On 27 June 2014, Georgia, the Republic of Moldova (hereinafter referred to as ‘Moldova’) and Ukraine signed Association Agreements (AA) with the European Union. These agreements are fully in force since 1 July 2016 with Georgia and Moldova and since 1 September 2017 with Ukraine. While constituting the basis for political association and economic integration of the Partner Countries with the EU, they aim at fostering economic development, long-term stability, transparency and predictability for businesses. The Association Agreements also provide for establishment of the Deep and Comprehensive Free Trade Areas (DCFTAs), which – through the gradual removal of tariff, non-tariff and regulatory barriers - will create new opportunities for economic cooperation and trade, notably for small and medium sized enterprises (SMEs), boost foreign direct investments, enhance economic modernization and contribute to creation of new jobs in the three countries.
What are the DCFTAs?
The Deep and Comprehensive Free Trade Areas being created on the basis of Association Agreements with 3 Eastern neighbours are more ambitious in terms of bilateral commitments than traditional free trade agreements (FTAs) concluded by the EU so far. This is due to the depth and comprehensiveness of bilateral commitments which foresee gradual economic integration of Georgia, Moldova and Ukraine with the EU's internal market.
The trade and trade-related commitments have a ‘deep and comprehensive’ character which means that – in terms of market access - they aim at reciprocal liberalization of substantially all trade in goods, opening markets for providers of services (non-discrimination and national treatment) as well as for companies wanting to take part in public procurement tenders. In practical terms it means that customs duties paid by importers of industrial and agricultural goods are gradually removed or reduced (in principle faster on the EU side - in accordance with the asymmetry approach) and non-tariff barriers are eliminated. In order to facilitate and effectively benefit from opening of the big EU internal market the DCFTA Partners decided to embark on regulatory approximation with the EU law in trade-related areas like: technical regulations and standards, sanitary and phytosanitary measures, customs and trade facilitation, intellectual property rights, competition, telecommunication services, postal and courier services, financial and international maritime transport services.
Simultaneously, cognisant of the impact which their respective regulatory environment may have on trade between them, the Parties committed to establish and maintain an effective and predictable regulatory environment for economic operators doing business in their territory, especially small ones, due account being taken of the requirements of legal certainty and proportionality.
In the context of economic integration, it should also be recalled that apart from the DCFTA parts there are also specific Titles of the Association Agreements which concern economic and sectoral cooperation between the partners. It goes without saying that their provisions supplement and enhance cooperation in several areas important for businesses. To this end Georgia, Moldova and Ukraine extended there their regulatory approximation commitments to environmental protection, transport, accounting and auditing, consumer protection, employment, social policy and equal opportunities. Moreover, the Parties shall develop and strengthen their cooperation on industrial and enterprise policy, thereby improving the business environment for all economic operators, but with particular emphasis on SMEs.
Having said this, the Association Agreements with their DCFTAs will positively impact the business environment and regulatory framework within each Partner Country. The latter will affect not only exporters to the EU, but also the companies operating locally to the extent that they will have a chance to enjoy transparency of regulations, fair competition and – in general more friendly investment and business climate.
With the DCFTA, Georgia, Moldova and Ukraine receive preferential access to the largest market in the world (governed by single rules) with 500 million consumers and a GDP of €14 trillion, as well as greater opportunities to export to regional and global markets.
The gradual phasing out of existing customs tariffs, non-tariff and regulatory barriers will boost bilateral trade and hence increase the variety, quality and safety of available products and services, enhance competition on the market which should contribute to lower prices for consumers, improve business climate, attract investors while ensuring higher levels of social, environmental and consumer protection. It will also provide stable and more predictable rules for business operation, notably for SMEs.
For EU companies, the DCFTA will offer – in terms of liberalization of tariffs and regulatory convergence - easier market access for goods and services, increase investment opportunities, new potential suppliers and outsourcing opportunities.
In simple terms, the DCFTA means:
- Duty-free trade
- Less red tape
- Transparent conditions for business operations
- Fair competition
- Opportunities for service providers
- Investment opportunities
- Sourcing opportunities
Do you know?
- Following the application of the Association Agreements/DCFTAs:
- EU imports from the Republic of Moldova increased by 5.5% in 2015 and by 7.7% in 2016. Moldova’s trade has also shifted towards the EU. Around two thirds (66%) of Moldova's exports went to the EU in 2016, followed by Russia (12%) and Belarus (5%).
- EU imports from Georgia increased by 12% in 2015 but decreased by 25% in 2016 [the decrease is nominal, driven by changes in the prices of Georgia’s exports of raw materials]. In 2016 the EU was Georgia's key partner, with 30% share in its total trade (27% before the entry into force of the DCFTA), followed by Canada (15%), Turkey (13%), Russia (7%).
- EU imports from Ukraine experienced a recovery in 2016 as they increased by 1.9% in 2016 following a decrease by 6.5% in 2015 due to a difficult economic situation in Ukraine. The EU is by far Ukraine's first trading partner with the share of around 41% in its total trade (about 44% in Ukraine’s total imports and 38% in its total exports). Russia is the second partner representing about 11.4% of Ukraine's total trade.
- Exports from Georgia to the EU rose by 12% in the first six months of the DCFTA, while exports of some Georgian products, like hazelnuts, copper, or petroleum oils, doubled or even tripled in that time. The DCFTA as a whole is expected to boost GDP by 4.3% annually (€292 million in national income), provided reforms are completed.
- In the first six months of the DCFTA, the EU imported nearly 15,000 tonnes of sugar from Moldova, a rise of 350% compared to the corresponding period the year before. As an overall result of the DCFTA, national income is estimated to rise by around €142 million, i.e. 5.4% of the country’s GDP, while exports to the EU are expected to increase by as much as 16%.
- In Ukraine, exporters are expected to save €487 million annually due to reduced EU import duties. At the same time, Ukrainian companies will improve their competitive position, by getting the opportunity to import advanced capital goods at relatively lower prices.
DCFTA Facility for SMEs
The implementation of the DCFTA commitments imply certain costs of reforms and adjustments to be financed by public authorities (e.g. as concerns legal changes and administrative capacity building e.g. of veterinary and phytosanitary inspections, the bodies assessing the conformity of industrial products with safety requirements, agencies implementing and monitoring the competition rules, supervisory bodies in services sectors etc.
Simultaneously, business operators have to adapt to the new rules and standards stemming from the regulatory approximation to the EU law as foreseen by the DCFTAs. These adaptations and necessary investments may be particularly challenging for SMEs, which will need extra skills and more financial resources.
In order to seize new trade opportunities, SMEs need not only to increase their competitiveness, but also to comply with new food safety, technical and quality standards implied by DCFTAs implementation, as well as with certain measures foreseen in economic and sectoral cooperation part of the Association Agreements, like environmental protection, employment and social policy measures.
To reply to these needs, the European Commission (EC) – jointly with the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD) and KfW Development Bank (KfW) – has put in place the DCFTA Facility for SMEs.
The DCFTA Facility will receive approximately €200 million of grants from the EU budget to unlock at least €2 billion of new investments by SMEs in Georgia, Moldova and Ukraine, to be financed largely by new loans supported by the Facility.
The funding will:
- Help SMEs to seize new trade opportunities with the EU and within the region, which have been opened up thanks to the DCFTAs;
- Improve access to finance for SMEs, enabling them to make the necessary investments to increase their competitiveness;
- Allow SMEs to integrate into global value chains by becoming business partners of foreign direct investors;
- Enable SMEs to comply with new sanitary, phytosanitary, technical and quality standards, as well as with environmental protection measures.
At present, the DCFTA Facility consists of the following set of EU supported programmes:
- EBRD DCFTA Direct Facility
- EBRD Advice for Small Business
- EBRD DCFTA Facilitation Programme
- EBRD SME Finance Facility Phase II
- EIB DCFTA Initiative East
- EIB SME Finance Facility Phase II
- KfW SME Finance Facility Phase II
 Source : Eurostat