to the period of the most intensive exportation) less than one half of the planned wheat ­volumes was exported (2.2 million t) and correspondingly less than one third for maize (2.5 million t). Based on the Balance of grain prepared by Ministry of Agriculture of 1.12.2012 and own calculations. 171 WT/ACC/UKR/152, para. 250. Further details Strubenhoff, Movchan, Buriakovski, pp. 272 seq.

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combat any kind of domestic imbalances,172 but rather contributed to export advantages of competing Russia and Kazakhstan.173 Thus, speaking economically, “the best cure against high prices are high prices”174 as they force producers to expand their yields, primarily in the food wheat segment. The associated danger of rising livestock prices is rather ­ungrounded for the reason that commodity prices and consumer food prices are not directly linked.175 High prices should also create incentives for investing in agriculture, move resources from urban to rural activities, and urge the government to promote the agricultural sector.176 New Mechanisms of Quasi-Voluntary Export Restrictions by Exporters The reciprocal concerns about national food security and prices for population on the government’s side and about contract performance security and revenues on the exporters’ side induced the development of a new soft law ­export control instrument – a memorandum between the large-scale agricultural business and the state. Memoranda have been used in the grain and sunflower sectors since 2007. In the cereals segment, the government and grain exporters have fixed the limitations for maximal grain export volumes on an annual basis since 2011.177 Formally the restrictions were established for food security purposes.178 Thus, the authorised export level was calculated on the ground of the preliminary grain balance elaborated by the state. The exporters agreed to 7.2.4

172 In the terms of imperfect competition, a restrictive export measure is supposed to be efficient only if it imposes lower costs than the market failure in concern. The policy’s welfare effects should be measured at a household level. Valdes, Foster, p. 14; Trachtman J. The Applicability of Law and Economics to Law and Development: The Case of Financial Law. In: Seidman A.; Seidman R.; Waelde T. (eds.) Making Development Work: Legislative Reform for Institutional Transformation and Good Governance, The Hague, 1999, pp. 193–220, p. 209. 173 Strubenhoff, Movchan, Buriakovski, p. 274. 174 Schumacher K.; Chilla B. Der Markt für Getreide und Ölfrüchte. In: Agrarwirtschaft, 58, 2009, pp. 15–25, p. 15. 175 Price increase for primary products is supposed to lead to around three times’ lower price rise for processed or related products. be Berlin Economics, pp. 11–12. 176 Valdes, Foster, p. 14. 177 Memorandum of Understanding between the Ministry of Agricultural Policy of Ukraine and Grain Exporters dated on 10 October 2011 with Annexes (further Memorandum). The Memorandum founded “main partnership principles between business and government,” while the purpose of the document was defined as the “need for stabilisation of grain consumption market.” 178 Art. 1 and 2 of the Memorandum.

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declare their exports volumes on a weekly basis.179 When export volumes of any grain type reached 80 per cent of the agreed total exports, the government was entitled to restrict or even ban exports, but it was to inform the exporters at least two months in advance.180 Basically, by establishing clear rules, the Memorandum should have guaranteed a win-win situation for both the state and the grain exporters. This instrument could hardly be found to non-conform with the wto system, although the Uruguay Round’s process of tariffication resulted in the ­prohibition of any measures that were required to be converted into ordinary customs duties, i.a. voluntary export restraints.181 Measures other than ordinary customs duties are also prohibited within the wto rules on safeguards, but are largely understood as a restraint at the inter-state level, not in the ­relationship between a state and producers.182 Even assuming that certain non-compliance of Ukraine’s practice in focus could be identified, a quasi non-mandatory ­nature of the Memorandum would not allow the measure to pass the “classical test” because of the principle that only legislation mandating a violation of the gatt/wto obligations can be found inconsistent with those obligations.183 On the other side, as already implied, the wto dispute settlement system knows successful challenges of administrative practice (“a consistent approach adopted by an agency of the executive branch of government with respect to a particular issue, usually used repeatedly during a certain period of time… (and) not formally embodied in a legal instrument”184), as well as of ­actions taken by private parties with involvement of the government,185 i.a. delegation.186 However, given the fact that the Memorandum was only ­applied over the course of two years and the grain export levels were higher at that time than in the 179 Art. 1 and 4 of the Memorandum. 180 Art. 3 of the Memorandum. 181 Art. 4.2. of the AoA and footnote 1 to the AoA. 182 See e.g. Van den Bossche, Zdouc, p. 491; Art. 11.1. (b) of wto Agreement on Safeguards. 183 Panel Report US-Export Restraints, para. 8.4. 184 Administrative practice was successfully challenged “as applied” in EC-Bed Linen and U ­ S-Hot-Rolled Steel and “as such” in US-Countervailing Measures on Certain ec Products. As for the challenge “as such,” significant evidence could be required to establish existence, content, and a binding nature of a particular administrative practice. Yanovich, Voon, pp. 138–140. 185 See footnote 41 to this Chapter. 186 In China-Raw Materials, the Panel found that the export price coordination requirement administered by the China Chamber of Commerce (cccmc) constituted a restriction on exportation. China, however, acknowledged that it delegated authority to the cccmc to coordinate export prices. Panel Report China-Raw Materials, paras. 7.1005., 7.1026.

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preceding years,187 it is very unlikely that a restrictive de facto character of the measure in the sense of Art. xi of the gatt could be established. By the same token, mandatory standards issued by the state may be an ­obstacle to exportation.188 Art. 21.1. of the Law on Grain demands that grain quality be in accordance with state standards and other normative documents, as well as to the requirements agreed on in the export contracts. At the same time, the harmonisation level of Ukrainian regulation with international grain standards is reported as rather low.189 Therefore, albeit compatible with international norms, grain quality considered sufficient under an export contract could turn out to be in non-conformity with national standards. As concluded in Sub-chapter 7.1.3.1., only regulatory measures, not private parties’ behaviour, may be disputed under the wto rules. Therefore, to reach the conclusion about a de facto restrictive character of a measure, the manner of its enforcement must be examined. The outcome of the Argentina-Bovine Hides case may suggest that under the described circumstances there are more chances to establish a violation of the wto norms under Art. X:3 of the gatt than under Art. xi of the gatt. In any case, the standard of proof is high and could allegedly not be attained if there is no evidence that the measure caused a decrease in trade flows. 7.3

Credibility of Ukraine’s Justifications for Export Restraints

7.3.1 Arguments at the National Level The government of Ukraine usually makes use of two arguments to justify export restrictions on foodstuffs: price fluctuations and consequentual food

187 http://statistics.amis-outlook.org. In case of de jure export restrictions, Art. XI:1 of the gatt protects competitive opportunities of imported products, not trade flows. On the contrary, for the case of de facto restrictions, the dsb found it inevitable that a greater weight had to be given the actual trade impact of a measure. Thus, a complaining party is to establish “a causal link between the contested measure and the low level of exports.” Panel Report Argentina-Bovine Hides, paras. 11.20.-11.21. 188 State mandatory standards may make trade more difficult. For example, issued in 2004, Ukrainian standard on division of grain according to protein content set the mandatory protein content for food wheat at a lower level comparing to international practice (over 10 per cent against over 11 per cent). This discrepancy of solely one per cent could have had large negative consequences, because the exports of the food wheat with protein content of 10–11 per cent was endangered. Ukraine-Canada Grain Project 2007, p. 61. 189 Ukraine-Canada Grain Project 2007, p. 79.

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­insecurity.190 Where the food inflation concern has an economic nature and, as already indicated, shows a major interplay with state interventions on the grain market along with low grade domestic processing of export-oriented goods, the food security issue definitely requires legal interpretation. Achieving food security is supposed to be a key goal of Ukraine’s agricultural support system.191 The legal definition of food security is given in Art. 2.13. of the Law on State Support and is based on the state guarantee of unrestricted economic access to food. However, the legislature does not provide a hint as to what constitutes “unrestricted economic access.” The Ministry of Economic Affairs took another approach to the term “food security” and qualified it as a level of food supply for the population that guaranteed, among other things, social and political stability in the country.192 Again, it may be argued that the passage “social and political stability” requires further explanation to prevent the tempting recourse to avoidable protectionist policies. All in all, this regulatory uncertainty makes it complicated to determine the line between reasonable food security concerns, and political and lobbying considerations. 7.3.2 Arguments at the Multilateral Level 7.3.2.1 Justification under Art. XI:2(a) of the gatt During the wto accession negotiations, the representative of Ukraine confirmed that grain export quotas would be eliminated after the accession.193 However, the government did not make any commitments regarding further non-use of export restrictions authorised by the gatt, except for some export duties. In autumn 2010, Ukraine imposed export quotas for most cereals for a p ­ eriod of three months, making use of the provisions of Art. XI:2(a) of the gatt in conjunction with Art. 12.1. of the AoA. The notification to the wto required ­under Art. 12 of the AoA was submitted in October 2010, three weeks after the introduction of the quota.194 According to the notification text, the quotas were established “to prevent a critical shortage in the domestic market resulting from a poor harvest” of cereals in 2010, and “to eliminate a significant imbalance 190 It is, however, highly questionable whether export restrictions for all agricultural goods may be justified by food security reasons, e.g. export restrictions on barley, which is used to produce animal feed. While the barley production level was very high in 2006/2007, the only explanation for export quota introduction could obviously be rent-seeking or/and support for in-land livestock production. Strubenhoff, Movchan, Buriakovski, 2008, p. 268. 191 Art. 1.1. of Law on State Support. 192 Para. ii of Ministry of Economic Affairs Order No. 60 of 2.3.2007. 193 WT/ACC/UKR/152, para. 370. 194 G/AG/N/UKR/5 of 28.10.2010; cmu Resolution No. 938 of 4.10.2010.

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in the domestic grain market that is essential for food security and ­stability of the grain market.”195 At the same time, Ukraine declared its readiness to enter into consultation with any wto member having a substantial interest as an importer, as foreseen by Art. 12.1. (b) of the AoA.196 At first sight, the requirements of Art. XI:2(a) of the gatt seem to be formally met given the fact that the measure was provisional and was justified by a critical shortage of foodstuffs. As for the timing of the notification, the requirement of Art. 12.1. (b) of the AoA was evidently not observed.197 In early 2011, Ukraine notified about the extension of the export quotas for a further three months, as well as the increase of their volumes. The requirement for notification timing was again not fulfilled.198 In April 2011, notification was provided about the quota regime extension until the end of June 2011 and about the quota increase for maize.199 This modification of a quantitative restriction duration does not seem to be in non-conformity with the provisions of Art. XI:2(a) of the gatt inasmuch as the measure in concern remained temporary. Yet, the extension rather contributed to unpredictability for importers and could potentially be questioned under Art. 12.1. (a) of the AoA as a failure to give due consideration to the effects of restriction on importing members’ food security. However, since the quota volumes were expanded anew, the ­aggravation on the side of importers could not necessarily be found. In the end, the only well-grounded procedural concern regarding the way grain ­export quotas are applied by Ukraine in 2010/2011 may be non-compliance with the pre-notification requirement laid down in Art. 12.1. of the AoA.200 On the other hand, the necessity of the 2010/2011 quotas for preventing “critical shortages” could be also disputed. According to the figures provided in Ukraine’s notification of April 2011, the domestic grain supply equalled 195 G/AG/N/UKR/5. 196 The eu demanded Ukraine’s clarifications regarding the compliance with the procedural requirements of Art. 12 of the AoA. Ukraine’s answer to the concern regarding food security for importing states could be interpreted as a desire to expand exportation of processed grain products, primarily flour. 197 Art. 12.1. (b) of the AoA reads as: “Before any Member institutes an export prohibition or restriction, it shall give notice in writing, as far in advance as practicable.” 198 G/AG/N/UKR/5/Add.1 of 10.1.2011 was submitted a month later after the adoption of the measure by cmu Resolution No. 1182 of 6.12.2010 amending cmu Resolution No. 938 of 4.10.2010. 199 Ukraine provided the content of the Draft cmu Resolution amending cmu Resolution No. 938 of 4.10.2010. G/AG/N/UKR/5/Add.2 of 7.4.2011. 200 Israel and Japan claimed in autumn 2010 that Ukraine did not comply with the timelines of Art. 12 of the AoA.

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45.4 million t in 2010.201 This number dropped with a loss of 21.6 million t in ­expected domestic grain consumption,202 and 5.7 million t reserved for stocks, leaving 13.5 million t in estimated grain exports.203 Indeed, prior to this, in 2009, the country’s cereal production was higher (46 million t of grain were harvested, and the total supply was equal to 53 million t). The potential export capacities were calculated at 20 million t.204 During the first half of the marketing year of 2009/2010, more than ¾ of the grain export potential was sold, while wheat made up 48 per cent of the total grain exports.205 However, this very high ­export activity did not trigger any export restrictions in 2009/2010. As for the subsequent year, Ukraine stipulated that the grain exports amounted to more than half the total eligible exports at the beginning of the 2010/2011 marketing year, while the barley exports reached the annual reasonable limit.206 The quotas were initially allocated at 0.5 million t for wheat, 2 million t for maize, and 0.2 million t for barley.207 Hence, where the volume of the barley quota may be justifiable, the quotas for maize and, in particular, for common wheat were obviously far too limited.208 The subsequent doubling

201 This figure includes 39.2 million t harvested production and 6 million t carry-over stocks. G/AG/N/UKR/5/Add.2. 202 Domestic consumption composed of 6.7 million t for food needs, 2.8 million t for seeds, 14.6 million t for fodder production and 1.5 million t for non-food processing. The sum of the given consumption purposes makes up less than 25.6 million t. Ibid. 203 The calculated eligible exports consisted of 5.1 million t of wheat, 2.4 million t of barley and 5.9 million t of maize. Ibid. 204 www.ukrexport.gov.ua. 205 In July-January 2009/2010 15.3 million t grain were exported from Ukraine (8.5 per cent more than during the corresponding period of the previous year), i.a. 7.5 million t wheat, including 4.1 million t food wheat (+ 39 per cent comparing to the previous year), and 3.6 million t maize (+ 200 per cent comparing to the previous year). www.ukrexport.gov.ua. 206 In summer 2010 2.8 million t wheat, 2.4 million t barley and 2.5 million t maize were exported. G/AG/N/UKR/5. Nevertheless, according to Ukraine’s response to the eu dated on 18 November 2010, the share of July-October 2010 exports in the total export potential was very high only for rye and barley (98 and 88 per cent, accordingly), was moderate for wheat (35 per cent), and was normal for maize (11 per cent). The question of Japan dated on 18 November 2010 on the procedure of quota calculation remained without a direct answer. 207 G/AG/N/UKR/5 comparing to footnote 204. 208 A concern about maize quota calculations was reflected in Australia’s question dated on 26 June 2011 regarding the maize export volumes in April-June 2011 (the months prior the full quota elimination). Ukraine did not give an answer and pointed to the production and exports forecast for 2011/2012.

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of the wheat and maize export quotas seems to support this assumption.209 Since the availability of grain for exportation remained very high at 5.8 million t during March-June 2011 (2.3 million t for wheat and 3.4 million t for maize),210 it may be concluded that either the government’s calculations were initially incorrect211 or the quotas suspended wheat and corn exports almost entirely, i.e. the imposition of export restrictions reduced the exportations even below the state’s forecast levels.212 It may be argued that the government of Ukraine tends to exaggerate anticipated grain consumption growth213 as the Ukrainian population is decreasing and the consumption level cannot rise. In that way, the fiasco of 2010/2011 strengthened the government’s concerns surrounding the credibility of agricultural statistics.214 Some other positions in the calculations provided by Ukraine may also be questionable. For instance, the whole wheat and maize quotas for January through March of 2011 made up 1.5 million t, where 1.3 million t cereals were to be exported under the ftas (thus, Ukraine made use of rta exclusion from the export restrictions215). The calculated export capability in April-June 2011 was substantially higher at 2.9 million t, and the allocation of the maize share was

209 G/AG/N/UKR/5/Add.1. 210 The quota allocation for maize in April 2011 amounted to almost one half of the entire export potential for 2010/2011G/AG/N/UKR/5/Add.2. 211 The eligible grain exports in March 2011 (5.8 million t) and the grain volumes exported in summer 2010 (7.8 million t) were equal to 14.6 million t. Adding the quotas allocated for at least 2.7 million t, the final authorised grain exports from Ukraine in 2010/2011 were much higher than the initially calculated export potential of 13.6 million t. 212 In 2010/2011 12 million t grain were exported from Ukraine, thus, less than country’s calculated potential exports. Information of www.economics.unian.net dated on 14.7.2011 with the reference to Ministry of Agriculture. 213 When the annual wheat consumption in 2005–2009 was on average around 5 million t (+/- 300 000 t), the wheat consumption estimated by Ministry of Agriculture for 2011/2012 amounted to ca. 12 million t., i.a. food wheat – ca. 8 million t. www.eastagri.org, Grain ­balance prepared by Ministry of Agriculture dated on 1.12.2012. 214 Statistical irregularities in the grain sector are not rare, although Art. 20 of the Law on Grain requires mandatory monthly declarations about the volumes of stored grain. In 2009 the International Trade Center documented 8.2 per cent of non-reported agricultural exports and 5.8 per cent of non-reported agricultural imports in Ukraine. The discrepancy of cereals exports was evaluated as low, and that of cereals imports – as average (15.6 per cent of export were non-reported). url: http://legacy.intracen.org/appli1/TradeCom/ RS_TP_CI.aspx?RP=804&YR=2009. 215 See Sub-chapter 7.1.3.2.

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increased up to 2 million t.216 During the next two months, maize,217 barley, and wheat218 were excluded from the scope of the quantitative export restrictions. Hence, all in all, the maize quota for 2010/2011 made up 5 million t. Adding another 2.5 million t of maize that was exported before the quota introduction, it may be concluded that the calculated 5.9 million t maize export capacity in 2010/2011 were underestimated. By the same token, the entire wheat quota (1.9 million t at most) did not reach the estimated export potential of 2.3 million t. These simple calculations seem to oppose Ukraine’s argument that export activities on the grain market may have led to critical shortages of foodstuffs or other essential products.219 If observing the agricultural export restrictions in Ukraine in the light of the proportionality principle, the imprecise calculations the country presented to the wto may fail to satisfy the requirement of proportionality stricto sensu seeing as the measures did not succeed in maintaining low prices for the population and revealed themselves as extremely h ­ armful for producers. At the same time, the justification submitted by Ukraine in April 2011 that the export restrictions were imposed to prevent “the substantial growth of grain prices on the domestic market” may not be accepted as a sufficient ground under Art. XI:2(a) of the gatt which clearly requires a threat of critical shortages on the market.220 Turning back to exportations under the ftas, the government of Ukraine proposed in the draft amendment to cmu Regulation of 4.10.2010 that export quotas not be used with the fta partners.221 This measure was questioned by Japan and the us in the wto Committee for Agriculture. Ukraine suggested that the ftas with the cis partners exempt the possibilities for export restrictions in bilateral trade. However, Art. 3 of the fta between Russia and Ukraine of 1993, which governed the bilateral trade between these countries, at that time allowed the imposition of export restrictions to remedy a sharp domestic deficit of a specific product. Thus, this fta had a narrower policy space in 216 G/AG/N/UKR/5/Add.2; cmu Regulation No. 337 of 30.3.2011. The us asked Ukraine about a clear disproportion of the wheat and maize quotas to the available stocks. Ukraine justified that by a low level of domestic maize consumption. 217 G/AG/N/UKR/5/Add.3 of 13.5.2011; cmu Resolution No. 463 of 27.4.2011. 218 G/AG/N/UKR/5/Add.4 of 12.6.2011; cmu Resolution No. 566 of 25.5.2011. 219 Barley should obviously fall beyond the category of foodstuffs, but may be recognised as an essential product since is a basis for animal feed. 220 G/AG/N/UKR/5/Add.2; cmu Regulation No. 337 of 30.3.2011. 221 In October 2010, the eu pointed to the fact that Ukraine concluded a memorandum with Russia for supply of 2 million t coarse grains and asked for detailed evidence of a critical shortage.

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c­ omparison to the wto rules (threat of critical shortages v. sharp deficit), but did not preclude export restrictions. So basically, if Ukraine did not evaluate the situation on the domestic grain market as a “sharp deficit,” but solely as a “critical shortage,” given the fact that the confines of both notions are unknown, the government was free to continue exports to Russia in the period of export restrictions taken under Art. XI:2(a) of the gatt. This conclusion is also in line with the arguments given in Sub-chapter 7.1.3.2. At the end of the day, it seems that only economic considerations may stop export protective policies in Ukraine as the long-term use of exemptions under Art. XI:2(a) of the gatt by other wto members222 without any consequences may create incentives for further avoidable restrictions. The loose disciplines may be strengthened to a certain extent through pressure (first of all, through public questioning) from within the wto Committee on Agriculture.223 7.3.2.2 Potential Environmental Concern under Art. xx of the gatt Agronomy rules prescribe rotation for sunflower planting once every four to seven years if sufficient plant protection technologies, fertilisers, and diseaseresistant seeds are used. A good number of Ukrainian farmers cannot afford the costly compliance with these scientific rules and tend to plant oilseeds once every four years or more frequently.224 Due to the rise of oilseed prices and lower production costs for these crops compared to the cereals sector, the area under oilseeds is expanding.225 A similar situation may be observed for maize production, which is no less environmentally burdensome. In this ­regard, it is important to maintain the planting structure in Ukraine since monocrop agriculture may damage the environmental system. Supposedly, imposing export duties or export restrictions for soil-intensive crops may somewhat restrict the expansion of unsustainable agricultural practices. Inasmuch as export duties (though not for sunflowers) may be levied in Ukraine without any legal consequences under the wto law, export duties 222 For instance, Argentina has been using an export quota of 1 million t for low-protein bread wheat since 2011. WT/TPR/S/277, p. 98. 223 The increasing unpredictability of the world grain market caused by the extension of grain export quotas regimes was on the table in the Committee for Agriculture from ­October 2010 until June 2011 and its echo could be heard in 2011–2012. 224 In 2004 sunflower planting was twice as high as the scientifically justified level. Being an optimal rotation for oilseeds, bean crops sowing was used three times less frequent than the scientifically required norms. fao, ebrd 2010, p. 6; Audit Chamber of Ukraine. Report for 2009. 225 The total area under oilseeds exceeded 30 per cent of Ukraine’s total arable area in 2008. fao, ebrd 2010, p. 4.

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for maize and other oilseed could be de jure allowed. Moreover, supposedly the opt-in for the gatt application to Ukraine’s commitment on the sunflower export duties may potentially be used for a tax rate increase if there are ­environmental concerns, making recourse to Art. xx(g) of the gatt. Given that justification under this objective will be operable along with restrictions on domestic consumption of the specified product, the government will be obliged to limit oilseed supply for in-land processing capacities, although they already exceed the domestic production. The required limitations would be disastrous for the Ukrainian sunflower processing industry. In this regard, it is rather improbable that a political compromise on measures of that kind would be found in Ukraine. The export protection could be also justified by Art. xx(d) of the gatt that permits measures “necessary to secure compliance with laws or regulations which are not inconsistent” with the gatt. Thus, export restrictions violating Art. XI:1 of the gatt may not be justified. In respect to export duties, the situation would be different for sunflower seeds and other agricultural goods. ­Although Ukraine reserved the right to use the general gatt exceptions on its commitment to not increase sunflower seed export duties, an increase of those export duties would be inconsistent with Ukraine’s Accession Protocol, and thus, with the gatt, since the Accession Protocol is supposed to be an integral part of the gatt.226 On the contrary, it may be argued that export duties for crops other than sunflowers, which incur an environmental burden, could be justified under Art. xx(d) of the gatt provided that they are imposed to secure compliance with national environmental protection legislation and that these measures are necessary.227 Making a conclusion about the necessity of a measure’s character is a complex issue. The Appellate Body held in Korea-Beef that necessity in this sense may have different degrees,228 and that the examination of this requirement (the so-called “weighing and balancing” test) should involve, in 226 “Individual provisions of China’s Accession Protocol could also be made an integral part of one or more of the Multilateral Trade Agreements (e.g. gatt 1994)… it would occur if and where such language is contained in the individual provision.” Panel Report China-Rare Earths WT/DS431/R, WT/DS432/R, WT/DS433/R, para. 7.80., similarly Appellate Body ­Reports China-Raw Materials, para. 303. See para. 1.2. of the Protocol of Ukraine’s Accession to the wto WT/L/718. 227 Appellate Body Report Korea-Beef, para. 157. 228 “…The reach of the word ‘necessary’ is not limited to that which is ‘indispensable’ or ‘of absolute necessity’ or ‘inevitable’ … We consider that a ‘necessary’ measure is, in this continuum, located significantly closer to the pole of ‘indispensable’ than to the opposite pole of simply ‘making a contribution to.’” Appellate Body Report Korea-Beef, paras. 161–162.

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particular, “the contribution made by the compliance measure to the enforcement of the law or regulation at issue, the importance of the common interests or values protected by that law or regulation, and the accompanying impact of the law or regulation on imports or exports.”229 Theoretically, high export duties on sunflower seeds (and preferably, also to the processed products) seeking to enhance environmental protection should contribute to compliance with crop-rotation rules by imposing disadvantages for exportation. However, this measure must sustain the scrutiny of “reasonable alternative,” i.e. the extent of the contribution to the goal, difficulty of implementation, and trade impact.230 It appears that a control mechanism for agricultural producers’ compliance with mandatory environmental practices (e.g. the mechanism similar to the environmental cross-compliance in the eu) could be an effective alternative measure to prohibitive export duties. That should contribute to the environmental protection goal to an even greater ­extent than export measures, while at the same time showing no trade impact; any difficulties with the implementation can typically be overcome. To summarize, using gatt Art. xx to justify export restrictive measures directed toward reducing harmful environmental impacts associated with monocrop production is not expected to be successful since no objectives of Art. xx could be effectively invoked. Even if they could be, the measures in concern also had to be verified under the chapeau criteria. In this regard, difficulties may arise in respect to meeting the requirement on absence of disguised restriction to trade due to the protectionist nature of export restrictions. 7.4

Alternative Measures

7.4.1 National Level Trade self-regulation may be the simplest solution for escaping the vicious circle of export restrictions and the resulting differences in local and international cereal prices that stimulate even further export restrictions. Essentially, step-by-step bread price liberalisation should line up internal grain prices with world prices and make domestic purchases as profitable as exportation. By the same token, higher in-land prices for cereals should stimulate farm income whilst processors may be supported by aid in non-distortive forms, i.a. investment aid, in particular aid to comply with standards.

229 Appellate Body Report Korea-Beef, para. 164. 230 Panel Report Canada-Wheat, para. 6.226.

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The impact of high bread prices on the poorest population may be reconciled through food subsidies.231 They could be designed under the wto “green box” criteria (para. 4 of Annex 2 of the AoA).232 Referring to the eu experience,233 products stored in intervention stocks (provided that the r­ equirement of para. 1 of Annex 2 of the AoA regarding public financing of stock-building is satisfied) may be distributed to the most deprived individuals free of charge (clearlydefined eligibility criteria related to nutritional objectives are to be developed) or at a price which is not higher than the one justified by the costs incurred by the designated organisations in implementing the action. The Annex 2 prerequisite of no or minimal trade-distortion should be achieved as long as the aid is targeted and restricted. Thus, the measures directed to a large part of the population, e.g. reduced vat rates for bread, could not be justified. Remarkably, para. 4 of Annex 2 of the AoA makes it clear that governmental purchases for food aid purposes must be executed at market prices. In this regard, distribution of food aid from the intervention stocks built at administered prices are not acceptable under the “green box.” Anyway, since it is not capable of tackling the agricultural inflation issue, domestic food aid may only be a supplementary measure. In order to succeed in combating this problem, it is vital that the grade of domestic processing increases as food is considered to be less sensitive to price spikes than commodities.234 Furthermore, processing is the most common way to add value to agricultural goods,235 which has clear, positive economic implications.236 In respect to this, some believe it would be more profitable for the ­national welfare to reduce cereals exports by processing the crops into feed to increase livestock exports, which have a higher added value. Besides being highly questionable from an economic point of view,237 this proposal may be ­legally 231 Food aid for the poor is foreseen by para. 2.37. and Annex 7 to the Programme on Rural Development until 2015. 232 The eu practice of food aid (consumption subsidies) notified to the wto as domestic food aid may be taken as a model. G/AG/N/EU/10, p. 3. 233 Art. 27 of the Single cmo Regulation 2007; Art. 16 of the Single cmo Regulation 2013. 234 Food prices reflect not only commodity prices but also other costs within the supply chain. Valdes, Foster, p. 1. 235 There are also other methods, for instance, production of high quality goods. 236 Added production value plays the key role in rural poverty reduction and efficient ­resource use. oecd; wto. Aid for Trade and Value Chains in Agrifood, 2013, p. 2; G ­ roupement Européen d’Intérêt Economique Agrosynergie. Evaluation of Income Effects of Direct Support, Brussels, 2011, p. 5; Strubenhoff, Movchan, Buriakovski, p. 30. 237 Commonly viewed, efficient cereals and oilseeds sectors should contribute to general agricultural competitiveness. On the one hand, the expansion of grain production which

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­enforceable only by imposing export duties.238 While it is potentially the most powerful instrument for expanding domestic processing, an export tax could only be a supplementary measure because the core problem is linked with insufficient competitiveness of domestic processors. In this context, the recommendations concerning domestic support reform illustrated in Chapter 6 should be reiterated, namely, investment promotion and the launch of non-­distortive public interventions. In addition to that, domestic regulation on ­export restrictions should be reviewed. It appears that the current discrepancies with the wto disciplines should be interpreted in the short term in ­favour of wto law, which has a higher rank in Ukraine’s legal hierarchy than ordinary laws. The vagueness of the wto rules on export restriction may be rectified through voluntary precision of the Art. XI:2(a) of the gatt provisions (Art. 12 of the AoA) in the national regulation. For that purpose the eu experience could be used. Pursuant to eu trade regulation, the volume of goods exported under the contracts already concluded (addressing the predictability issue) will be taken into account prior to deciding on quantitative restrictions, and the need to avoid jeopardizing the aim behind introducing quantitative restrictions ­(regard of the proportionality concern) will also be taken into consideration.239 7.4.2 Regional Level Most Ukrainian processed agricultural products are competitive only in cis markets.240 Products from the first processing stage make up the largest part of agricultural exports to the eu.241 Naturally, the Ukrainian government has an interest in diminishing incentives for exporting primary products to the huge, proximate European market with a substantial demand. The main obstacles

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239 240 241

is less costly than development of the livestock sector may benefit animal products due to decreased feed costs. Nonetheless, feed price reduction does not necessarily lead to promotion of the livestock sector which is largely dependent on infrastructure and modernisation. Export restrictions in other forms would not be available since neither the exceptions authorised under Art. XI:2 of the gatt nor the provisions of Art. xx(i) of the gatt can be applicable to the situation in concern since those norms could not be invoked to protect domestic production and to increase exports. Art. 7(3) of Council Regulation No. 1061/2009 of 19.10.2009 establishing common rules for exports (oj l 291 7.11.2009 p. 1). Kobuta 2012, p. 4. The largest share of agricultural trade within the cis is duty-free under the bilateral ftas. European Commission. International Aspects of Agricultural Policy: Background document for the Advisory Group on International Aspects of Agriculture, 2012, p. 43.

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for that plan may be associated with stiff food standards and tariff escalation on the eu side. Observing the last concern with the example of trade in vegetable oils, it would not be hard to establish that the eu stimulates importation of unprocessed oilseeds from Ukraine by imposing low or zero import levies,242 while vegetable oils may be imported duty-free only under the gsp schemes. The usual levies on vegetable oils vary depending on the processing stage (correspondingly, lower duties are imposed for crude oils and oils for technical use). Moreover, Ukrainian sunflower oils for non-technical use are excluded from free circulation. Their importation to the eu is conditional on the provision of quality certificates (a non-tariff measure).243 As a consequence of this policy only 20 per cent of crude sunflower oil exported from Ukraine244 flows to the eu, where almost 50 per cent is sold to far off destinations of Asia and North Africa.245 Yet Ukrainian exports of sunflower oils are generally dominated by oil with a low degree of processing,246 although the largest share of domestically produced refined oil is also exported.247 This fact could be interpreted in a way that the margin between production cost dynamics and the prices for oils from different processing stages creates a situation where a low degree of processing is perceived by Ukrainian vegetable oil producers as the most profitable. Similarly to the eu, Ukraine makes use of tariff escalation for sunflower oils where importation of other vegetable oils is not protected by duties.248 The country does not produce large volumes of rapeseed oil and most of the rapeseed that is harvested there is destined for the eu because of favourable price 242 As for January 2013, import duties for rapeseed and sunflower seeds equalled to 0 per cent. taric Database url: http://ec.europa.eu/taxation_customs/dds2/taric/taric_con sultation.jsp?Lang=en. 243 Ibid. 244 80 per cent of total exported sunflower oil is crude oil. www.ukrexport.gov.ua. 245 See e.g. usda. Ukraine: Oilseeds and Product Annual, gain Report, Washington, 2011 (further gain Report 2011). 246 Ukraine is the most powerful producer of crude sunflower oil (in 2009 the country produced almost 2.2 million t), followed by Russia with around 0.5 million t. The production in other countries does not exceed 0.1 million t. At the same time, Ukraine produces only 150 000 t refined oil, being behind Hungary and Russia. www.eastagri.org. 247 In 2008 1.2 million t sunflower crude oil and only around 130 000 t refined oil were exported. www.ukrexport.gov.ua. 248 Ukraine’s mfn import tariffs for oilseed make up 0 per cent, for crude sunflower oil – 8 per cent, for normal sunflower oil – 20 per cent, for palm oil – 0 per cent, for rape oil – 5 per cent. Ukraine’s wto Accession Schedule clxii.

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dynamics and the absence of export duties.249 Thus, the rise of vegetable oil exports is due mostly to the contributions of the sunflower sector, as well the re-exports of processed palm oil.250 In respect to the latter factor, it must be clarified that an undersupply trend of domestic inputs for sunflower oil stimulates processing of other products – though especially palm oil – which may be imported duty-free.251 Since it is more profitable for vegetable oil extraction enterprises to process oilseeds,252 rapeseed oil production would resolve the problem of idle processing capacities.253 The elimination of import protection for processed oilseeds on the eu side following the implementation of the ­e u-Ukraine aa would offer a chance for this development. Where the tariff escalation in the oilseed sector will be eliminated on the importer’s side, Ukrainian processors will remain protected in the mid-term. During Ukraine’s wto accession, the European Commission and Ukraine ­negotiated a bilateral agreement in the form of an exchange of letters254 whereby the latter committed to eliminating export duties on goods traded with the eu upon the entry into force of the future eu-Ukraine rta. This commitment was adjusted afterwards and Ukraine, while promising not to introduce export duties in the future,255 obtained the right to maintain the incumbent export duties and to phase them out during the first ten years of the free trade area implemention. Thus, export taxes for oilseeds (sunflower seed, rapeseed and linseed) have to be reduced from 9.1 per cent in 2013 to 0 per cent in 2023.256 Meanwhile, no export duty on rapeseed and linseed is applied in Ukraine. Thereby, the reservation for rapeseed duty may be viewed as a plan of Ukraine 249 The in-land exw prices for rapeseed varied between 370 and 400 usd/t in 2013 and the fob prices were close to 460 usd/t. At the same time, futures contracts on matif for November 2013 were traded in the range of 485–500 usd/t showing an increase trend. Information received during the interviews; https://www.euronext.com/en/market-data/ products/historical-data. See also gain Report 2011. 250 Kobuta 2012, p. 4. 251 The increase in palm oil processing by simultaneous price surge for milk products stimulates a demand on cheap “milk products” based on palm oil. 252 In 2013 the average world price for sunflower oil made up 1 120 usd/t, while for crude palm oil – only 856 usd/t. www.fao.org. 253 Another solution would be sunflower oil production under tolling agreements. 254 Council Decision 2008/306/EC of 17.3.2008 on the conclusion of an Agreement in the form of an Exchange of Letters between the European Community and Ukraine in relation to export duties (oj l 106 16.4.2008); cmu Letter No. 7797/0/2–07 of 11.12.2007; Answer of the Commissioner for Trade of 1.4.2008. 255 Art. 31(1) of eu-Ukraine aa. 256 Art. 31(2), Annex I-C to the eu-Ukraine aa. The provisions on export duties may be ­reviewed pursuant to para.5 Annex 1-D to the eu-Ukraine aa.

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either to promote its own rapeseed oil processing or to acquire additional state revenues. The second rationale seems to be more credible due to the fact that sunflower seed will be the only agricultural product eligible for the application of export safeguard measures within the eu-Ukraine aa regime.257 The safeguard mechanism is supposed to provide some legal certainty to both exporters and importers.258 All in all, the instrument is rather unusual inasmuch as safeguards are mostly imposed on the importer’s side.259 In addition to the possible imbalances after the elimination of export restraints within the fta with the eu, the abolishment of import protection will bring Ukrainian food processors face-to-face with high quality agricultural ­imports from the eu.260 The surge of these imports will lead to a steep increase in competition on Ukrainian markets. Under these circumstances, the only way to support domestic food producers within the very limited policy space left for export taxation would be the promotion of investment. 7.4.3 Global Approach: Alternative Measures at the Multilateral Level 7.4.3.1 Unilateral Measures To be fit to replace export restrictions, alternative measures should be targeted, economically speaking, toward balancing inelastic supply and demand over the long term. The first and probably simplest possibility for attaining this goal would be lowering tariffs to offset price spikes.261 This instrument absolutely conforms to the wto norms and seems to be effective at the national level. But it tends to contribute to sustaining import demand and so will keep the world 257 The prerequisites for the application of export safeguards laid down in paras. 1–9 of A ­ nnex 1-D to the eu-Ukraine aa encompass time restriction; form restriction (a surcharge to the export duty); product restriction (“the goods listed in Annex I-D” to the eu-Ukraine aa); occurrence of a trigger mechanism (exceeding 100 000 t of cumulative volume of exports from Ukraine to the eu in course of any one-year period), and requirements to the manner of application. 258 According to the schedule, a surcharge to the export duty is to increase year by year up to 10 per cent in 2023 (the level of Ukraine’s wto commitment) by simultaneous reduction of export duty, followed by a gradual surcharge reduction until 2028. The parties also agreed on a transparent manner of application of this measure and on verification of statistics data credibility, as well as on the exemption of goods en route (for the contracts concluded before the surcharge is imposed). 259 The multilateral regulation refers only to import safeguard mechanisms. Art. 5 of the AoA and Art. 2 of Agreement on Safeguards. 260 However, oilseed processors will be provisionally protected by export duties and import duties on vegetable oils, albeit low. Annex I-A to the eu-Ukraine aa. 261 Valdes, Foster, pp. 2, 16.

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prices high. Thus, in the end, a tariff reduction during price increases has basically the same negative effect on price volatility as export restraints. Another effective alternative might be domestic food stocks (carry-over stocks) released during price spikes. This policy may have a “green” nature for the purpose of the wto disciplines as long as it satisfies the criteria of para. 3 of Annex 2 of the AoA. Holding publicly subsidised stocks, however, would be too costly as inter-spike periods may extend for several years. Furthermore, public stocking can be trade-distortive if its volumes are too large262 (in these circumstances the policy would fail to be compatible with the Annex 2-­fundamental criterion). That is why private stocks would be preferable over public ones, but their formation may be guaranteed only in a non-intervention environment.263 Yet, it is advocated that the stocks effectiveness could be guaranteed only if their use is accompanied by other stabilizing policies.264 In the absence of a public policy panacea, it may be argued that marketbased mechanisms, predominantly trade at commodity exchanges and price derivatives265 may contribute to internal price stabilisation. 7.4.3.2 Plurilateral and Multilateral Actions Given the fact that world agricultural production fluctuates to a lesser extent in comparison to national outputs, international trade should generally permit stabilizing world prices, at least to some degree. In this connection, the question of global stocks emerges. It is believed that they would be able to combat price volatility at a moderate cost.266 The form of such reserves may vary. The classic method of stock organisation is the operation of international commodity agreements (icas).267 The key problem of this instrument is that participating exporters normally have a shared goal of high and stable prices that can also be achieved when supplies are restricted. Hence, the position of exporters and importers may hardly be reconciled because the importers seek supply guarantees at stable prices.268 These two internal contradictions (prices and supply guarantees) led to the collapse of almost all attempts to 262 Excessive stock volumes are supposed to limit transmission of signals along the supply chain and tend to influence decision-making of private stores and traders at commodity exchanges. Tangermann 2011, p. 64. 263 Public stocks may be prone to corruption. They may also lead to inefficient use of supplies in exporting countries. Tangermann 2011, pp. 64–66. 264 Tangermann 2011, pp. 63–64, 66. 265 Valdes, Foster, p. 2. 266 ebrd. Transition Report 2011, p. 23. 267 Mitra, Josling, p. 21. 268 Ibid.

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carry on commodity agreements.269 It is suggested that icas with mandatory guaranteed supply clauses and obligations for guaranteed purchases at a minimum price could be effectively enforceable only under state dominance in trade. Thus, nowadays the operation of those icas could be conceivable only if accompanied by duties and subsidies (or quantitative restrictions). Owing to these obstacles, the existing icas are exclusively cooperation agreements with vague disciplines,270 like the incumbent ica for grain – the Grain Trade Convention (gtc) of the International Grain Council (igc).271 The current igc Convention, in force since 1995, is the main instrument of this inter-­ governmental organisation of grain trading countries whose practical role, however, is diminished to rather “soft” disciplines on information exchange and ­consultations.272 Nevertheless, the gtc objectives are quite ambitious and not limited to trade issues, such as the elimination of trade barriers (Art. 1(b) of gtc), but also extend to the social dimension. Art. 1(c) of gtc calls for contributing to “the fullest extent possible” to the stability of international grain markets, to world food security, and to the development of countries whose economies are heavily dependent on commercial grain sales. Nonetheless, the extent of the actions is limited to soft law instruments, e.g. consultations on market developments (Art. 4 of gtc), and is restricted due to igc lacking the capacity to influence the internal policies of its members.273 Theoretically, commodity agreements may constitute a ground for export restrictions pursuant to Art. xx(h) of the gatt provided they are ­consistent with requirements of ecosos Resolution 30(iv) of 28 March 1947. The ­Resolution274 requires that participation in an ica shall be open to all trading nations and not limited to a select group of countries. It is claimed these 269 icas covering market intervention measures existed for six commodities, i.a. for wheat. None of them survived. Grennes Th.; Johnson P.; Thursby M. The Economics of World Grain Trade, New York, 1978, p. 16; Sewell T. The World Grain Trade, New York, 1992, p. 101; Mitra, Josling, pp. 14–15. 270 Agreements with market intervention elements (predominantly, buffer stocks) do not exist anymore. Tietje, p. 275. 271 Ukraine has been an igc member since 2009 (in 1998–2009 a provisional member). cmu Letter No. 22–3550/8 of 27.12.1997. 272 Art. 3–4 of the gtc. The scope of the Convention extends to private grain purchases. Art. 2(f)(iii) of gtc. 273 Art. 14(2) of gtc reads as: “Without prejudice to the complete liberty of action of any member in the determination and administration of its agricultural and price policies, each ­member undertakes to accept as binding all decisions of the Council under the provisions of this Convention.” 274 The ecosos Resolution 30(iv) refers to the Havana Charter that did not come into force.

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criteria have never been fulfilled.275 Another possibility for making use of Art. xx(h) of the gatt is to submit an ica to wto members who are generally free to disapprove it.276 However, this alternative has not ever been brought into play either.277 The situation might change with the Doha package adoption seeing as the Draft Modalities 2008 envisage the joint action option as including elaboration of icas for stabilisation, equitability, and remunerative level of export prices for agricultural commodities.278 These agreements may be concluded either between “producing and consuming countries” or “commodity-dependent producing countries only.”279 The general exception under Art. xx(h) of the gatt shall also apply to intergovernmental commodity agreements concluded between exclusively producing countries.280 Alternatively to icas, substantial volumes of stocks may be achieved by ­localisation, namely, regional stock building.281 Ukraine was mentioned in discussions on the Black Sea Grain Pool (a “grain opec”), together with Russia and Kazakhstan, at the beginning of this decade. The rationale for the Pool, as well as the main basis for growing concerns over restrictive export policies in these countries, was the concentrated grain production resources in the ­region. Around one tenth of the world’s grain originates in the region, and at the same time it contributes about 20 per cent of the world’s trade in grain282 (these figures may be doubled under conditions of increased productivity283). On this ground, establishment of the Pool may advance the role of its stocks in the global price building for cereals. Still, the idea of a regional grain pool may be associated with certain economic concerns given to grain sector

275 276 277 278

279 280 281 282

283

Tietje, p. 274. Mavroidis, pp. 351–353. Ibid., p. 353. In fact, this clause may be regarded as a reiteration of Art. xxxviii of the gatt which should be “reviewed, clarified and improved.” See Mitra, Josling, p. 22; paras. 95 seq. of ­Modalities 2008. Para. 96 of Modalities 2008. Para. 100 of Modalities 2008. The project of regional stocks is partially enforced in the asean states. About one half of the Black Sea grain region share in the world trade falls on Ukraine. Von Cramon-Taubadel S. Internationale Verantwortung der Getreidenationen – die Ukraine in der Pflicht. In: Ukraine-Analysen, 98, 13.12.2011, pp. 8–13, pp. 8, 11. ebrd. Transition Report 2011, p. 23. Wheat productivity in Ukraine makes up around 30 c/ ha and in the eu – 53 c/ha (the world average lays at 30 c/ha). lmc International, p. 75.

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­particularities.284 From a legal point of view, the interaction of the construction with the wto disciplines is not very clear. With the lack of compromise on Modalities 2008, there is no wto legal provision that directly regulates commodity agreements.285 The Pool members’ application of the general exception as defined in gatt Art. xx(h) will not be possible since the agreement will not be open to all those willing to participate. Furthermore, stocks built within the Black Sea Pool will not be subject to the exemption under para. 3 of Annex 2 of the AoA inasmuch as the project does not target the food security programme. Last but not least, an international impact of possible export restrictions within the Pool may be higher as a result of the synergy effect. The fact that both Ukraine and Russia acquired indirect permission to levy export duties for cereals at the accession, along with a frequent application of other export restraints in the region, may increase awareness of Ukrainian and Russian grain policies within the wto. The only way to maintain a physical balance on agricultural markets that will not push to expanding supply in the short-term seems to be reduced ­demand through a rise in prices. The expansion of demand for agricultural production observed nowadays has two origins. The first is associated with the growing world population and life standards in developing countries, as well as the increasing non-nutrition use of food stocks. Seeing that reducing the demand for food would be complicated because of its inelastic nature, the only way to curtail it is through regulatory limitations on biofuel production. The second reason for the expanded demand on food is usually linked to a recent boom of trade in agricultural commodity derivatives. This trend is the consequence of the financial particularities of these contracts, which may be effectively used for risk diversification within investment portfolios. The surge of food prices in the second part of the 2000s also added to this “artificial” ­demand on agricultural goods. Though there is no direct evidence of any distortive effect of speculations with agricultural derivatives, commodity exchanges normally limit their volumes to some extent.286 Over the counter trade is not restricted. If taking the leading point of view that market risk instruments may help smooth price fluctuations, no regulative changes are, in principle, required. 284 World Bank. A State Trading Enterprise for Grains in Russia?: Issues and Options, ­Washington, 2009, p. x. 285 Incumbent Art. XXXVIII:2(a) of the gatt authorises joint actions only to support ldcs. 286 Berg A. Agricultural Futures: Strengthening Market Signals for Global Price Discovery, fao, Rome, 2010, p. 4.

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In the opposite case, matters are getting more complicated inasmuch as both the unanimity on the necessity of global (or even regional) commodity market regulations, as well as on its extent, may not be currently achieved.

Intermediary Summary

In the circumstances of lacking international compromise on export restrictions in the agricultural sector, all global initiatives for alternative food security mechanisms hardly seem achievable, at least in the short-term. Obviously, the solutions – primarily domestic food stocks – should be provisionally sought at the regional level or as unilateral actions. When unilateral actions can be operated in a wto friendly mode (in compliance with para. 3 of Annex 2 of the AoA or within the member’s ams commitments), joint actions of particular wto members may be perceived as distortive. Thus, trade restrictions associated with the formation and operation of regional agricultural stocks should be carefully examined in the light of the wto/gatt disciplines. Supposedly the only safe haven for inter-state stocks is economic integration in compliance with Art. xxiv of the gatt. 7.5

wto Disciplines on Export-Incentive Measures in the Context of Ukraine’s Agricultural Policies

Rationale for the Examination Although Art. 3.1. (a) of the scma generally prohibits export subsidies, it makes an explicit exception for export subsidies regulated by the AoA. Moreover, Art. 8 of the AoA provides that wto members are entitled to grant agricultural export subsidies as long as they are compatible with the AoA disciplines and members’ schedule commitments. Art. 9.1. of the AoA contains a list of agricultural export subsidies subject to reduction commitments which are basically permitted.287 Nevertheless, a member that did not reserve the right to grant agricultural export subsidies in its schedule commitments shall not provide any, even those listed in Art. 9.1. of the AoA. Ukraine explicitly committed to

287 In the Bali Ministerial Declarations the members took the commitment “to exercise utmost restraint with regard to any recourse to all forms of export subsidies” which was reaffirmed in 2015 in Nairobi (WT/MIN(15)/45).

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r­ efraining from granting export subsidies in any form.288 Even though no ­direct payments contingent on exportation are provided in Ukraine, some Ukrainian regulation practices or initiatives might raise concerns over whether they may qualify as export subsidies in the light of the wto norms. 7.5.1 Distribution of Non-Commercial Stocks As already examined in Sub-chapter 6.3.2., the Agrarian Fund of Ukraine purchases some agricultural products for building commodity intervention stocks. The commodity intervention mechanism may per se be associated with export subsidisation if applied in periods of high agricultural prices. It seems, however, as concluded in Sub-chapter 6.3.2., that this model is not based on export contingency as defined in Art. 3.1. of the scma. Yet the recent amendments to legislation may create some further prerequisites for export subsidies. First, notwithstanding the fact that commodity interventions for the purpose of further exportation are explicitly prohibited,289 the Agrarian Fund acquired a right in 2009 to commercial sales of public stocks and to exportation of regulated products at the government’s discretion.290 The Agrarian Fund sold considerable volumes of grain from the intervention fund a couple of times to refill the special budget fund and thereby to finance further interventions.291 Assuming that this practice may be pursued in the future, it is suggested that its interplay with the wto disciplines should be closer examined. Art. 9.1. (b) of the AoA qualifies “the sale or disposal for export by governments or their agencies of non-commercial stocks of agricultural products” as an export subsidy provided that the stocks are distributed at a price lower than “the comparable price charged for the like product to buyers in the domestic market.” Consequently, if domestic prices are low, even artificially, they still constitute a reference mark for the measurement of distortion. The measure’s efficiency is not relevant for compliance with the subsidy disciplines. The Law on State Support authorises sale prices for the intervention stock tenders at the level between -20 per cent of the minimal prices and +20 288 Paras. 256, 259 and 391 of WT/ACC/UKR/152. Ukraine’s Schedule of Commitments does not preview agricultural export subsidies either. 289 Art. 6.3. (b) of Law on State Support. Presumably, this norm was included into the text with a view to limit a possible influence of domestic price regulation for world price. 290 Art. 9.2.8 of Law on State Support and Art. i(1)(1) of Law No. 422-VI of 4.2.2009. 291 E.g. in winter 2008/2009 the Agrarian Fund sold 2.3 billion t cereals while the state intervention fund was filled to less than 1 million t in 2009. cmu Regulations No. 62 of 4.2.2009 and No. 1128 of 27.12.2008.

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per   cent to the maximal prices.292 This range should be normally wide enough to catch the market price. Nevertheless, even if the Agrarian Fund sells grain at prices below the market level, but it is not contingent on export, an export subsidy in the sense of Art. 9.1. (b) of the AoA may be established. Direct sales to exporters via tenders cannot automatically constitute a subsidy.293 Next, the measure’s export contingency on the example of grain stocks distribution in winter 2012/2013 will be examined. In January 2013 the Agrarian Fund sold over 225 000 t of milling wheat at the Agrarian Commodity Exchange at the price 260 usd/t.294 This amount was close to the domestic market price at that point in time. The tender rules allowed exportation, but it was not a mandatory purchasing condition. The January-February was a time of low prices in grain markets (the cbot Black Sea Wheat futures prices did not exceed 300 usd/t). Taking into consideration the fact that traders had to gather small wheat quantities at elevators from all over the country and then get them to the ports, a margin between domestic and world wheat prices does not seem profitable for immediate exportation. But the grain could be stored or processed. Applying the contingency in fact test elaborated by the Appellate Body,295 three substantive elements of footnote 4 to the scma are to be proved: (1) “granting of a subsidy,” i.e. whether a granting authority imposed a condition based on export performance in providing a subsidy.296 The granting of subsidy per se is not clear in the present case due to the fact that the sale prices were close to the market prices. Nevertheless, if the state had acted as a private entity, it would not have sold the stocks at time of the lowest market prices. Therefore, the contribution in the form of revenue foregone may be alleged. The benefit element may be presumed only if private actors did not propose similar or better purchase conditions. 292 The grain stocks were distributed in winter 2008/2009 at the average price of 1 206 uah/t, which was below the maximal prices for most grain sorts. cmu Regulations No. 62 of 4.2.2009 and No. 1128 of 27.12.2008. 293 At the same time, export orientation of a recipient may be taken into account as a relevant fact provided that it is one of the several which are considered and is not the only fact supporting a finding. Appellate Body Report Canada-Aircraft, para. 173. 294 The minimal intervention prices for wheat made up 205–240 usd/t in 2012. Thus, the state sold the grain stocks at the prices higher than the purchase prices. 295 Appellate Body Report Canada-Aircraft, para. 169. 296 Ibid., para. 170.

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(2) which “is…tied to,” i.e. a relationship of conditionality or dependence must be demonstrated between the governmental action and e­xportation, while a government simply anticipating that granting a subsidy would result in exporting would be not sufficient.297 In the present case, anticipation may be presumed because the state’s motivation for selling the stocks was to collect funds to enforce budget programmes. The idea of expanding exportation did not seem to drive the government. (3) “actual or anticipated exportation or export earnings.” In this context any fact could be relevant when it “demonstrates (either individually or in conjunction with other facts) whether or not a subsidy would have been granted but for anticipated exportation or export earnings.”298 The Panel, in Canada-Dairy, developed sixteen factual elements that in their entirety had to provide support to evaluate this part of the contingency test. They include overall objectives of the measure, types of information called for in applications for funding, eligibility criteria to make decisions about granting aid, the nearness-to-the-export market; the importance of an applicant’s export sales to the funding decisions, and export orientation of the industry/ firms receiving support.299 Some of these factors may be identified in the case in focus. For instance, although there was no set legal condition for exportation, the prerequisites for participation in the tender were developed in such a way that interested persons other than grain export traders (e.g. grain processors) could not satisfy the eligibility criteria (in particular, volumes of the tendered grain sets, security payment levels). Moreover, since the tender price was fixed close to the market level, further domestic re-sale could not be r­ ationally anticipated, as it would be unprofitable for the purchasers. Besides exportation, other probable options could be processing by export traders at their own milling capacities, domestic food production, or flour exportation. Otherwise grain could simply be stored before prices increase again. In this ­regard, it should be scrutinised what share of the cereals purchased by the stocks distributions in winter 2012/2013 was factually exported. All in all, this case does not seem to pass the subsidy “but for” exportation test given that the government’s goal for distributing grain intervention stocks was primarily the accrual of its own revenues, not to support grain

297 Ibid., para. 171. 298 Ibid., para. 162. 299 Ibid.

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e­xportation. For the same reason, the conditionality test (“tied to”) could hardly be approved either. 7.5.2 Payments Financed by Virtue of Governmental Action Ukraine’s practice of export duty protection for sunflower seeds – which contributed significantly to the expansion of domestic vegetable oil production, and correspondingly, to export growth – may also become the subject of an e­ xport subsidy concern because the largest part of in-land sunflower oil production is exported. Similar issues arise with the initiatives implemented to promote rapeseed oil production (the imposition of an export duty on ­rapeseed exported to the eu reserved in the eu-Ukraine aa) as the Ukrainian population does not consume significant amounts of rapeseed oil. It may be suggested that the oilseed export duty mechanism that makes ­agricultural producers sell unprocessed seeds to in-land processing facilities may contain elements of export subsidisation. As established in Sub-chapter 7.1.6., this kind of regulation would not fall within the subsidy definition of Art. 1 of the scma, owing to the absence of a “financial contribution.” However, pursuant to Art. 9.1. (c) of the AoA, payments on the export of an agricultural product financed by virtue of governmental action, whether or not a charge on the public account is involved,300 fall within the scope of export subsidies. Thus, payments executed by private parties may also constitute export subsidies in the sense of Art. 9.1. (c) of the AoA,301 provided the comprehensive standard of proof developed by the Appellate Body is met. First of all, it should be clarified what may constitute “payments” in the sense of Art. 9.1. (c) of the AoA. In the Canada-Dairy case, the existence of payments was examined by comparing producers’ selling prices to the ­“objective standard… reflecting the proper value of product for producers” which was found to amount to “the average cost of production,” i.e. if a product is sold at less than its proper value, “payments” are made, because there is a transfer of the portion of economic resources not reflected in the selling price.302 In its turn, the cost of production covers “all of the economic resources invested in the production 300 Art. 9.1. (c) of the AoA serves to preserve a legal “distinction between the domestic support and export subsidies disciplines of the Agreement on Agriculture.” Appellate Body Report Canada-Dairy, para. 148. 301 The obligations under Art. 9.1. (c) of the AoA are put on a state, not on private parties, thus any “export subsidy provided through private party action in a state are deemed to be provided by a state.” Appellate Body Report Canada-Dairy, para. 95. 302 “If the producer sells milk at a price sufficient to cover only the farm/based production costs, it transfers to the processor any resources invested in selling the milk, such as the value of transport, marketing, and administration.” Appellate Body Report Canada-Dairy, paras. 78 seq., 113.

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and which may be transferred, irrespective of the resources involve an actual cash flow.”303 The Appellate Body took the industry-wide average cost of production as a reference mark for the comparison in the Canada-Dairy dispute,304 thus preferring the value-based, not price-based, approach (Canada-Dairy dispute considered payment-in-kind scheme). If this approach is taken, the “payments” within Ukraine’s sunflower sector should be calculated as the difference between the sector’s evaluated profitability, as if no export duty was imposed, and the current profitability. It may also be argued that “payments” in the sense of Art. 9.1. (c) of the AoA may be defined as a gap between the oilseed price paid by private entities “by virtue of governmental action” and the price they would pay in the absence of the respective state regulation. In this regard, it could be concluded that the amount paid to vegetable oil processors should be equal to the export duty ­collected, which is equivalent to the difference between export prices and ­average domestic plant-gate oilseed prices. Article 9.1. (c) of the AoA does not require that payments be financed by virtue of government actions that mandate or provide direction, as stipulated by Art. 1.1. (a)(iv) of the scma .305 The word “financed” in this context is supposed to refer to a “mechanism” or a “process” by which financial resources are provided.306 The scope of the provision should be broader than making payments to a funding mechanism by a government as required in Art. 1.1. (a)(iv) of the scma, since a charge on the public account is not mandatory. Nevertheless, the government “must play a sufficiently important part in the process by which a private party funds ‘payments’”307 including “the full-range of activities” (as a single act or omission, or a series of acts or omissions) by which governments regulate, control or supervise individuals.308 The consequences of the governmental action (“by virtue of which”) are important, not the government’s intent.309 This finding is obviously contrary to the dsb position on the scope of Art. 1.1. (a)(iv) of the scma in the US-Export Restraints case. Therefore, it seems that the expanded approach to Art. 9.1. (c) of the AoA in comparison to the scma should be broad enough to include export restraints, i.a. export duties. 303 Appellate Body Report Canada-Dairy, para. 102. 304 The approach proposed by Canada presented individual farms as a reference mark. ­Appellate Body Report Canada-Dairy, paras. 88–96. 305 Appellate Body Report Canada-Dairy, para. 128. 306 Appellate Body Report EC-Export Subsidies on Sugar WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R, para. 236. 307 Ibid., paras. 132–133. 308 Ibid., paras. 126–127. 309 Ibid., para. 148. In opposite to the scma approach to subsidies. See Sub-chapter 4.1.2.

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Last but not least, the examination of a measure in the light of Art. 9.1. (c) of the AoA requires establishment of a “demonstrable link” between the governmental action and the financing of payments.310 That must be analysed ­taking into account the particular character of the governmental action at issue and its relationship to the payments made.311 No link in this sense would be present where the government action creates a regulatory framework merely ­enabling a third person to freely make or finance “payments”; a “tighter ­nexus” is ­required.312 Hence, the Appellate Body considers “incentive regulation” to satisfy the criteria of Art. 9.1. (c) of the AoA as a counterpart to “enabling regulation.”313 While Canada’s dairy regime made domestic sales subject to fines,314 and the ec sugar regime controlled the volume of production for C sugar quote, the Ukrainian regulator does not take any control actions. The imposed export duties directly reduce the incentives for exportation of unprocessed oilseeds. Comparing the governmental regulation in Ukraine with the two successful challenges under Art. 9.1. (c) of the AoA, it may be suggested that the former rules are far too lax to reach the necessary standard. The Appellate Body took controversial attitudes to the aptness of the “benefit” criterion for the purpose of Art. 9.1. (c) of the AoA. Among others, it was established in EC-Export Subsidies on Sugar that the provision under scrutiny did not require an independent examination on the existence of a “benefit” for recipients in the sense of Art. 1.2. of the scma, as all subsidies listed in  Art. 9.1. of the AoA are supposed to fall automatically within the meaning of Art. 1(e) of the AoA.315 Anyhow, it does not appear that finding evidence of certain price advantages for processors and vegetable oil exporters through dumped domestic prices on primary goods would be a very hard task. The Appellate Body in EC-Export Subsidies on Sugar ruled that payments under Art. 9.1. (c) of the AoA were not to be analysed under the “export ­contingency” test laid down in Art. 3.1. of the scma.316 In respect to Ukraine’s oilseed export duties, the export contingency, if any, may be present ­exclusively 310 Ibid., paras. 124 seq. 311 Ibid., paras. 87 seq., 134. 312 Appellate Body Report EC-Export Subsidies on Sugar, para. 237; Appellate Body Report Canada-Dairy (21.5 New Zealand), para. 115. 313 The Appellate Body Report EC-Export Subsidies on Sugar, paras. 238–239. 314 Appellate Body Report Canada-Dairy, para. 14. 315 Appellate Body Report EC-Export Subsidies on Sugar, para. 269. 316 The passage of Art. 9.1. (c) of the AoA “on the export” should not mean “contingent on” exports, but “in connection” with exports. Appellate Body Report EC-Export Subsidies on Sugar, para. 274, upholding the Panel Reports, para. 7.275.

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in a de facto form. Assuming that the duty may constitute a payment in the sense of Art. 9.1. (c) of the AoA, its export contingency is still to be established. Thus, the Appellate Body test depicted in the previous sub-title requires evidence that the “payment” (presumably, reduction of producers’ profitability on the export duty amount) would be levied “but for” anticipated exportation or export earnings for processed goods (sunflower meal or oil), where other relevant facts are also to be considered. While searching additional fiscal revenues may also be a reason for imposing oilseed duties, the main rationale of the measure is, without any doubt, the willingness to develop the domestic processing industry with a view to provide additional value to national oilseed production. The open question is whether the government maintains the ­export duty primarily with a goal to ensure low domestic purchase prices or to expand processors’ export volumes. Several arguments in favour of anticipation of exportation by the government could be found. First, since domestic retail prices for vegetable oils may be artificially reduced,317 the gap between domestic and export prices for sunflower oil remains substantial, providing incentives to export. Second, there is a clear long-term trend for exportation of the largest part of in-land produced vegetable oils. Hence, it may be argued that the oilseed export regulation scheme is export contingent provided that sufficient economic data are presented illustrating the interplay between all regulatory measures on the market (duties, price caps, other preferences to processors) and their implications. In contrast, in case of imposition of export duties or other restrictions on grain products, the export contingency standard would be practically unprovable given the market access protection for processed cereals in most importing states. In summary, it may be suggested that the catching export duties in Ukraine’s oilseed sector through the disciplines of Art. 9.1. (c) of the AoA could be a very hard task, especially for in demonstrating the link between the governmental action (the duty) and the payment (decrease in farm profitability or in plantgate prices). On the other hand, this construct may be able to satisfy the export contingency test and the looser “payment on the export” approach. 7.5.3 Reduction of Export Marketing Costs Listed in Art. 9.1. (d)–(e) of the AoA, export subsidies directed toward reducing marketing costs for exports may be conferred in Ukraine by means of state price regulation for trade-related services contingent to the exportation of goods, e.g. certification. Although the Ukrainian regulator imposes mandatory 317 See Sub-chapter 6.3.4.

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price setting for some agricultural services,318 this mechanism does not distinguish between domestically marketed and exported products, thus, no objective evidence of preferences for exportation may be pursued. Given Ukraine’s wto commitments on export subsidies, the only secure way to provide support for exporters to reduce their marketing costs may be granting infrastructural aid, which should also weaken corruption schemes. 7.5.4 Export Credit and Insurance Schemes 7.5.4.1 Qualification under wto and European law As stated in Chapter 3, export subsidies not included in the scope of Art. 9.1. of the AoA are not per se prohibited, but must not circumvent members’ commitments.319 Where export credits, export credit guarantees, or insurance programmes are deemed to fall within the scope of the scma export subsidy disciplines,320 they are basically non-restricted under the AoA,321 and are largely used by developed countries, particularly the us.322 Although the economic impact these measures provide for the agricultural sector is normally comparable to that of export subsidies,323 they are subject to disciplines on export subsidies only if they contain export subsidy components.324 For example, the eu did not notify the wto about short-term export credits to the wto as agricultural export subsidies.325 This implies that the eu does not consider these to be agricultural export subsidies. But the illustrative list of export subsidies incorporated into Annex 1 of the scma includes export credit guarantee and insurance programmes enforced by government (the element of financial contribution) to prevent increases in the cost of exported products as well as exchange risk programmes at premium rates, which do not adequately cover the long-term operating costs and losses of those programmes,326 and export credits granted by governments at rates

318 319 320 321

Including veterinary services, grain storage services. Art. 10.1. of the AoA. Lit. (j) and (k) of Annex 1 of the scma. Art. 10.2. of the AoA calls for co-operation to set disciplines in this area. See Appellate Body Report US-Upland Cotton, paras. 609, 617; Mavroidis, p. 770. 322 Lacking notifications on credit and insurance export schemes, as well as their confidential character, makes calculation of transfers issued within the measures highly complicated. World Trade Report 2006, p. xxxii. 323 Podbury T.; Roberts I. and others. Agricultural Export Measures in wto Negotiations, Canberra, 2001, p. 91. 324 Appellate Body Report US-Upland Cotton (21.5. Brazil), para. 14.154. 325 See e.g. G/AG/N/EU/14; G/AG/W/125/Add.2, p. 12. 326 Lit. (j) of Annex 1 of the scma.

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below the normal rates on the market for similar operations327 (the element of benefit). Government-issued export credit guarantees were successfully challenged under lit. (j) of Annex 1 to the scma in the US-Upland Cotton case and are on the consultations’ agenda nowadays.328 Thus, after the expiry of the “peace clause,” agricultural export credit and insurance schemes may be potentially examined in the light of the scma due to further observations.329 First, these schemes tend to fulfil the requirement of “financial contribution by the government” laid down in Art. 1.1. (a) of the scma as they are usually funded by central banks, export credit agencies, or other government-owned or controlled entities that are public bodies; or their distribution is delegated, i.e. “entrusted” in the sense of Art. 1.1. (a)(iv) of the scma. Benefits for exporters are also likely to be found because the schemes in focus usually propose more advantageous conditions than the market does. In fact, provision of credits and insurance by government is based on the rationale that market conditions may be too burdensome for particular categories of exporters. As for the contingency to export performance, it will be met in the most cases a priori. Some additional multilateral disciplines on export credits, export credit guarantees, and insurance programmes should be implemented after the outcome of the Nairobi Conference.330 This is, roughly speaking, a modified Draft Modalities extract,331 which was originally based on the Cairns group proposal of 2007, although with some more preferences for developing countries.332 ­Basically, only two terms should be restricted: limiting the maximal repayment term for developed states to 18 months (and up to 36 months for developing 327 Lit. (k) of Annex 1 of the scma. 328 Request for Consultations by Canada WT/DS357/1 joined by the eu, Australia, Brazil, ­Argentina and Guatemala. Also China World Top Brand Programme and Chinese Famous Export Brand Programme were challenged under Art. 3, 9 and 10 of the AoA. Request for Consultations by the us WT/DS387/1 joined by Guatemala, Ecuador, Canada, eu, New Zealand, Turkey, Mexico, Australia, Colombia. 329 See also Kovesdi M. Report on Best Practices in Export Financing. undp Aid for Trade Project in Ukraine, Kiev, 2012 (further Kovesdi), p. 18; Coppens D. wto Disciplines on Export Credit Support for Agricultural Products in the wake of us Cotton Case and the Doha Round Negotiations, Leuven Centre for Global Governance Studies, Working Paper 28, 2009. 330 Ministerial Declaration of 19.12.2015 WT/MIN(15)/45, paras. 13–17. 331 See for comparison the draft of Art. 10.2. of the AoA, para. 165 and Annex J to Modalities 2008. 332 Pursuant to the Cairns Group Proposal on Export credits, Export Credit Guarantees or Insurance Programs JOB(07)/69, terms and conditions were to apply equally to all members. Annex J to Modalities 2008 provides that developed countries shall comply with all requirements while developing countries shall have certain benefits (i.a. extended transition phase to introduce the maximal repayment period).

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states)333 and the requirement on self-financing. The idea is that financial contributions by government should be reduced due to the requirement on self-financing, and the schemes should be approximated to market-based conditions through a reduction of repayment terms. Thereby, the provision of a subsidy in the sense of Art. 1 of the scma must be prevented. The degree of international law penetration on export financing regulation may be larger in the intra-RTA domain. For instance, aid granted to promote export activities to third countries is governed within the eu by the general regulation on state aid, insofar they threaten to affect intra-Union trade and competition.334 In addition to this, any aid to export-related activities is not authorised as a de minimis aid for agricultural producers.335 Thus, the Commission must approve any state aid of this kind, including export credit insurance schemes. 7.5.4.2 The Issue of Export Financing in Ukraine Between 80 and 90 per cent of global trade transactions are executed using credit, insurance, or guarantee schemes.336 Those measures, if provided without elements of subsidisation, are even desirable within the multilateral trade system.337 A part of Ukrainian trade finance practice is founded on co-operation between the multilateral development institutions (ifc, ebrd, World Bank) and local banks.338 The export schemes usually require high due diligence standards339 that are hardly attainable for smes and, in particular, for small and middle-scale agricultural producers. Similar problems arise within the global 333 Paras. 15(a), 16 of Ministerial Declaration of 19.12.2015. The Draft Modalities set the 180 days’ deadline. Nowadays the repayment terms reach 10 years in the eu and 24 months in the us. Both Canada and Australia require repayments in the course of 180 days. G/ AG/W/125/Add.2. 334 C-142/87 Belgium v. Commission 1990 ecr 959, para. 32; Commission Communication on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to short-term export-credit insurance (2012/C 392/01) (oj c 392 19.12.2012 p. 1), para. 3.3. 335 Art. 1(1)(b) of Commission Regulation No. 1408/2013. 336 Kovesdi, p. 5. 337 To assist developing and transition countries having a lack of trade finance facilities, the wto supports activities of international financial institutions, regional development banks and private actors through the wto Director-General’s Expert Group on Trade ­Finance. Ibid., p. 6. 338 Ibid., p. 90. 339 Ibid., pp. 89–90.

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banks’ programmes executed through their subsidiaries in Ukraine. Therefore, the only possibility to obtain trade financing for enterprises that may not meet the high eligibility criteria of international projects is to co-operate with local banks whose fees are not affordable for smes.340 Due to the above constraints, the government of Ukraine is often called on for developing export promotion strategies with the goal of supporting export operations carried out by smes and increasing their income.341 Export incentives may help combat the current practice of large agricultural exporters purchasing small parties of agricultural goods through a chain of intermediaries. As a consequence of that, small producers who cannot export or sell directly for exports receive a price below the international level. However, it may be assumed that the true problem in this context is infrastructural weakness rather than a lack of export financing. Drafting legislative proposals on state financial support for export activities is en vogue in Ukraine.342 Among other laws in 2011–2012, the draft Law on State Financial Support for Export Activities343 was being discussed in parliament. It envisaged export credits to be issued by commercial banks to Ukrainian exporting enterprises as well as for foreign entities against the obligation to purchase Ukrainian products. Thereby, the performance of export and import contracts and the production of specific products for exportation would be ensured. According to the draft law, a state export credit agency had to provide insurance for export credits, provide guarantees to foreign buyers and Ukrainian banks issuing credits, and confer guarantees to Ukrainian exporters for participation in international tenders.344 In the end, the government did not support the draft. The possible non-compliance of the rules with lit. (j) and (k) of Annex i to the scma was one of the motives for the rejection.345 Given that export credit and insurance schemes – which are export subsidies in the sense of Art. 3.1. of the scma or Art. 1(e) of the AoA – are not ­permissible for Ukraine, regardless of whether they fall within the scope of lit. 340 Ibid. 341 See e.g. on undp Project. Movchan V. Export Promotion Policy in Ukraine after the Administrative Reform: Executive summary. undp Aid for Trade Project in Ukraine, Kiev, 2012, p. 3. 342 Government Programme for Stimulation of Export Production was approved already in 2003, one of its basic priorities was development of food-processing industry. 343 Draft Law on State Financial Support for Export Activities No. 9373 of 1.11.2011 was rejected on 5 July 2012. 344 Art. 3 of Draft Law on State Financial Support for Export Activities No. 9373 of 1.11.2011. 345 cmu Report on the Draft No. 9373 of 1.11.2011.

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(j) and (k) of Annex i to the scma or not, the policy space to design those sorts of state measures is extremely narrow. Basically, since the export contingency will be omnipresent within export financing with governmental participation, the only possibility to get out of a measure’s qualification as an export subsidy could be avoiding a benefit comparing to the market conditions. Then the sense of support would however be lost. In the end, the only way to prevent a “charge on the public account” and secure a publicly desirable outcome of export financing would be the development of mandatory regulations for the financial sector requiring the provision of special conditions for export credits and insurances issued for smes. Yet, these types of measures would increase risks for financial institutions with the provision of trade finance products for the group concerned. Under these circumstances, this sector of services will presumably not evolve. 7.5.5 Regulation of Export-Incentive Measures within the eu-Ukraine aa Seeking to promote effective multilateralism,346 the eu-Ukraine aa directly incorporates a limited number of the gatt provisions, among others, gatt Art. iii,347 xi,348 xix,349 xx and xxi.350 Apparently that was done to underline the priority of wto law over the text of the bilateral treaty for certain trade-related issues. In this regard, based on the findings of Sub-chapter 7.1.3.2., the reiteration of the gatt disciplines on quantitative restrictions under gatt Art. xi should be seen as a failure of the eu to protect itself against Ukraine’s possible grain export restrictions. At the same time, it may be claimed that the incorporation of Art. xi of the gatt may be restricted to a certain extent by Art. 76(1) of eu-Ukraine aa, which requires proportionality of national trade provisions and procedures.351 This norm has in its entirety a scope that goes beyond Art. X:3 of the gatt and seems to still be too vague to deal with the possible abuses of Art. XI:2(a) of the gatt. Despite that, it may be argued that the proportionality test can be applicable between the parties in the context of Art. xi of the 346 Sentence 2 of Art. 3 of EU-Ukraine aa, as well as the Preamble: “desirous of achieving economic integration… in compliance with rights and obligations arising out of the World Trade Organisation (wto) membership of the Parties.” 347 Art. 34 of eu-Ukraine aa. 348 Art. 35 of eu-Ukraine aa. 349 Art. 40 of eu-Ukraine aa. 350 Art. 36 of eu-Ukraine aa. 351 Besides the proportionality concern, the provision calls for transparency, predictability, non-discrimination, impartiality, uniformity and effectiveness for application of national regulation.

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gatt. Thereby, as it was found in Sub-chapters 7.1.3.3. and 7.3.2.1., the test may be effectively used to overcome the shortcomings of Art. xi of the gatt. Ukraine and the eu reached the consensus that export subsidies on agricultural products and “other measures with equivalent effect” were to be prohibited in bilateral trade after the implementation of the eu-Ukraine aa.352 While Ukraine basically reiterated its wto commitments on export subsidies on the bilateral level, the eu, which is still entitled to grant agricultural export subsidies, provides additional preferences for Ukraine. In this regard, the exemption for agricultural subsidies secured by Art. 266 of eu-Ukraine aa will extend to export subsidies as to “other subsidies covered by the AoA” only in respect to the state aid disciplines,353 but not to the general prohibition of export subsidies. The parties agreed that the export subsidy definition contained in Art. 1(e) of the AoA will be applicable in the bilateral context. So far, it is not clear which measures might fall within the category of “other measures with equivalent effect.” The AoA defines export subsidies through their contingency on export performance. At first sight, export contingency may not constitute the effect of the measure, but rather a prerequisite for its classification as an export subsidy. Therefore, the effect of export subsidies should actually be evaluated through the scma subsidy definition, which requires a benefit for a recipient conferred by a subsidy and a transfer of public resources. However, if it were like this, measures with an equivalent effect would constitute subsidies in the sense of Art. 1 of the scma, and their distinction from export subsidies could barely be their non-contingency to exportation. Thus, “other measures with equivalent effect” would basically be equalised to domestic support measures. This intention of the parties seems rather irrational in the context of Art. 32 of the ­e u-Ukraine aa, owing to the extent of the cap. Alternatively, an “equivalent effect” may be regarded as a cause-­consequence bond between a non-subsidy measure and export performance that leads to export contingency (in the sense of footnote 4 of the scma). Pursuant to this approach, the category “other measures with equivalent effect” may encompass any measure that does not constitute a subsidy in the sense of Art. 1 of the scma, but is taken to ensure by law or in fact exportation of agricultural products. This interpretation is broad enough to catch a large scope of export competition measures, e.g. export credit and insurances, activities of exporting state-trading enterprises (stes), and international food aid. Hence, under this approach the implementation of Art. 32 of eu-Ukraine aa should restrict the policy space of the signatories in the export competition area. In respect 352 Art. 32(2) of eu-Ukraine aa. 353 Section 2 of Chapter 10 of eu-Ukraine aa.

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to this, it may be recommended to harmonise the legal base in Ukraine to the respective eu regulation. Furthermore, the parties should reach a conclusion about the scope of the authorised measures. Theoretically, if Art. 32 of ­e u-Ukraine aa is interpreted broadly, the entire system of trade financing and food aid in the eu may be questioned by Ukraine.

Intermediary Summary

Ukraine’s agricultural policies may make it inclined to provide export incentives in the production segments with high international demand, predominantly in the oilseeds and cereals sectors. The selected case studies concerned export taxation promoting oilseed processing during a surge of international demand on vegetable oils and sales of the state intervention grain stocks. So far, the measures do not seem potentially challengeable under the wto rules on agricultural subsidies. Probable concerns may be rectified after Ukraine’s inclusion in the list of wto significant exporters for wheat and coarse grain that will require a member’s notification on export volumes.354 That shall ­increase attention to Ukraine’s export grain policies and will entail additional transparency. Direct support for export transactions is desirable for Ukrainian agricultural smes, as it should help ensure higher incomes for them. However, due to a narrow policy space in comparison to developed states, Ukraine is only ­entitled to provision of credit and insurance services on the market-price base (e.g. similar to the eu practice). Apparently, approximation of Ukrainian regulation to the European rules is indispensable in this domain inasmuch as the eu-Ukraine aa requires elimination of measures with an effect equivalent to export subsidies in the bilateral agricultural trade. 7.6

Export Impact of State Trading

7.6.1 gatt Disciplines In the wto/gatt context, state trading encompasses activities of state-owned enterprises (stes) or private entities with special rights, but not state trade instruments per se.355 Finding a proper place for state trading within the trade 354 Currently adopted on a voluntary basis. G/AG/W/123. 355 Several state trading concepts were developed, where the stes regulation incorporated into the gatt is based on the institutional approach. Dixit P.; Josling T. State Trading

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instruments classification is rather demanding. Interestingly, the core provision on state trading (Art. xvii of the gatt) is placed in the gatt after the subsidy disciplines,356 where the Modalities 2008 explicitly includes state trading in the scope of export measures by incorporating the ste disciplines in the chapter on export competition.357 On the other hand, state trading is classified by the tprm as a measure affecting production and trade along with subsidies and other government assistance, not as an export-affecting measure. In fact, ste activities may constitute either subsidies (export subsidies or domestic support), or export (import) restrictions, as well as limitations to the mfn and the national treatment regimes.358 State trading is generally permitted under the wto regulation,359 but its operation is restricted. Art. xvii of the gatt establishes three requirements for the manner of “purchases or sales involving either imports or exports” by an ste, described briefly below. (1) Acting in a manner consistent with non-discriminatory treatment in the sense of the gatt.360 The wto judicial practice gives prevalence to the ste non-discrimination requirement over other disciplines of Art. xvii of the gatt.361 As interpreted by the Appellate Body, discrimination in general is defined as differential treatment on an improper basis.362 On in Agriculture: Analytical Framework, Working Paper of International Agricultural Trade Research Consortium, 1997 (further Dixit, Josling), p. 2. 356 The provision has not been reviewed since 1948, but was supplemented by the Understanding on the Interpretation of Art. xvii of the gatt 1994 (further Understanding) in the course of the Uruguay Round. 357 Chapter iii of Modalities 2008. 358 Hoeckmann M.; Low P. State Trading: Rule Making Alternatives for Entities with Exclusive Rights. In: Cottier T.; Mavroidis P. (eds.) State Trading in the Twenty-First Century, Ann Arbor, 1998, pp. 327–344 (further Hoeckmann, Low), pp. 327–328. 359 The authorisation of state trading practices is a reflection of the principle on state sovereignty. Petersmann E.-U. gatt Law on stes: Critical Evaluation of Art. xvii and Proposals for Reforms. In: Cottier T.; Mavroidis P. (eds.) State Trading in the Twenty-First Century, Ann Arbor, 1998, pp. 71–96 (further Petersmann 1998), p. 71. 360 Art. XVII:1(a) of the gatt. 361 The Appellate Body in Canada-Wheat case analysed the relationship between sub-paras. (a) and (b) of Art. XVII:1 of the gatt and came to the conclusion that sub-para. (b) by defining and clarifying the requirement of sub-para. (a) is dependent upon, rather than separate and independent from sub-para. (a). Appellate Body Report Canada-Wheat paras. 79 seq., in particular, para. 91. 362 Appellate Body Report Canada-Wheat WT/DS276/AB/R, para. 87.

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that ground, the discrimination in the context of Art. xvii of the gatt should include “at least” the provisions of Art. i and iii of the gatt.363 (2) Compliance with the principle of commercial consideration, i.e. running ­international trade transactions solely in accordance with commercial considerations, although having a due regard to other gatt provisions.364 The dsb viewed this obligation as a requirement to conduct business “on terms which are economically advantageous” for stes themselves “and/ or their owners, members, beneficiaries.”365 Therefore, stes benefits, even if undesirable for the state or agricultural producers, would be still eligible under the wto rules. The dsb rejected the argument that stes had to act like private traders, and suggested that export stes might “in accordance with commercial considerations” reduce their prices so as to deter competitors from entering the market.366 Whether particular sales of an export ste are driven exclusively by commercial considerations must be assessed in the light of specific circumstances surrounding those transactions, including the extent of competition in the relevant market.367 (3) Requirement to afford enterprises of other contracting parties an adequate opportunity, in accordance with customary business practice, to compete for participation in purchases or sales.368 This criterion refers to the ­opportunity to become a ste’s counterpart in the transaction.369 The test of “adequate opportunity to compete” is directed to ste consumers rather than to their competitors. The Appellate Body found that, if consumers are damaged, this requirement would not be fulfilled.370 363 Panel Report Korea-Various Measures on Beef WT/DS161/R, WT/DS169/R, para. 753. Differently, it was established by the gatt Panel in the fira dispute (bisd 30S/140, para. 5.16.) that only the mfn principle, but not national treatment obligations were included into the scope of Art. XVII:1(a) of the gatt. See also Horlick G.; Heim Mowry K. The Treatment of Activities of stes under the wto Subsidies Rules. In: Cottier T.; Mavroidis P. (eds.) State Trading in the Twenty-First Century, Ann Arbor, 1998, pp. 97–110, pp. 98–99; Petersmann 1998, pp. 80–84. 364 Commercial considerations may include price, quality, availability, marketability, transportation and other conditions of purchase or sale. Art. XVII:1(b) of the gatt. 365 Panel Report Canada-Wheat, para. 6.87. 366 Panel Report Canada-Dairy, para. 6.69. The Canada Wheat Board (an ste) was found to act in accordance with commercial considerations. Appellate Body Report CanadaWheat, para. 120 recalling the Panel Report, paras. 6.147–6.149. 367 Appellate Body Report Canada-Wheat, paras. 148–149 recalling Panel Report, para. 6.103. 368 Art. XVII:1(b) of the gatt. 369 Appellate Body Report Canada-Wheat, para. 157. 370 Ibid.

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All in all, the disciplines of Art. xvii of the gatt may be characterised as quite loose. Moreover, it is suggested that they may even be neglected by using the general gatt exceptions. Thus, Art. xx(d) of the gatt explicitly provides that nothing in the gatt shall prevent the adoption of measures necessary to secure compliance with laws and regulations relating to the enforcement of the stes. It may be argued that this provision could justify the measures necessary to secure a provision compatible with the gatt, so therefore, only stes operating in conformity with Art. xvii of the gatt. This conclusion is also supported by the fact that the chapeau to Art. xx of the gatt merely authorises measures taken in a non-discriminative manner, similarly to Art. XVII:1(a) of the gatt. Furthermore, Art. XVII:1(c) of the gatt explicitly denies the member’s right to prevent any enterprise under its jurisdiction to act in compliance with the requirements of Art. XVII:1(a) and (b) of the gatt. Hence, the application of the general gatt exception under Art. xx(d) of the gatt is not able to expand the policy space specified in Art. xvii of the gatt. The looseness of ste obligations may somehow be tightened by the disciplines on mandatory ste notifications laid down in the Understanding on the Interpretation of Art. xvii of the gatt 1994. Members are to notify all stes that fall within the scope of the elaborated working definition of ste, regardless of the fact that factual importation (exportation) takes place.371 The notifications shall contain an indication of the affected products, information about the legal basis, rationale, and functioning of the stes; and statistics on related imports, exports, and domestic production.372 The wto definition of stes for the notification purpose includes governmental and non-governmental enterprises “wherever located,” which have been granted exclusive or special rights or privileges, “formally or in effect,” in the exercise of which they influence through their purchases or sales the level or direction of imports or exports.373 This definition is deemed to be rather imprecise inasmuch as the scope of the notions “enterprise,” “exclusive rights,” “special rights” and “privileges” is not specified in the wto legal texts. Moreover, the application of the “trade effect test” is supposed to decrease the willingness of the wto members to notify stes.374 Despite that, the working definition obviously gives some additional shape to the vague disciplines of Art. xvii of 371 372 373 374

Paras. 1, 3 of the Understanding; Art. XVII:1(a) of the gatt. In accordance with the revised wto questionnaire of 1998. www.wto.org. Para. 1 of the Understanding; Art. XVII:1(a) of the gatt. It was suggested that the use of the “least trade distorting test” in a manner similar to that of Art. xx of the gatt instead of the “trade effect test” may be more consistent. Hoeckmann, Low, pp. 329–330.

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the gatt. But being applicable only to the notification obligation (the Understanding postulates that it is “without prejudice to the substantive disciplines” of Art. xvii of the gatt), it could not be used as a legal ground for challenging stes activities within the gatt/wto system. The wto regulation on stes sets a focus on the ste behaviour of an ste, not solely on the regulatory rules.375 Therefore, it could be presumed that the ste measures will be mostly disputed “as applied” inasmuch as the rules “as such” may, in most cases, not reflect the compliance with the criterion on commercial considerations. 7.6.2 stes in Agriculture About 75 per cent of stes notified to the wto376 function in the agricultural sector.377 The stes practice in the cereal sector is particularly profound.378 Reasons for the establishment of stes vary from poverty reduction, rectification of domestic market failures, strategic considerations,379 where developed countries emphasised producers’ price stabilisation and developing states emphasised food security issues by taxing producers.380 The majority of the largest stes are still concentrated in the developed states, although their number is decreasing as a result of the privatisation trend.381 The classic examples of exporting stes in the grain sector are the Canadian and Australian Wheat Boards (both created as a result of pressure from farmers). They operate(d) a price pool and distribute total revenues among the farmers, minus operating 375 Ibid., p. 329. 376 Dixit supposes that the wto statistics on stes is underestimated (due to the imperfect definition within the Understanding). See Dixit, Josling, p. 4. 377 The most common ste type is producer-controlled statutory marketing boards charged with the tasks of price stabilisation, market regulation, and export control and promotion. Other ste types are less market distortive, e.g. fiscal monopolies; canalizing agencies with monopoly rights for the import or export of a specific product. See for further details wto. Operations of State Trading Enterprises as They Relate to International Trade: Background paper by the Secretariat G/STR/2, pp. 3–14. 378 Sixteen countries among 30 notifying stes in the wto operate stes for cereals. In fact, in 1996 73 per cent of the world wheat trade flew through stes, this percentage even reached 95 per cent in the 1970s. See Abbot P.; Young L. Wheat-importing stes: Impact on the World Wheat Market. In: Canadian Journal of Agricultural Economics, 47(2), 1999, pp. 119–136; Dixit, Josling, p. 4. 379 I.a. public health issues, natural resource management, and access to investment resources. 380 G/STR/2, pp. 3–4. 381 G/STR/2, p. 4.

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costs.382 Both the United States and the eu are supposed to employ agricultural stes, but do not notify them.383 According to some opinions, the eu system of grain interventions and export refunds, as well as the us marketing orders, suit the wto ste definition.384 On the economic side, exporting agricultural stes may have some potential to stabilise producers’ income through price pooling, management, and disposal of stocks. This effect is achieved by imposing additional costs on producers.385 On the other hand, activities of agricultural stes may be distortive. The extent of the trade-distortion depends on a particular ste’s degree of market power, its regulatory or institutional distance from the government, and competitive advantages that an ste might gain by using its special rights and privileges.386 In spite of the trade-distortion and excessive subsidisation associated with state trading,387 it is still supposed to be, in general, more favourable as an ­income redistribution instrument than taxation or direct subsidies to ­producers.388 But in fact stes usually would cost more money than could be justified to target food security issues, and could instead be effectively substituted by ­investment in infrastructural support, competition policy, innovative standards, and grain certification.389 stes may be successful in carrying out long-term export agreements as they have secured supplies.390 Yet, large tncs in the cereals sector may also effectively overcome the obstacle of stock uncertainty by building supply chains in 382 Australian Wheat Board was privatised in 1999. Canada removed the mandatory requirement to distribute wheat and barley through Canadian Wheat Board in 2012 (Bill C-18 of 18 October 2011) while price support measures and transportation subsidies were abolished already in the 1990s. Butault, Bureau and others, p. 113; WT/TPR/S/246, p. 104. 383 G/AG/W/125/Add. 4. 384 Mitra, Josling, p. 10; Rude J.; Annard M. European Grain Export Practices: Do They Constitute a State Trading. In: Estey Journal of International Law and Trade Policy, 3(2), 2000, pp. 176–202, pp. 176–187; Dixit, Josling, p. 2. 385 World Trade Report 2006, p. 144. 386 Pearce R.; Morrison J. Agricultural ste in Developing Countries (based on a paper prepared for the fao Commodities and Trade Division) url: www.fao.org/docrep/005/ y3733e/y3733e07.htm (further Pearce and Morrison). 387 Pearce and Morrison, p. 9. The concerns about an expansion of export subsidies through stes sales are not empirically approved. World Trade Report 2006, p. 144; Dixit, Josling, p. 6. 388 A less non-distortive alternative to stes may be only decoupled payments. Pearce and Morrison, pp. 7–8. 389 World Bank. A State Trading Enterprise for Grains in Russia? Issues and Options, Washington, 2009, p. ix. 390 World Trade Report 2006, p. 144.

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several regions or countries.391 Another argument in favour of private trade is the predisposition of stes toward price discrimination as a consequence of their high concentration in agricultural markets (stes can get higher export prices than individual producers).392 Given the distortive effects produced by stes and the unsettled issue of the respective multilateral disciplines, state trading in agriculture was expected to be a focal point of the Doha negotiations.393 But the dda failed to set any ambitious goals for state trading reform.394 The Modalities 2008 mostly confirm the obligations laid down in Art. xvii of the gatt and other relevant provisions of the wto agreements. Beyond that, the draft envisages some commitments directed toward suppressing trade-distorting practices used by exporting stes, i.a. the gradual elimination of export subsidies currently eligible under the AoA, the removal of agricultural export monopoly; as well as the discontinuance of stes preferential financing, including government guarantees and debt cut-offs.395 These objectives still remain only on the long-term agenda. The recent compromise within the Nairobi package restates the disciplines for the other forms of export competition for agricultural stes and calls for minimising distortive effects of ste export monopoly powers. At present, besides export subsidisation, other state trading aspects are left without attention. 7.6.3 State Trading in Ukraine 7.6.3.1 “Soft” stes in the Grain Sector Even after more than two decades of market reforms, the public share in Ukrainian agriculture is not particularly low396 and consists mostly of large-scale enterprises. In the course of the wto accession, Ukraine notified about eight stes,397 but did not mention the state enterprise “Bread of Ukraine” operating in the grain sector.398 In response to the direct inquiry, Ukrainian negotiators 391 Pearce and Morrison, p. 8. 392 World Trade Report 2006, p. 144. 393 See e.g. Dixit, Josling, p. 1. 394 The July Framework 2004 simply provided that stes disciplines had to be strengthened. 395 Proposal on Art. 10 bis of the AoA. Para. 166 and Annex K to Modalities 2008, in particular, para. 3 of Annex K. 396 For instance, the share of the public sector in the Ukrainian agriculture was reported at the level 10.3 per cent in 2006. WT/ACC/UKR/152, para. 40. 397 Ukraine undertook to provide information on state trading enterprises in order to ensure transparency of stes activities. WT/ACC/UKR/152, paras. 40, 46, 51. 398 The company’s goal is to supply the population, organisations and enterprises of all property forms with food and feedstock grain, processed products and seeds, as well as to provide storage, processing and distribution services, and to attain profits by means of

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reported that this entity was acting as a state agent for governmental grain pledge procurement and for carrying out interventions on the grain market.399 Since no other state-owned or private entities were entitled to participate in the abovementioned programmes, it may be argued that “Bread of Ukraine” was conferred with exclusive and/or special rights in the sense of the Understanding. The representative of Ukraine declared that the business conditions granted for “Bread of Ukraine” after 2005 were the same as those of private grain traders.400 However, given that the entity was eligible in 2009 for state subsidised short-term credits for purchasing grain that were not distributed among other grain market actors,401 it may be argued that “Bread of Ukraine” was a holder of special rights also after Ukraine’s wto accession. Despite that, it is questionable whether the enterprise in concern may fall within the gatt ste definition. Besides the exclusive or special rights, a ste must have an impact on “the level or direction” of exports through its purchases or sales in the exercise of these rights. In 2007 when the final stage of wto accession negotiations was running, “Bread of Ukraine” did not exercise any special rights, thus, its notification as an ste was indeed not necessary. “Bread of Ukraine” was not financially self-sufficient and had massive debts, i.a. before the state.402 Thus, it was decided to restructure the enterprise and to privatise its most profitable units.403 In 2010, dozens of its subsidiaries (predominantly grain elevators and bakery factories) were dissolved and integrated into a new state enterprise, the State Food and Grain Corporation of Ukraine (gcu).404 This transaction may not qualify as privatisation since the new company remained under state ownership. In respect to the wto disciplines on agricultural subsidies, this event may be concerned in the context of writing off the enterprise’s debts to the state.405

entrepreneurial activity. Statute of “Bread of Ukraine” confirmed by cmu Regulation No. 240 of 14.3.2001 (repealed in 2011). 399 WT/ACC/UKR/152, para. 48. 400 Ibid. 401 cmu Regulation No. 153 of 26.2.2009. 402 Klimenko, p. 27. 403 Privatisation of “Bread of Ukraine” was not authorised by law. Para. 34 of cmu Regulation No. 153 of 26.2.2009. 404 cmu Regulation No. 764 of 11.08.2010. In a year the entity was transferred to a public stock share company with 100 per cent shares owned by the government of Ukraine. cmu Regulation No. 593 of 6.6.2011. 405 In case of the adoption of the Modalities 2008, para. 3(iii) thereof will directly preclude such practice.

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The gcu reserved most of the predecessor’s privileges. Thus, in 2010/2011 a limited liability company in the structure of the gcu, Hlibinvestbud Ltd., which was partially owned by the state,406 was charged with carrying out a state grain forward purchase programme. The involvement of the private ­entity was allegedly necessary to ensure a prompt contract performance where every single payment executed by the Agrarian Fund had to be confirmed by governmental regulations. This function, delegated to Hlibinvestbud, was, in fact, a special right to act as an agent for the governmental forward purchasing. Due to substantial volumes of grain interventions, this right may have had an impact on the level of grain exports, but it may be hard to attest to the causation. Apparently the profitability of grain exports provokes the state’s interest in the sector. In early 2011 there were attempts to create a “hard” ste on Ukraine’s grain market. The draft law proposed to authorise grain exports exclusively to producers, and the exportation and importation of grain and processed products to a state agent.407 The notion “state agent for exportation” was already introduced into legislation in 2002.408 Art. 1.5. of the Law on Grain set up strict eligibility criteria for participating in the competition for state exportation agent status. The requirement on mandatory state ownership, or alternatively, a state share of the capital exceeding 75 per cent, could be fulfilled solely by the gcu and earlier by “Bread of Ukraine.” Besides that, obligatory experience in exportation, possession of its own infrastructural capacities (including ­elevators), and the lowest rate of commission payments proposed are essential for the selection.409 For these reasons, the procedure of state agent selection seems to be de facto non-competitive but indicative. The state agent role used to be very limited, but its impact on the grain market increased after the launch of the Chinese credit programme that was ­examined in Sub-chapter 6.8. Within this scheme, the gcu has an exclusive right to execute grain purchases under the credit agreement with state guarantees and to export cereals to China at the fixed annual level. It may be argued that the gcu in this new role fulfils the ste definition laid down in para. 1 of the Understanding inasmuch as it is conferred the government’s exclusive right to export large volumes of specified cereals to a particular state, and in exercising that right the enterprise at least has an impact on the direction of certain 406 Before 2012 the state possessed 49 per cent of the company. 407 Draft Law No. 8053 of 2.2.2011; Draft Law No. 8163 of 25.2.2011. Formally, the drafts were not approved due to their collision with the provisions of igc Grain Trade Convention and Art. 20 of Ukraine’s Law on External Economic Activity. 408 Art. 79 of Law on Grain. 409 Para. 4 of cmu Regulation No. 99 of 27.1.2010.

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grain exports. Furthermore, gcu deliveries to China may potentially influence the level of general exports. On the other side, it could be assumed that despite the absence of the purchasing programme private operators would still have exported to other destinations the cereals exported by the gcu. Therefore, if the Chinese agricultural credit scheme is further performed under the agreed conditions and in the specified volumes, the gcu could be classified as an ste and Ukraine may be invited to submit a respective notification to the wto. Regardless of compliance with the Understanding’s “trade effect test,” the gcu activities (as a state enterprise with exclusive rights) are to be examined by virtue of the Art. xvii of the gatt criteria. It could appear that the gcu practice may fail to satisfy the non-discrimination requirement of Art. XVII:1(a) of the gatt since there are export preferences for a particular wto member. However, as established in Sub-chapter 6.8.2.1., it remains questionable whether transactions within the Chinese loan agreement may be found in violation of the mfn obligation. In this context, it should be pointed out that the requirements on ste commercial consideration and an adequate opportunity for foreign consumers to compete are closely connected with the mfn principle. As identified in Chapter 6, the interplay between non-­discrimination and the mfn issue is controversial. Supposedly if the non-discrimination test of Art. xvii of the gatt is satisfied, the fulfilment of other requirements of Art. xvii of the gatt would be attained automatically. 7.6.3.2 The Case of the Agrarian Fund The Agrarian Fund of Ukraine, the functions of which were analysed in Subchapter 6.3., may acquire some features of an ste. Ukraine reported during its wto accession about an exclusive right conferred to this public entity410 to ­execute market interventions. It was also confirmed that the Agrarian Fund neither imported/exported commodities nor had any special rights with regard to their imports or exports.411 However, as already indicated in Sub-­chapter 6.3., the entity acquired the right to export the regulated products upon the decision of the government in 2009.412 Therefore, the Agrarian Fund may have the features of an ste since it is granted exclusive and special rights, namely, price policy execution in the agricultural sector through interventions on the exchange market,413 the state agent status for 410 Art. 9.1.1. of Law on State Support defines the Agrarian Fund of Ukraine as a state specialised body. 411 WT/ACC/UKR/152, paras. 43, 49. 412 Art. 9.2.8. of Law on State Support. 413 Art. 9.2.4. of Law on State Support.

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state grain pledge programmes,414 and state forward purchases. Moreover, the entity granted the exclusive right to purchase regulated products for the state reserve fund.415 In short, the public body is able to substantially impact the agricultural market by expanding supply through commodity interventions that it commences at its own discretion. Provided that export restrictions are not imposed and d­ omestic prices are below export prices, this additional grain supply may, at least to some extent, influence export decisions. In the above circumstances, the Agrarian Fund’s employment of its special and exclusive rights may affect the level of exports. It may be contended that the entity constitutes a ste in the sense of the Understanding as long as commodity interventions in fact ­extend the market ­supply of grain. It will now be examined whether exercising the exclusive or special rights of the Agrarian Fund may lead to non-compliance with the disciplines under Art. xvii of the gatt. Starting with a reservation for direct stock exportation by the Agrarian Fund, the issue of discriminatory treatment may not be ­effectively assessed for now as the entity has never made use of that right. It may be presumed that when export sales are executed on a competitive basis, allowing free participation for all importing members, the conformity with the non-discrimination criterion should be preserved. Commodity interventions do not seem to be non-discriminative either given that the successive exports, if any, are subject to general trade terms. A possible claim of discrimination for imported cereals by purchases to the food grain reserve416 may be justified on the ground of Art. III:8(a) of the gatt. Although the interplay between this provision and the disciplines of Art. XVII:1(a) of the gatt is unclear, it seems reasonable that general exclusions from the national treatment regime should also be applicable to stes in the absence of the special opt-out in Art. xvii of the gatt. In this regard, it is remarkable that, until recently, grain procurement by the Agrarian Fund was explicitly excluded from the general legal track for public procurement in Ukraine.417 This fact may be interpreted as an optout from the exemption under Art. III:8(b) of the gatt for governmental grain purchases. Nevertheless, it is suggested that the qualification of the scheme as 414 Art. 12 of Law on State Support. 415 Art. 10 of Law on Grain foresees building of the state grain reserve with a goal to ensure an adequate level of food security and execution of commodity interventions. After 2010 the reserve’s volumes shall not be lower than 20 per cent of annual internal consumption. Art. 9.2.2. of Law on State Support. 416 WT/ACC/UKR/152, para. 40. 417 Art. 2.3. of Law on Government Procurement No. 2289-VI of 1.6.2010. The successive Law No. 922-VIII of 25.12.2016 excluded the explicit opt-out.

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“procurement by governmental agencies of products purchased for governmental purposes” must be evaluated on a factual, not legal basis. In any case, the justification under Art. xx(d) of the gatt may still be invoked. It is more complicated to arrive at a conclusion regarding compliance of the Agrarian Fund’s activities with the principle of commercial considerations. On one side, the public body shall be governed by market considerations.418 At the same time, it is not entitled to execute speculative operations, i.e. trade in agricultural goods (commodity derivatives) with a view to sell them for a purpose other than attaining price stabilisation.419 On this point, it must be reiterated that the reference mark for commercial considerations must be economically advantageous in trade terms (“price, quality, availability, marketability, transportation and other conditions of purchase or sale”) for the Agrarian Fund itself and/or for the state or producers. However, the behaviour required from the Agrarian Fund by enforcement of commodity interventions is not based on direct economic benefits for the entity (neither for the state or producers) due to the sole goal of reducing prices. Therefore, the only rationale of these operations is a political one, namely, to hold prices low for the population and internal processors. The fact that the Agrarian Fund was allowed to sell regulated products using advantageous market conditions420 should somehow rectify the concern about compliance with Art. XVII:1(b) of the gatt, but it directly contradicts the prohibition of speculations. To summarise, it may be concluded that the regulatory basis for the Agrarian Fund activities examined “as such” may entail non-compliance with the requirement of Art. XVII:1(b) of the gatt. In the end, being defined by law as a specialised public body, it is questionable whether the Agrarian Fund could fall within the undefined notion of “enterprise” given in Art. xvii of the gatt. If it could, the gatt rules on stes may be perceived by members as going too far by blurring the delimitation between state trading and regulatory rules. 7.6.4 State Trading Issues within the eu-Ukraine Cooperation The eu-Ukraine pca explicitly prohibited governmental measures distorting trade. This provision could arguably extend to state trading. However, the ­exemptions conferred in favour of “the Parties’ respective interests” and “the 418 Pursuant to Art. 9.2.4. of Law on State Support, the Agrarian Fund makes decision on commodity and financial intervention on its own discretion. 419 Since 2009 the speculation activities are authorised exclusively to achieve the purposes of Law on State Support that may be broader than price regulation, but in general should be practically limited to that. Art. 9.2.5. of Law on State Support. 420 Art. 9.2.6. of Law on State Support.

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­performance, in law or fact, of the particular tasks assigned” to public undertakings diminished the impact of this norm.421 In the lax wto regulatory environment on state trading, the eu and Ukraine seem to endeavour to make the wto rules more precise in their further bilateral relations. Where the main accent within state trading disciplines under the eu-Ukraine aa is made on domestic competition laws,422 the major contribution of the agreement into the cross-border stes regulation should be elaboration of a non-legally binding glossary that provides definitions of exclusive and special rights.423 The distinction between the notions is quantitative, i.e. where exclusive rights may be granted only to a single entity, special rights may be granted to a limited number of actors “otherwise than according to objective, proportional and non-discriminatory criteria.” Since the disciplines of Art. xvii of the gatt are binding to both parties and the definitions are provided in the same context as in the gatt, it may be concluded that pursuant to Art. 31(3)(a) of the vclt, “exclusive and special rights” in the sense of Art. xvii of the gatt shall be interpreted between eu and Ukraine after the agreement’s implementation in the sense of the bilaterally arranged definitions. In opposition to the gatt, the eu-Ukraine aa operates with the term “­ public undertaking,” not ste. The notion is defined within the eu-Ukraine aa as the state’s ability to “exercise directly or indirectly a dominant influence” over the ­entity, not through the state share quantification in a statutory capital. Dominant influence may not be solely a consequence of ownership or financial participation of the state, but may also have its source in the rules that govern the undertaking.424 This approach is harmonised with the provisions of Art. 2(b) of eu Transparency Directive.425 The notion “public undertaking” under the eu-Ukraine aa obviously may not be equalised with an ste in the sense of wto regulation. The latter is narrower since it is limited to those public ­enterprises that have special or exclusive rights and an impact on international trade. 421 Art. 49(2.5) of pca. 422 State trading (activities of public enterprises and enterprises entrusted with special or exclusive rights) shall be subject to the antitrust laws and principles, insofar as their application does not obstruct the performance, in law or in fact, of the particular tasks assigned to the enterprises. Art. 257(1)(2) in conjunction with Art. 253 and 254 of eu-Ukraine aa. 423 Annexes xxiii(e) and (d) to the eu-Ukraine aa. 424 Annex xxiii(c) to the eu-Ukraine aa. 425 Commission Directive 2006/111/EC of 16.11.2006 on transparency of financial relations ­between Member States and public undertakings as well as financial transparency within certain undertakings (oj l 318 17.11.2006 p. 17).

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The eu-Ukraine aa is silent on the scope of the term “undertaking.” The jurisdictions have different approaches on that matter (functional approach within the eu v. institutional approach taken in Ukraine). Presumably, e­ ither a compromise should be made regarding the definition or the European ­approach should be taken inasmuch as the fact that the bilateral rules are based on the eu norms. The European “undertaking” concept reveals a clear exclusion of the exercise of official authority.426 In this regard, the activities of the Agrarian Fund of Ukraine for price policy matters definitely fall beyond the disciplines of eu-Ukraine aa. At the same time, the entity’s sales on the market may still constitute economic activity under eu-Ukraine aa. The aa definition of public undertakings may also have a link with state aid disciplines if public enterprises receive benefits (aid) that constitute a charge on the public account and affect bilateral trade. As opposed to the general disciplines on state trading, which are covered by the competition chapter and applicable to the agricultural sector, state aid granted to agricultural public undertakings is excluded from the agreement scope, as already discussed in Sub-chapter 4.5.

Intermediary Summary

It may be argued that two actors on the Ukrainian grain market, namely, the gcu and the Agrarian Fund of Ukraine, may be concerned by the wto state trading disciplines. For now, only the gcu may fall within the working ste definition given in the Understanding. Concerning the compliance of the gcu activities with the disciplines of Art. xvii of the gatt, the performance of the grain delivery contract with China may be found incompatible with the provisions of Art. XVII:1(a) of the gatt. Furthermore, if the Modalities 2008 are ever adopted, the government’s practice of providing financial injections to the gcu on a preferential basis, particularly through loans and state guarantees, would be at risk under para. 3 of Annex K to the Modalities 2008. As for the Agrarian Fund of Ukraine, the prohibition of speculative operations and its task to dump prices could hardly be reconciled with the commercial considerations requirement of Art. XVII:1(b) of the gatt.

426 Bourgeois J.H.J. ec Rules on State Monopolies and Public Undertakings: Any Relevance for the wto? In: Cottier T.; Mavroidis P. (eds.) State Trading in the Twenty-First Century, Ann Arbor, 1998, pp. 161–180, p. 164.

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Conclusion on Chapter 7

The analysis for implementing direct and indirect agricultural export restrictive measures allows the conclusion that, despite the expansion among the developing states, the practice is challengeable within the wto and may ­potentially be targeted solely on a bilateral basis. In this regard, Ukraine may use a full agricultural export liberalisation trump card as a trade-off for market access in other segments. That should not be hard to achieve since the country does not provide export subsidies to agricultural goods and the ste activities are at present limited, whereas the stes may be identified only in their weakest models.

Final Conclusions This research was conducted during a time of upheaval for the settled rules of international co-existence. The global community is divided in their understanding of how traditional co-operation structures should further function. In this regard, trade law might seem to be less affected than other areas of ­international public law. That does not mean, however, that international trade faces no challenges. For agricultural trade in particular, it cannot be overseen that the sector is exposed to persisting tariff and non-tariff measures, which aggravate the already serious food security concerns. Evidently, as c­ oncluded in Chapter 3.1., the present multilateral rules developed more than 20 years ago may not consistently respond to the current market irregularities, because the present situation is distinct from the trade patterns at the time of the Uruguay Round. Nevertheless, regardless of clear, urgent signals that reforms are needed, a substantial modification of the multilateral commitments are not expected in the near future due to irreconcilable positions among the key trade players. Under such circumstances, further expansion of regionalism and fragmentation of international trade law may be anticipated. But as suggested in Chapter 3, the new rules within the wto would be more attractive than rta proliferation. The former should be more efficient due to a high degree of legalisation within the wto. Yet, the interest of some members to avoid any binding rules on non-market agricultural access may be one of the major reasons that efforts to achieve a multilateral agricultural compromise have failed. Furthermore, given the sensitivity of the agricultural sector, it may be stated with a high degree of certainty that full inclusion of agricultural trade into the running free trade deals should not be expected either. In respect to this, one should distinguish the uniqueness of the eu cap as a common market order for agricultural products without exclusions. The eu supranational structure is in charge of the core agricultural policies and is committed to limit to zero any free ride of national agricultural policies that may hinder cross-border trade within the eu. For that reason, the eu system of control over Member States’ policies is more elaborated upon than the multilateral disciplines within the wto/gatt system. Nevertheless, both legal orders have similar features for handling agricultural state aid/subsidies, since they have implemented the economic approach to distortive subsidies. Besides that, further similarities may be found. To begin with, one can observe partial integration of agricultural support in the general regulation track on subsidies at the wto level: the “peace clause” of Art. 13 of the AoA expired and Art. 1 of the scma is ex ante applied to agricultural subsidies. At the same

© koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004353695_010

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time, the AoA authorises distortive forms of domestic support within the committed levels, and the current development shows that the post-Doha round regulation will not include agricultural subsidies into the overall prohibition of subsidies declared in the scma. Similarly, the provisions on state aid at the eu level (Art. 107–109 of the tfeu) are applicable to the agricultural sector, but are conditional on the  Council and Parliament decision on this matter (Art. 42 of the tfeu). The ­restrictions may be applied if they are required for the market order (cap), i.e. justified on the ground of the agricultural objectives set out in Art. 39 of the tfeu, which may be broadly interpreted. Furthermore, aid provided by the eu sources (in particular, direct payments and since 2014 a major share of rural development support measures) is not subject to the state aid rules at all. In this regard, the external control over eu agricultural subsidies within the wto is of particular importance. Massive eu agricultural support is still a concern for the international trade community. Moreover, the far-reaching integration of agricultural trade in the eu stands in contrast to high external protective barriers for market entry. For that reason, even the eu’s formal support for the Draft Modalities 2008 and its declared interest in the successful outcome of the Doha negotiations could hardly rectify the eu’s worldwide reputation as “Keynes at home and Smith abroad”.1 Setting aside the prejudices, it is hard to look past the major influence that wto membership has executed on eu agricultural policies. The notifications submitted in recent years have documented the large structural change of eu domestic support, i.e. steep reduction of “amber” and “blue box” measures,2 and proportional increase of the “green box.”3 This tendency may be associated, first of all, with the introduction of direct income support schemes ­constituting half of the notified “green box.”4 This policy replaced public interventions and per area payments (market price support and output payments).

1 Gilpin R. The Political Economy of International Relations, Princeton, 1987, p. 355 through de Cecco, p. 14. 2 The ams for the eu was bound at the amount of over 72 million eur, where the Current ams made up 12.3 million eur in 2007/2008, 8.7 million eur in 2009/2010, around 6.5 billion eur in 2010/2011, and 5.9 billion eur in 2013/2014. G/AG/N/EU/10; G/AG/N/EU/17; G/AG/N/ EU/34. 3 62.6 million eur in 2007/2008, 63.7 million eur in 2009/2010, 68 billion eur in 2010/2011, and almost 68.7 million eur in 2013/2014. G/AG/N/EEC/68; G/AG/N/EU/10; G/AG/N/EU/17; G/ AG/N/EU/34. 4 If direct decoupled income support in the eu were calculated into the Current ams, the eu would be quite close to the ams commitments’ ceiling. WT/TPR/S/248/Rev.1, p. 112.

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The switch to the “green” area did not lead to a reduction in eu support rates overall. Maintaining support at a very high rank, albeit justified as an implementation of the multifunctional model of agriculture, may raise concerns regarding the distortive character of European agricultural aid. Although the findings of Chapter 5 do not allow for a conclusion on whether there is any direct cap non-compliance with the AoA disciplines, the further “greening” of direct payments in the course of the latest cap reform may threaten the classification of aid for more environmentally friendly agricultural practices as a measure exempt from the Current ams calculation. After examining the compliance of eu grain policies with the wto rules, the relevant regulation in Ukraine, a key player on the world grain market, was studied. It was established in Chapter 1 that Ukraine’s agricultural sector has not accomplished the transition process and acquired particular features immanent to most transition states, including a disparity of input and output prices. The situation is aggravated by the lack of a land market in the country. Due to considerable social concerns, the termination of the land purchase moratorium in Ukraine should not be expected in the near future. In this situation, the state is pushed to take over certain tasks of market institutions (banks, insurers etc.) in order to protect vulnerable small and mid-scale production segments that are short on collateral. Yet, the declaratory character of state support and shortcomings of legal enforcement in Ukraine may reduce any government efforts to zero. The direct aid in Ukraine is designed exclusively in the “amber box” form (credit and leasing subsidies, as well as input and insurance subsidies). Hence, the increase in the amount is not desirable given Ukraine’s multilateral commitments. On the other hand, certain market instruments, accompanied by the shift to direct payments on the European model, may substitute direct aid. By the same token, it was demonstrated in Chapter 6 that the excessive use of advantageous tax schemes for agricultural production, although largely advocated by the civil society in Ukraine, caused a high budget burden and a steep growth in the country’s non-product specific domestic support. In addition to the internally driven policy mechanisms, the “China factor” may become significant for development of the grain sector in Ukraine. The credit arrangement with a Chinese state-owned credit institution may be observed from different points of view. As concluded in Chapter 6, the contract’s classification as domestic support in the light of the AoA disciplines does not seem to be appropriate, but violation of the gatt provisions, in particular, the mfn principle (Art. i: 1 of the gatt), may not be excluded. The examination of the public intervention mechanism in Ukrainian commodity markets revealed that instruments of financial interventions, i.a.

432

Final Conclusions

f­orward programmes, may be efficient in supporting producers’ income, but would not be able to do so without falling within the Current ams. The fact that this mechanism is not currently included in Ukraine’s ams calculation methodology does not prevent other wto members from pointing to this practice using the right given in Art. 18.7. of the AoA. By contrast, largely used commodity interventions do not confer subsidies in the wto sense, but dump the in-land prices. Triggering commodity interventions is normally justified in Ukraine by the need for food security. However, the competing goals to secure supplies and to increase producers’ income may be achieved simultaneously, if transparent policies are adopted that enable a surge of investment into the sector. Instead of that, grain-producing countries may explore methods that make it convenient for governments to attain their short-term political objectives, but that may lead to large crossborder distortions (this phenomenon was described in Chapter 7). Thus, introduction of export restrictions for cereals, i.a. by Ukraine, allegedly contributed to the food price crisis of 2008, which had profound global economical, social and political consequences. The incumbent world trade rules and the provisions of most rtas concluded by Ukraine are not strict enough to effectively limit the use of agricultural export restrictive measures (quotas, bans, duties and stes). On the other hand, the disciplines on export subsidies taken by the recently acceded wto members, including Ukraine, are so tight that any kind of export promotion by the state may be caught by the prohibition. Furthermore, most of the developing countries simply do not have sufficient funds to develop their own public export programmes. That is why developing food-exporting states, including Ukraine, should be eager to promote as much liberalisation in the agricultural segment as possible. They would probably be ready to sacrifice, to a certain extent, their interests in other sectors in order to achieve a better outcome for agriculture. Then again, in the absence of a global compromise, they concentrate on regional projects. Until recently, the rtas concluded by Ukraine did not directly affect agricultural policies. Where the “shallow” integration projects within the cis usually left some space for agricultural export restraints, the very ambitious free trade deal between the eu and Ukraine makes an attempt to reduce Ukraine’s export protection in the oilseed sector and to bring more discipline to export competition, although agricultural subsidies are left off the bilateral agenda. The dcfta outcome pointed to a lack of readiness for a bilateral compromise concerning import barriers in the form of trqs for some “sensitive” products on the eu side, along with Ukraine’s hard position on agricultural export duties. Nevertheless, inclusion of sensitive topics in the final deal was highly desired

Final Conclusions

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inasmuch as the opportunities and challenges of the dcfta between the eu and Ukraine are dependent on the coverage of the free trade regime. Normally, Ukraine’s rtas do not cover agricultural issues, except for market access (that corresponds to the world fta practice). The approximation of ­agricultural policies within other AoA pillars and the reduction/elimination of non-tariff barriers are possible either through legal approximation envisaged under the eu-Ukraine aa or through a deeper economic integration with the cis. However, as it was established in Chapter 3.2.2., the second way is not possible without reviewing the eu-Ukraine aa. Taking into consideration current political tensions between Ukraine and the Russian Federation, the possibility of the accession of the former to the eeu is close to impossible. As a final remark, it should be reiterated that global co-operation for trade in agricultural goods is still the territory of diplomacy rather than the subject of law. The reluctance of wto members to take legal actions against certain disputable measures supports this argument, e.g. the Russian Federation’s recent agricultural import ban in response to the economic sanctions in other sectors taken by most developed states, as well as the long-term ­non-notification of domestic support by some members. By the same token, it has been revealed that the intra-RTA legal mechanisms are unable to reconcile conflicts surrounding agricultural restrictions, e.g. the ban on imported Ukrainian food by the Russian Federation. Under these circumstances, it is not easy to provide any forecast for the possible interpretation of national grain policies in the inter-state dimension. Being largely used as a trade-off, trade in agriculture may remain partially “beyond the law,” and thereby, guarantee a fragile international compromise.

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Index accession 28, 37, 60, 105, 113, 115, 119, 122, 128, 138, 141, 143, 145, 148, 151, 193, 198, 200, 202, 204, 244, 246, 247, 256, 294, 299, 321–325, 335, 342, 358, 364, 365, 374, 376, 378, 383, 394, 399, 420, 421, 423, 433 Accession Protocol 35n102, 65n73, 142, 193n255, 244n1, 365n85, 389 acquis communautaire 105, 106n348, 112n388, 119n445, 129, 130n509, 133n531, 134n532 actionability 68, 70n107, 159, 160, 164, 165 active farmer 230, 231, 345 administered price 71, 214n57, 253, 391 advantage 125, 155, 169, 171n115, 305, 312n398, 313, 330, 332, 333, 337, 358 adverse weather conditions/adverse event 237–239, 281, 285, 286n247 Aggregate Measurement of Support (ams) 69, 72, 74, 79, 82–84, 125, 164, 187,  190, 202, 204, 214, 243, 245, 285, 300, 309, 323, 344, 345, 400, 430n2 Agrarian Fund 247, 251–254, 257, 258, 259n91, 263, 265n118, 273, 274, 287n255, 288n260, 401, 402, 422–425, 427 Agreement on Agriculture (AoA) Annex 2 of the AoA 69–80, 81n183, 82, 87, 89, 160, 161, 164, 165, 180, 201, 214, 218, 221–235, 237–243, 250, 260, 269, 270, 272, 276, 277, 285, 286, 296, 297, 320, 323, 344, 345, 391, 396, 399, 400 Annex 3 of the AoA 68n95, 69n103, 71n113, 72, 82n185, 203, 214, 249, 253, 263, 268, 269, 272, 275, 276, 295, 297n314, 302, 335n510 AoA pillars 68, 80, 82, 84, 90, 166, 433 Art. 9 of the AoA 65, 67n85 Art. 10 of the AoA 67 Art. 12 of the AoA 355, 363, 368n99, 371, 372, 383, 384, 392 Art. 21 of the AoA 163 Agreement on Sanitary and Phytosanitary Measures (sps) 4 Agreement on Subsidies and Countervailing Measures (scma)

Art. 1 of the scma 66n80, 68, 71, 152, 157n30, 166, 167, 190, 191, 194, 200–201, 204, 216, 257, 260, 274, 295, 300, 307, 335, 336, 368, 369, 376n146, 404, 410, 413, 429 Art. 3 of the scma 144, 163 Agreement on Technical Barriers to Trade (tbt) 4, 84, 136, 362n73 Agreement on Trade-Related Investment Measures (trims) 4, 342 agricultural activity 17, 44, 189, 219n84, 220, 223, 224, 230, 231, 318n433, 322 agricultural enterprises 32, 35n103, 39, 45–49, 159, 245, 246, 248n30, 266, 271, 280, 292, 297–302, 309, 317, 320 agricultural inputs 27, 73, 275–277, 298, 328 agricultural market 3, 11–13, 16, 18, 21, 40, 42, 52, 80, 107n358, 126, 151, 174, 178n163, 179, 182, 186, 194, 322, 329, 352, 353, 399, 420, 424 agricultural policy 2–5, 13–15, 19–53, 81–92, 100, 125, 131, 151, 152, 176, 177, 182, 183, 200, 204, 206, 209, 225, 243, 244, 259, 262, 316, 324, 340–348, 351, 352, 400–414, 429, 430, 432, 433 agricultural receipt 278–281 agricultural support/agricultural subsidies 5, 14–16, 19, 26, 40–43, 68,  76n144, 81–83, 90, 148, 166, 189, 193n256, 198, 203–246, 287, 289, 290, 309, 319, 321–324, 346, 347, 383, 429, 430 agriholdings 45, 48, 49, 53, 277, 288n260, 294, 316, 320n439 amber box 69, 75, 79, 133n531, 163–165, 214, 256, 272, 276, 285, 300, 314, 323n449, 324, 431 Appellate Body 4, 57n15, 58n20, 59n25, 85n202, 98, 101n315, 122n463, 155, 156, 164, 278n194, 328, 331, 333n502, 336n511, 357, 359, 361, 362, 365, 370n113, 389, 402, 404–407, 415, 416 approximation/legal approximation 4, 37, 54, 104, 105, 114, 116, 117, 119n439, 126, 128–135, 140, 147, 151, 195, 196, 198, 200, 206, 310, 311, 316–319, 347, 414, 433

Index arbitrary/unjustifiable discrimination 357, 361, 362n69 Bali 91, 92n255 base period 64, 71, 76–78, 79n167, 87n226, 123, 219, 223, 224, 227, 244, 292 basic agricultural dilemma 12 basic payment scheme 230, 231 benefit 4, 7, 8, 10, 19, 22, 36, 47, 90, 93, 96, 106, 115, 153, 158–159, 169–172, 191, 193n256, 194, 204, 239, 242, 248–250, 258, 260, 263, 271, 273–276, 291, 295, 300, 302, 303, 306, 307, 309, 312–314, 317, 320, 321, 334–337, 350n11, 374, 402, 406, 409, 412, 413, 416, 425, 427 bilateral investment treaty (bit) 337–339 bilateral trade agreements 25, 109, 135 biofuel 1, 91, 218, 352n21, 370n113, 399 Black Sea Grain Pool 398 block exemption 187–190, 195, 233, 238 blue box 73, 75, 87, 89n233, 164, 218, 232, 430 border protection 7–8n6, 13n45, 18, 23, 82, 166, 205, 365, 370 Bound Total ams 70 Bread of Ukraine 268n136, 420–422 budgetary outlays 68, 72, 297 Cairns group 61, 87, 89, 347, 364, 409 cap reform 2013, 185, 210 Central and Eastern European Countries (ceecs) 25–28, 53, 111n383, 112n386, 133,  134n538, 197, 303n352, 340n532, 346 centrally-planned economy 20–22 chapeau test 343, 357, 363 charge on the public account 82, 153, 171, 191, 201, 249, 257, 274, 297, 313, 318, 376, 404, 405, 412, 427 China 65n73, 72n119, 82, 108n359, 122n463, 155, 156n24, 158, 257n85, 265, 324n459, 325–339, 381n186, 422, 423, 427 collateral 38, 40, 248n28, 265, 278, 279, 431 collective enterprises 45, 46, 292n288 commodity derivatives 399 commodity exchange 247n24, 249, 251, 256, 262, 264, 328, 396, 399 commodity intervention 251–253, 255, 261, 401, 424, 425, 432 Common Agricultural Policy (cap) 2, 15n58, 108, 173–178, 206–210, 224n118, 230n147

453 common external duty 94 Commonwealth of Independent States (cis) 4, 5, 23n21, 25, 27, 28, 30n62, 55,  74n130, 94n270, 112–114, 121, 137–145, 147, 149–151, 265n121, 341n534, 342n546, 373, 374n131, 387, 392, 432, 433 competition 1, 5, 9n14, 11, 13, 15, 20, 24, 35, 36, 38, 40–42, 44, 49, 63, 68, 79, 88, 90, 91, 93, 95n278, 98, 119, 160, 162, 168, 169n102, 172, 174, 178, 179, 181–190, 192, 196, 197, 206, 220, 264–267, 269, 301, 306, 311, 313, 325, 380n172, 395, 410, 413, 415, 416, 419, 420, 422, 426, 427, 432 conflict 3, 10n28, 31n68, 55, 60n36, 76, 100–106, 120, 128, 142–144, 148–151, 162, 163, 177, 188, 193n252, 203, 244, 271, 324, 357, 358, 433 conservation of exhaustible natural resources 359 contingency in fact 402 coupled aid 218 credit subsidies 15, 266, 267n133, 268–270, 277, 289n266, 290n274, 322, 344 critical shortage 354, 356, 357, 359, 360n59, 362, 363, 367, 372, 373, 383, 384, 387, 388 cross-compliance 219–222, 224, 226, 230, 232, 345, 346, 390 Current Total ams 70, 71n113, 80, 86n217 customs union (cu) 94, 95, 96n285, 97, 98, 99n296, 139n564, 140, 198 decoupled aid 80, 217, 223 decoupled income support 16, 76–77, 79n166, 217–219, 221, 227, 229, 231, 243, 277, 286, 296, 344, 345n556, 430n4 Deep and Comprehensive Free Trade Agreement (dcfta) 118–136, 143,  145–151, 205, 432, 433 deficiency payments 16n64, 77–79, 186, 188, 236–238, 240, 243, 281, 283–285 de minimis 73–75, 87, 89n233, 164, 172, 173n132, 186, 187, 189, 190, 196, 202, 204, 214, 245, 250n36, 269, 272n161, 275, 286, 289n270, 297, 300, 301, 309, 320, 323, 410 developing countries 1, 2, 6, 14, 15, 19, 37, 73–75, 79, 80, 82, 86, 87, 89–91, 96n283, 105, 245, 272, 291, 324, 325n460, 327, 340, 342n544, 350–354, 363–365, 371n118, 399, 409, 432

454 differential treatment 73, 87, 89–91, 200, 203, 229, 233, 245, 415 direct effect 33, 80, 166, 167, 177 direct payment 71, 73, 75–77, 87, 89, 90, 134, 178, 180, 183, 185, 206–208, 217–232, 233n167, 235, 241, 243, 246, 247, 270, 276, 281, 286n248, 288n263, 289, 296, 300, 302, 345, 346, 352n25, 401, 430, 431 direct price control 262–263 direct transfer of funds 153, 291n275, 321 disadvantageous region 160, 229 disguised restriction on international trade 361, 362 Dispute Settlement Body (dsb) 4, 56, 58, 59n29, 60n31, 64n64, 65, 66, 67n84, 68n96, 70n108, 76n143, 85n202, 97n286, 120, 122n463, 127, 145, 152n2, 153, 154, 156, 158, 159, 161, 162, 165, 191, 199, 200, 228, 269, 274, 295, 300n337, 304, 306, 320, 332, 333n500, 336, 355, 358–360, 366, 368, 370, 376n146, 405, 416 distortion 1, 8–11, 16, 68, 70, 77, 79, 80, 82, 87, 89, 168, 169, 186–188, 190, 210, 215, 220, 243, 269, 277, 278n194, 296, 313, 363, 374, 401, 432 Doha/Doha Development Agenda (dda)/ Doha Round 18n83, 85, 86n213, 87, 90,  92n255, 94, 99, 109, 208, 209, 342n544, 371–372, 398, 420, 430 domestic food stocks 396, 400 domestic processing 149, 349–351, 383, 391, 392, 407 domestic support commitments 69n97, 74–76, 84, 86, 198, 244–245 Draft Modalities for Agriculture/ Modalities 2008, 89–92, 111n381, 371, 372,  398, 399, 409n332, 415, 420, 421n405, 427, 430 economic integration 5, 23, 26, 55, 92n258, 93, 94, 95n274, 98–100, 104, 109, 120, 127, 128, 130, 137–140, 145, 148, 149, 151, 183, 204, 334, 400, 433 economic union 95, 138, 140, 145 eeu Treaty 140–142, 148, 150n623, 200n298, 201, 202n310, 203 effect on trade 168n98, 187, 272, 306 efta-Ukraine fta 35n102, 135–137, 148n614, 343

Index eligible hectares 220, 224, 230 endeavour clause 128 environment 1, 5, 9, 24, 25n32, 27, 29, 34, 38, 43, 107, 130, 132n524, 195, 222, 231, 245, 253, 264, 341n537, 342, 353, 378, 396, 426 equivalent effect 11, 374, 413 Equivalent Measurement of Support (ems) 69, 72 Eurasian Customs Union (ecu)/Eurasian Economic Union (eeu) 137n556, 139, 140 European Free Trade Association (efta) 4, 55, 135–137, 151, 197n281, 342 European Neighbourhood Policy (enp) 104n339, 114–120, 129 European Neighbourhood Programme for Agriculture & Rural Development (enpard) 117, 118 European Union (eu) 2, 67n87, 95n274, 118n437, 130, 132n525, 133n528, 166–190, 184n199, 187n215, 190n242, 206–347, 376n150, 410n334 eu-Ukraine Action Plan 117, 129 eu-Ukraine Association Agreement (eu-Ukraine aa) 4, 35n102, 54, 112n385,  195 evolutionary clause 106, 112, 128n493, 131 exclusive rights/special rights 414, 417, 419, 421–424, 426 export competition 5, 62n45, 63, 67n84, 68, 88, 90, 91, 160, 162, 306, 413, 415, 420, 432 export contingency 66, 162n61, 201, 260, 308, 376, 401, 402, 406, 407, 412, 413 export control 26, 38n125, 380, 418n377 export credit 65n77, 67, 90, 322, 408–413 export duties/export tax 38n125, 51, 113, 136, 142, 143, 255, 304, 348, 349, 354, 363–367, 368n103, 369, 370, 372–379, 383, 388–390, 392, 394, 395n257, 399, 404–407, 432 export-incentive measures 348, 400–414 export incentives 26, 411, 414 export quota 368, 371, 373, 374n138, 377n155, 378n161, 379, 383, 384, 386, 387, 388n222 export refund 216, 302–308, 419 export restraint/export restriction 349–372, 381–390, 395, 396, 399, 405, 432 export-restrictive measures 348, 370, 390, 428, 432

Index export subsidies 10, 61, 65–67, 72n122, 75n140, 82, 84n196, 85, 87, 88, 90, 91, 113, 144, 152n2, 158n37, 163, 165, 166, 187, 191n244, 198n289, 201–202, 204, 206, 215, 216, 243, 260, 306, 307, 400, 401, 404, 407, 408, 411, 413–415, 419n387, 420, 428, 432 externality 9, 13, 15, 17, 20, 29, 52, 53 external reference price 68n95, 71, 214n57, 253 extraterritoriality 157 extraterritorial support 335 farm income/farm-gate prices 15, 52, 222, 227, 228, 258, 261, 264, 290, 302, 303, 307, 308n369, 320, 336, 344–346, 348, 390 financial contribution 68, 70n109, 152–159, 166n85, 190, 191, 194, 204, 215, 216, 239, 240, 249, 257, 258, 274–276, 291n275, 295, 300, 307, 321, 336, 337, 368–370, 404, 408–410 financial intervention 250–255, 259, 261, 344, 425n418, 431 Fischler reform 208, 211, 217 Fixed Agricultural Tax (fat) 292–298, 301, 303, 309, 316–319, 320n439 food security 2, 9, 12, 14, 15, 17, 18, 30, 42, 87n224, 91, 107, 114, 118, 174, 194, 210, 250, 260, 261, 264, 289, 340, 348, 349n8, 350, 354, 378, 380, 383, 384, 397, 399, 400, 418, 419, 424n415, 429, 432 forward contract 252, 257, 258, 264 forward purchase 256–262, 283, 284n241, 322, 336, 422, 424 fragmentation 31, 38n122, 56n4, 93, 100–103, 106, 140, 314, 429 free trade agreement (fta) 4, 54, 94, 114, 138n560, 139n566, 197n282, 260n97, 376n150 fundamental requirement/trade-distortion criterion 70, 127, 222–223, 227 General Agreement on Tariffs and Trade (gatt) Art. iii of the gatt 253, 271, 299, 304n361, 320, 367, 412 Art. I of the gatt 64n64, 113, 330–332, 334, 358, 363, 364, 416, 431

455 Art. xiii of the gatt 64, 122, 123, 126, 357 Art. xi of the gatt 60, 98, 109, 127, 136, 263, 304, 334, 354–358, 362, 363, 366–368, 371, 372, 382, 412, 413 Art. X of the gatt 56 Art. xvii of the gatt 415–418, 420, 423–427 Art. xvi of the gatt 56, 61n39, 67, 152n1, 157, 158, 163, 198n289, 369 Art. XXIII:1(b) of the gatt 57, 102, 165, 334 Art. xxiv of the gatt 54, 95n276, 96–98, 102, 106, 126–128, 137, 149, 150, 199, 333, 356, 400 Art. xx of the gatt 127, 141, 333, 334, 343, 357–363, 367n96, 388–390, 417 Art. xxviii of the gatt 97n287, 122, 123 general exemptions/Art. xx of the gatt 358 general services 71, 241, 323n450, 344 Georgia 74, 118, 126, 147 grain pledge 247–250, 257, 266, 421, 424 green box 15n63, 69–71, 73, 74n131, 75, 76, 79, 80, 83n192, 84, 86–91, 160, 163–165, 180, 184n199, 207, 208, 209n19, 218, 220, 223, 224n118, 231, 233n167, 240, 243, 245n7, 250, 270, 272n160, 285, 286, 322–324, 345, 391, 430 gsp schemes 393 harmonisation/legal harmonisation 104– 106, 114, 128–134, 140, 150, 151, 187, 196, 199, 200, 240, 310, 316, 318, 319, 382 Health Check 15n58, 208, 226, 352n25 icsid Convention 338, 339 illustrative list 66, 201, 202, 304n359, 306, 307n368, 367, 408 import protection 27, 72n122, 125, 137, 144, 149, 151, 246, 291, 350n14, 394, 395 income redistribution 14, 71, 346, 419 income support 16, 76–77, 79n166, 87n226, 91, 175, 186, 208, 217–219, 221, 222, 225, 227, 229–231, 242, 243, 246, 257, 277, 286, 296, 344, 345n554, 352n25, 430 industrial subsidy 68, 162n62, 198n290, 199–201, 203, 263, 271, 275, 295 input subsidies 16, 71, 73, 218n83, 272–281, 285, 291

456 insurance 15, 42, 77–90, 188, 235–240, 242, 243, 245, 259, 278–286, 294, 322, 345, 348, 408–412, 414, 431 internal market/common market 81n181, 95, 108, 119, 168, 181n184, 184n199, 185, 187, 192, 197, 211, 349n9 international commodity agreements (icas) 396–398 International Grain Council (igc) 3n7, 339, 397, 422n407 international organisation 55, 81, 88, 106, 107, 131, 139, 166 international treaty 105, 115, 119, 141n577, 143, 193n252, 327, 373 intervention fund 251n45, 252, 256–258, 262, 263n110, 274, 322, 401 intervention period 212, 213 intervention price 207, 208, 211–214, 216, 217, 247, 248n27, 249, 251–254, 255n72, 257, 258, 261, 303, 322, 402n294 intervention stock 211n33, 214, 215n64, 216, 391, 401, 403 investment aid 79–80, 233–235, 243, 269, 270, 272, 276, 390 measure 240, 269, 272n160, 366–368 land cadastre 33, 34 Land Code 31, 32n81, 34, 35n101, 38n122, 40n138, 344 land grabbing 28, 38, 342 land market 28–30, 32n75, 33–38, 39n133, 40n136, 52, 53, 276–278, 341, 344, 431 land ownership/land property 14, 28n51, 30–33, 35–38, 45n164, 46, 227 land reform 5, 27–31, 37, 40, 346 Law on Grain and Grain Market/Law on Grain 42, 134n534, 252n50, 257n80,  275n177, 278n195, 279n202, 282, 372n123, 382, 386n214, 422, 424n415 Law on State Support for Agriculture/Law on State Support 42, 134, 194n259,  247, 248n26, 249n32, 250, 251n41–44, 252n49–52, 253n56–60, 256n73, 257n80, 261, 262n101, 263n111, 265n118, 266n125, 267n133, 269n143, 270n148, 271, 273n169, 275n177, 281–283, 293, 321n443, 383, 401, 423n410, 424n414, 425n418–420 lease market 29n55, 39, 48, 49, 276

Index leasing subsidies 270–272, 277, 323n449, 431 legalisation 55, 57, 60, 120, 137, 140, 151, 429 lex specialis 40–43, 55, 57, 102, 163, 167, 283n228, 372 liberalisation 12, 21–26, 33, 37, 38, 61, 62, 74n130, 80, 84, 85n202, 92–94, 96, 105n340, 106–108, 110, 111, 114, 119, 120, 128, 135–138, 151, 246, 263, 321, 325, 351n17, 353, 390, 428, 432 mandatory standards 195, 231, 382 market access 10, 11, 22, 63–65, 71, 82–85, 90, 106, 108, 111, 117, 122–126, 148, 151, 160, 166, 192, 198, 207n3, 325, 332, 335, 350, 407, 428, 433 market economy 20–22, 113n391, 128, 292 market failure 8–11, 13, 15, 17, 71, 236, 273, 282, 345n554, 380n172, 418 market infrastructure 23, 51, 53, 245, 309 marketing costs 407–408 market operator 169, 170, 191 market order 13, 206, 429, 430 market price support 15, 16, 71, 72, 77, 82, 83, 208, 217, 246n14, 251, 253, 255, 256, 276n188, 430 market regulation 13, 30, 38n122, 177, 181, 400, 418n377 market volatility/price volatility 12, 351n17, 352, 396 maximum price 253, 254, 255n68, 256, 259n92, 322 McSharry reform 207, 211, 213n51 measure (measure) “as applied” 58, 331, 381n184, 418 (measure) “as such” 58, 254, 361n62, 381n184, 418 Memorandum of Understanding (MoU) 129n502, 326–328, 331, 380n177 minimum price 253, 258, 397 mixed agreement 112, 118, 119n443 Moldova 28, 126, 138n559, 142n584, 145n601, 147 monocrop production 28n49, 52, 390 moral hazard 78, 79, 238, 268, 282, 283, 286 moratorium 28n51, 31, 34–36, 40, 317, 431

457

Index most-favoured nation principle (mfn) 59, 63, 64, 93n260, 95n280, 97, 103, 110, 122, 126, 137n553, 143, 144, 148n618, 149, 330, 331, 333, 334, 339, 343, 357, 358, 364, 415, 416n363, 423, 431 multifunctionality 16–19, 209, 217, 221 multilateral disciplines 16, 107, 143, 144, 251, 409, 420, 429 multilateral negotiations 88, 92, 96, 150, 167n90 multilateral rules 2, 3, 54, 205, 256, 309, 342, 429 Nairobi 91, 92n255, 400n287, 409, 420 natural disaster 78, 79, 186n208, 236–238, 240–242, 285, 286, 360n60 necessity 174n140, 232, 279, 301, 359n53, 363, 373, 384, 389, 400 new Member States (eu) 218, 225–230 non-discrimination 64, 141, 357, 358, 412n351, 415, 423, 424 non-members 4, 96, 103, 122n463, 143, 358 non-product specific ams 69, 71, 72, 74, 243, 268, 269, 272, 275, 285, 294, 297, 301n343, 302, 314n413, 318, 323, 323n453, 347 non-tariff barriers/non-tariff measures 63, 121, 135, 433 notification 60, 61n37, 69, 74n133, 75, 99, 127, 137n557, 145, 203, 214, 229, 232, 250, 268, 294, 334n504, 347, 355, 364, 371, 383, 384, 414, 417, 418, 421, 423, 430 Organisation for Economic Co-operation and Development (oecd) 14n55, 15n58,  16n69, 17, 18, 39n127, 47n180, 47n182, 51n213, 51n217, 78n160, 81–84, 111n377, 124, 245n10, 246n14, 255n71, 265n120, 267, 268n137, 277n191, 278n193, 289n267, 303n352, 324n456, 340n532, 342n543, 348n1, 364n76, 379n166, 391n236 other exempted measure 227 overall trade-distorting domestic support (otds) 86, 87n220, 89 Partnership and Co-operation Agreement (pca) 112–116, 122, 128–130, 133n526, 198,  310n379, 343, 425, 426n421

payments by virtue of governmental action 308, 404–407 peace clause/due restraint 88, 91, 125, 136, 161–166, 204, 409, 429 Pillar I (cap) 178, 206, 210–232, 243 Pillar ii (cap) 178, 206, 232–243 policy space 3, 5, 43, 55, 90, 95, 106, 107, 198n286, 200, 204, 216, 235, 244, 325, 339, 343, 358, 363, 365, 387, 395, 412–414, 417 price regulation 39, 179n171, 250, 251, 253n56, 322, 346, 369n107, 401n289, 407, 425n419 price spike 255, 351–353, 379, 391, 395, 396 private household 34n95, 44–46, 289n268, 301, 309 privatisation 21, 23n21, 24, 31, 32, 39, 48, 114, 345, 418, 421 Producer Support Estimate (pse) 81–84, 323–324n456 production costs 9, 49–51, 53, 108, 158n37, 246, 248, 259, 277, 278, 294, 379, 388, 393 product-specific ams 74n133, 216, 247, 250, 269, 275, 279, 286, 289n270, 300n340, 323 property rights 15, 21n11, 22, 23n21, 24, 27–29, 32–34, 36, 276, 278, 372n119 proportionality 10n27, 256, 343, 350n13, 362, 363, 371, 387, 392, 412 protectionism 12, 373 provisional price administration 255–256 public body 72n119, 155–157, 168n96, 170, 257n85, 274, 328, 336, 409, 424, 425 public goods 7n1, 9n14, 15n62, 17, 209, 230, 346 public intervention 134, 158, 169n103, 208, 211, 212n38, 213–217, 243, 250, 257, 392, 430, 431 public stockholding 18, 71, 75, 158, 250, 260 public undertaking 172n124, 426, 427 Punta del Este declaration 61, 62n45, 160 quantitative restrictions 64, 158, 349, 384, 392, 397, 412 quasi income support 246, 265–286 recently acceded members 65, 74, 89 reference price 121n457, 211–213, 215, 276

458 reference threshold 212, 213, 214n57 regional trade agreements (rtas) 2–5, 54, 92–151, 205, 348n1, 356–358, 362, 370, 373, 432, 433 reimbursement of vat 113, 154, 274, 298, 302–304, 306–308 rent-seeking 15, 65, 308, 377, 383n190 requirement on production 80n177, 224, 231, 297, 318, 345, 346 restructuring 21, 25n33, 26n37, 29, 32, 39, 80, 114, 180, 227, 272 revenue foregone by governments 70, 72, 291, 297, 309, 315 revenue “otherwise due” 154, 275, 299, 321n442 risk management 77, 79, 196, 220, 231, 235–243, 264, 281, 286n250 rules of origin 94, 144, 150 rural development 105n345, 117, 118n433, 129, 131, 178, 180, 183, 184n199, 188, 189, 207, 208, 210, 225n121, 231–233, 245, 294, 321, 343, 346, 430 Russia 1, 26n40, 28, 59n26, 65n73, 74, 82, 96n285, 112n386, 114, 138n559, 139, 140, 142, 143, 145–147, 148n618, 150, 200, 245n7, 288, 324, 350n10, 352n22, 374n133, 380, 387, 393n246, 398, 399 safeguard mechanism 92n255, 108n361, 144, 395 selectivity 168, 172–173, 185, 186, 192, 220, 288–290, 313, 314, 317, 318 self-contained regime 55, 56 shallow integration 119, 135, 151, 432 shared competence/exclusive competence 177, 178 Single Area Payment Scheme (saps) 225–230, 228n146 Single common market organisation (cmo) 178, 179, 184, 185, 209, 211, 216, 243 Single Farm Payment 218–228, 230 small and mid-size enterprises (smes) 44n158, 46, 188, 195, 196, 233, 234,  238, 241, 265, 319, 410–412, 414 soft law 42, 104, 106n349, 114–118, 128, 129n502, 130, 181n185, 310, 316, 372, 380, 397 specificity 4, 11–18, 62, 76, 110, 153, 159, 160, 164, 165n79, 168, 174, 192, 193n256, 248n30, 288n262, 295, 346

Index sps measures 116, 117, 119, 130n508, 133, 141, 143, 146, 150, 329, 359 standards 24, 59n25, 88, 114, 116–118, 121, 128, 131, 132, 133n528, 134, 141n576, 147, 150, 192, 195, 222n109, 231, 329n480, 382, 390, 393, 399, 410, 419 state aid/state aid control 8n10, 9n20, 10n28, 81n181, 114, 117, 128, 134n532, 167–192, 194–200, 203–205, 220, 221, 223, 233n171, 234, 238, 239, 241, 288, 289, 310–314, 316–318, 322, 370, 410, 413, 427, 429, 430 State Grain and Food Corporation of Ukraine (gcu) 328 state origin of resources/state resources 168, 170, 171, 182, 190, 215, 313, 317, 331 state reserve 252, 424 state support 7–19, 41, 42, 44, 46, 134, 170, 194, 244–347, 383, 401, 431 state-trading enterprises (stes)/state trading 67, 90, 399n284, 413–428, 432 structural disadvantage 80, 229, 234, 235, 269, 272 subsidiarity 96, 173 subsidy 5, 7–11, 41, 43, 59, 61, 66–68, 69n101, 70n107, 71–73, 76, 81n179, 83, 107, 136, 144, 152–205, 215–217, 222, 239, 240, 242, 248, 249, 257, 263, 266, 267n133, 270, 274–277, 279n209, 281, 288n262, 289n270, 295–297, 300, 307, 312, 314, 326, 335–337, 368–370, 375, 376, 401–404, 408, 410, 412, 413, 415, 2602 substantially all trade 97, 98, 109, 126, 127, 137, 148, 199, 356 sustainability 16, 17, 19, 52–53, 235 tariff escalation 90, 124, 325n461, 349, 350, 393, 394 tariffication 63, 365, 381 tariff quota/trq 63n53, 64, 65, 91, 107, 110, 111, 121–127, 136, 151, 330, 357, 432 taxation 7, 10, 13n45, 154n12, 156, 195, 246, 291–293, 295–302, 305, 307, 309–320, 325, 345, 367, 379, 393n242, 395, 414, 419 tendering procedure 213, 215, 217 Total Aggregate Measurement of Support (Total ams) 69–73, 80, 87, 89n233 trade distortion 16, 76, 78, 80, 90, 165, 181, 184, 232, 234, 241, 268, 272, 296, 391, 419 trade facilitation 97 trade policy review 67n87, 348

Index trade-related investment measures (trims) 4, 35n102, 304–306, 342–344,  366–368, 370 transaction costs 15, 20, 52, 94, 248, 264, 278, 289n266 transfer pricing 312, 316, 317 transition 3, 5, 18n81, 20–40, 46n178, 47, 50, 53, 74n134, 83, 98, 112, 113n391, 121, 124, 126, 129, 136, 137, 138n563, 155, 173n135, 179n165, 225–227, 230, 245, 291, 292, 299n336, 303n353, 305, 341, 346, 377n150, 396n266, 398n283, 409n332, 410n337, 431 transparency 13n49, 56, 59, 99, 100, 172n124, 188, 261, 311, 316, 324, 342–344, 412n351, 414, 420n397, 426 Treaty on Functioning of the European Union (tfeu) Art. 39 of the tfeu 174–179, 182, 189, 430 Art. 42 of the tfeu 182, 183 Art. 107 of the tfeu 167–169, 171, 172, 182–186, 189–191, 194, 195, 198, 215, 223, 237, 312–314, 430 Uruguay Round 61–63, 67, 68, 152, 161n52, 167n90, 207, 325n460, 381, 415n356, 429 ussr 3, 20n4, 25–27, 30, 53, 112, 292n287

459 vat Directive 195, 310n381, 314–316, 318–319 vat exemption 154, 298n324, 300, 305–308, 319 vat export refund/vat reimbursement 113, 154, 274, 298, 302–308 vat scheme/vat regime 291, 297–309, 315–319, 347 Vienna Convention on the Law of Treaties (vclt) 56n4, 57, 62n49, 96, 100, 102,  103, 106, 144n594, 162, 177, 199, 200n294, 326n464, 327, 426 voluntary export restraints 381 warehouse certificate 278, 279 World Bank 2n4, 28n50, 33, 39n127, 74, 245, 340, 399n284, 410, 419n389 World Trade Organisation (wto) 2, 35n98, 88n230, 153n5, 190n242, 193n253, 365n83, 412n346 wto Agreement 5, 16n64, 61, 62, 67n86, 99, 106, 112n389, 143, 144, 157n32, 161, 162, 177, 200n294, 342, 351n17, 365, 366, 376, 381n182, 420 Art. XVI:4 of the wto Agreement 56– 58, 59n25 wto-plus obligation 365