EUROPEAN COMMISSION Brussels, 9.11.2017 SWD(2017) 364 final COMMISSION STAFF WORKING DOCUMENT Country reports and info sheets on implementation of EU Free Trade Agreements Accompanying the document Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions

on Implementation of Free Trade Agreements



1 January 2016 - 31 December 2016 {COM(2017) 654 final}



Country reports and info sheets on implementation of EU Free Trade Agreements Table of Contents Georgia 2 Moldova 14 Ukraine 29 Chile 47 Mexico 53 Norway 57 Serbia 62 South Africa 66 Switzerland 70 Turkey 75 Algeria 79 Egypt 83 Israel 87 Jordan 91 Lebanon 95 Morocco 100 Palestine 104 Tunisia 108 Cariforum 113 Cameroon 121 Eastern and Southern Africa 125 Pacific 132



ANNUAL REPORT ON THE IMPLEMENTATION OF THE DEEP AND COMPREHENSIVE FREE TRADE AREA (DCFTA) BETWEEN THE EU AND GEORGIA 1. INTRODUCTION On 27 June 2014 the European Union and Georgia signed an ambitious Association Agreement (AA), including a Deep and Comprehensive Free Trade Area (DCFTA). Following the completion of the ratification process, the Association Agreement entered into force on 1 July 2016 after being applied on provisional basis since 1 September 2014. In the preamble of the Association Agreement the EU has acknowledged the European aspirations and European choice of Georgia and welcomed its European choice. Simultaneously both partners take into account that the AA will not prejudice and leaves open, the way for future progressive developments in EU-Georgia relations. The AA aims at closer political association and economic integration of Georgia with the EU, in particular through the DCFTA which includes commitments on regulatory approximation in trade-related areas, and in compliance with the rights and obligations arising out of the WTO membership. This process is based on shared values i.e. respect for democracy and the rule of law, human rights and fundamental freedoms as well as market economy. The general objective of the Agreement is to contribute to political, socio-economic and institutional development of Georgia through wide-ranging cooperation in many areas of common interest e.g. development of civil society, good governance, trade integration, sustainable development, enhanced economic cooperation (including in energy and transport sectors), institution building and fight against corruption. Both Parties believe that fulfilment of these objectives will create a new climate for economic relations, for the development of trade and investment, stimulate competition, and hence contribute to economic restructuring and modernization of Georgia. The Deep and Comprehensive Free Trade Area, (Title IV of the Association Agreement), consists of two main components: 1) Reciprocal commitments on market access opening through elimination of import and export tariffs and non-tariff barriers in bilateral trade; 2) Progressive approximation of Georgia's legislation with the EU laws in the relevant sectors, including trade-related areas and notably those which effectively contribute (e.g. EU compliant technical regulations, sanitary and phytosanitary measures) to benefiting from opportunities created by trade liberalization. The regulatory obligations commit Georgia to ensure the effective implementation of the domestic law approximated under DCFTA and to undertake any action needed to reflect the developments in EU law in its domestic legislation (the concept of the so called dynamic approximation). Therefore the EU committed itself to inform Georgian authorities about any final European Commission proposals to adopt or amend Union law relevant to Georgia's approximation obligations. Since the provisional application of the DCFTA the amendments/updates have been introduced in the Association Agreement annexes containing: 1) List of EU agricultural products and foodstuffs other than wine and spirits to be protected in Georgia (Annex XVII-C) and List of spirit drinks of the EU to be protected in Georgia (part B of Annex XVII-D); 2) List of the EU sanitary, phytosanitary (SPS) and animal welfare acquis (Annex XI-B) to which Georgia intends to approximate its domestic legislation. This jointly agreed SPS roadmap is to serve as a reference document for the implementation of SPS Chapter of the DCFTA. This is the first report on the implementation of the EU-Georgia DCFTA prepared as part of the annual Report on implementation of FTAs concluded by the EU. Moreover, it responds to the requirements of the Regulation implementing the anti-circumvention mechanism provided for in the EU-Georgia Association Agreement. Apart from the presentation of the statistics on evolution of EU-Georgia trade, the report gives an overview of the implementation of the DCFTA in terms of approximation in trade-related areas and activities of the specific Association Committee in Trade configuration as well as supporting Sub-Committees established in order to monitor a progress in implementation of the trade part (Title IV) of the Association Agreement. Those committees meet at least once a year.

2. METHODOLOGY USED FOR THE ANALYSIS The analysis, based on the Eurostat statistics on trade in goods, covers two years of DCFTA implementation i.e. 2015-2016 and presents the comparison of data with 2014 - the year preceding the provisional application of the trade part of AA which started on 1 September 2014. As regards trade in services, the analysis is based on annual data 2013-2015. It should be noted however, that the observed trade flows dynamics cannot be attributed solely to the DCFTA implementation, as also other internal and external factors may influence bilateral trade. The summary of the activities of the association bodies covers the calendar year 2016. 3. EVOLUTION OF TRADE (YEAR-TO-YEAR AND SINCE THE START OF PROVISIONAL APPLICATION) 3.1. Trade in Goods 3.1.1. The scope of trade liberalization At the start of provisional application of the DCFTA on 1 September 2014 both partners eliminated import duties for all goods with few exceptions on the European Union side, related to sensitive agriculture products. Nevertheless market access for these products has been improved. To this end the fresh or chilled garlic originating from Georgia has been covered by the annual duty-free tariff rate quota (TRQ) and for 28 agricultural products (including fresh and chilled fruits and vegetables) that are subject to entry prices, the ad valorem component of the import duty has been exempted by the EU. The anti-circumvention mechanism is applied to several agricultural goods i.e. beef, pork, sheep and poultry meat, dairy products, eggs and albumins, mushrooms, cereals, malt, starches and sugars as well as to processed agricultural products such as: sweetcorn, processed sugars and cereals and cigarettes. Both Parties agreed on a review clause i.e. that after five years from the entry into force of the DCFTA, they would consult (if there is a request from either party) to consider broadening the scope of the liberalization of customs duties in bilateral trade. 3.1.2. Overall evolution of trade in goods in 2014-2016 In accordance with 2016 Eurostat data, the EU is the most important trade partner of Georgia with 30% share in its overall trade (27% in total export and 31% imports). In terms of share in total Georgian exports, the EU is followed by Canada (15%), Turkey (13%), Russia (7%), China (6%) and Azerbaijan (5.5%). Georgia is the EU's 77th trade partner and accounts for only 0.1% of its total trade. In 2016 the overall trade between the EU and Georgia slightly declined on year-on-year-basis by 2% and amounted to EUR 2.51 billion. EU exports to Georgia increased in that time by 6.7% (by 3% since 2014 i.e. from EUR 1.91 billion to 1.96 billion) while EU imports from Georgia noted a decline of 25% compared to 2015 (by16% between 2014 and 2016 (from EUR 659 million to 551 million). Considering the fact that the structure of Georgian exports is dominated by raw materials and semi-finished products, the world prices of which tend to fluctuate, the price drop for a number of commodities at world level is one of the main causes of declining value of exports from Georgia to the EU, whereas in volume terms the level of exports remained stable. This nominal decrease was driven by a drop in prices of exported mineral fuels (-81%), nuts (-8%), fertilizers (-60%), and mining products (-4%). These four products account for almost 60% of total Georgian export to the EU. The EU trade surplus with Georgia has grown slightly since 2014, from EUR 1.25 billion to 1.4 billion. Table 1: EU trade in goods with Georgia, 2014-2016 (million EUR) EU trade with Georgia 2014 2015 % change 2015/2014 2016 % change 2016/2015 % change 2016/2014 EU Exports 1,910 1,840 3.7 1,964 6.7 2.8 EU Imports 659 736 11.7 551 -25.2 -16.4 Total trade 2,569 2,576 0.2 2,515 -2.4 -2.2 Trade balance +1,251 +1,104 - +1,413 - 12.9 Source: Eurostat COMEXT. In terms of presented statistics, it should be noted that a relatively short period of DCFTA implementation does not allow drawing thorough conclusions on trade dynamics and their sustainability. The results of the free trade area are to be seen rather in mid-term period and once approximation of Georgian legislation progresses. The timeline for the latter has been back-loaded by Georgia in the negotiation process to the extent that basically approximation intensifies in 2017 and will be continued e.g. until 2022 in TBT area or even until 2027 as concerns certain veterinary measures, plant protection and food safety. 3.1.3. The structure of the EU-Georgia trade As concerns the structure of EU exports to Georgia (2016), the most important product categories (by Sections of the Harmonized System Nomenclature – HS) are: machinery and appliances, mineral and chemical products. The observed shares and dynamics on year-on-year basis were as follows: Machinery and appliances (Section XVI) amounted to 22% of overall EU exports to Georgia and increased by 22%; Mineral products (Section V) - 18%, similar levels in 2016 compared to 2015; Products of chemical or allied industries (Section VI) - 17%, increase by 15% year-on-year (pharmaceutical products represented the largest proportion of EU exports to Georgia in this category, accounting for 11.8%, an increase of 17% compared to 2015). Other products categories that showed an increase in EU exports are Transport equipment (Section XVII), Optical, photographic and precision instruments (Section XVIII), Miscellaneous manufactured articles including furniture and toys (Section XX). In terms of structure of EU imports from Georgia (2016), the most important product categories are: mineral products, fruits and vegetables (notably nuts) and chemical goods. The following shares and dynamics on year-on-year basis were observed: Mineral products (Section V) accounted for 31.3% of the total EU imports from Georgia and decreased by 48% year-on-year (due to a sharp decline in EU imports of mineral fuels); Vegetable products (Section II) - 24.2%; a decrease by 7% (by far the largest sub-categories of imported products were edible fruits and nuts accounting for 23.2% of the total EU imports from Georgia); Products of chemical or allied industries" (Section VI) - 9.2%; a decrease by 49% compared to 2015, mostly due to a drop in imports of fertilisers by the EU); Prepared foodstuffs, beverages, spirits and vinegar (Section IV) - 8.6%; an increase of 13% compared to 2015. Other categories of products that have shown an increase in EU imports from Georgia are Precious stones and metals (Section XIV), Base metals and articles thereof (Section XV). It should be underlined that throughout the first two years of DCFTA implementation some new products started to be exported from Georgia to the EU, e.g. kiwi and blue berries. This shows a potential of the DCFTA to attract new product categories to be commercialized on the markets of both Parties. 3.2. Establishment, trade in services and investments

3.2.1. Market access related to establishment and trade in services In the DCFTA the EU and Georgia laid down the necessary arrangements for the progressive reciprocal liberalization of establishment and trade in services and for cooperation on electronic commerce. Both Partners made commitment on freedom of establishment as from the start of DCFTA provisional application by granting each other national treatment and most favoured-nation treatment (subject to several reservations specified by EU Member States and few reservations by Georgia) as well as liberalization of cross-border supply of services (by granting each other national treatment with several limitations and reservations on both sides). In four services sectors (postal and courier services, telecommunication, financial services and international maritime transport services) Georgia recognized the importance of gradual approximation (lasting between 4-8 years) of its existing and future legislation to the list of the EU acquis (in case of financial services also to the international best practice and standards). Further market opening in those sectors is conditioned upon Georgia fulfilling its commitments of gradual regulatory approximation (timeframe up to 2022). The EU and Georgia also agreed on a review clause with a view to liberalizing establishment (regular review), cross-border supply of services (regular review) and capital movement (by the end of the fifth year following the date of the entry into force of the DCFTA). This review shall take into account, inter alia, the process of gradual approximation foreseen in the DCFTA and its impact on the elimination of remaining obstacles to cross border supply of services between the parties. 3.2.2. EU trade in services with Georgia In general, trade in services between the EU and Georgia has more than doubled between 2006 and 2014, both in terms of imports and exports. In 2014-2015 the total trade in services between both Partners amounted to EUR 0.9 billion and basically stayed on the same levels in case of EU exports and imports (see Table 2). Table 2: EU trade in services with Georgia, 2013-2015 (billion EUR) EU trade with Georgia 2013 2014 % change 2014/2013 2015 % change 2015/2014 EU exports 0.5 0.6 20.0 0.6 0.0 EU imports 0.3 0.3 0.0 0.3 0.0 Total trade 0.8 0.9 12.5 0.9 0.0 Trade balance +0.2 +0.3 - +0.3 - Source: European Commission, DG Trade. The structure of exports of services by Georgia to the world is dominated by travel and transport services, in imports the most important sectors are transport, travel, insurance and pension services as well other business services. 3.2.3. EU foreign investment with Georgia In 2015 foreign direct investments (FDI) stocks in Georgia originating from the EU (see Table 3) accounted for EUR 3.6 billion (a slight decrease compared to 2014). Inward FDI in that year amounted to EUR 101 million and were at lower level than in 2014 when they reached EUR 197 million. Top EU Member States investing in Georgia are: the Netherlands, United Kingdom, Luxembourg and France. Table 3: EU foreign direct investment with Georgia, 2014-2015 (billion EUR) Foreign direct investment stocks 2013 2014 2015 Georgia in EU28 (inward) 0.1 0.1 0.1 EU28 in Georgia (outward) 2.9 3.8 3.6 Stocks: balance 2.8 3.7 3.5 Foreign direct investment flows 2013 2014 2015 Georgia into EU28 (inward) -0.0 0.0 -0.0 EU28 into Georgia (outward) 0.1 0.2 0.1 Flows: balance 0.1 0.2 0.2 Source: European Commission, DG Trade. According to data provided both by the EU and the Georgia, the main sectors chosen by EU investors are: telecommunications, transport, infrastructure and manufacturing. The above statistics show that positive impact of the DCFTA on attracting more investments from the EU is still ahead of Georgia. 3.3. Market access in public procurement The DCFTA envisages mutual access to public procurement markets on the basis of the principle of national treatment at national, regional and local level for public contracts and concessions in the traditional sectors as well as in the utilities sector. It provides for the progressive approximation (in 5 phases up to 2022) of the public procurement legislation in Georgia with the EU public procurement acquis, accompanied with an institutional reform and the creation of an efficient public procurement system based on the principles governing public procurement in the EU. The implementation of each phase shall be evaluated by the Association Committee in Trade configuration and, following a positive assessment, will allow the reciprocal market opening as set out in Annex XVI-B to the AA. After the completion of the first phase which has been foreseen for 2017, both sides may seek to grant the access to their markets for supplies for central government authorities. 3.4. Trade preferences utilisation rate The preference utilization rate (PUR) on imports into the EU from Georgia amounted to 78% in 2014, reaching 83% in 2015 and 80% in 2016. At HS Section level, the highest overall PURs are found in Animal and vegetable fats and oils (Section III) at 100%, Vegetable products (Section II) at 99%, Articles of stone, plaster, cement, asbestos (Section XIII) at 98%, Chemical products (Section VI) at 89% and Prepared foodstuffs, beverages, spirits and vinegar (Section IV) at 89%.

3.5. Utilization of the annual duty-free tariff rate quotas In 2015 and 2016 the EU annual duty-free TRQ of 220 tonnes for Georgian fresh & chilled garlic (Annex II-A of the Association Agreement) was not used, mainly due to marketing reasons. 4. ACTIVITIES OF THE IMPLEMENTATION BODIES The main body under institutional framework of the EU-Georgia Association Agreement is the Association Council (at ministerial level) which is supported by the Association Committee (at senior official level) in the supervising and monitoring of the application and implementation of AA. Due to the importance of the Title IV on Trade and Trade Related Matters of the AA (i.e. DCFTA) a dedicated Association Committee in Trade configuration (ACTC) has also been established. The ACTC is assisted by four specialised Sub-Committees at experts' level: (1) the Sanitary and Phytosanitary Sub-Committee; (2) the Customs Sub-Committee; (3) the Geographical Indications Sub-Committee; and (4) the Trade and Sustainable Development Sub-Committee. The 3rd meeting of the EU-Georgia Association Committee in Trade configuration was held on 1 December 2016 in Brussels, and preceded the 3rd EU-Georgia Association Council held on 2 December 2016. The meeting provided an opportunity to review all issues related to the comprehensive, timely and inclusive implementation of the EU-Georgia DCFTA. Both Parties reviewed progress made in all DCFTA Chapters, including trade in goods, sanitary and phytosanitary measures, intellectual property rights, customs and trade facilitation, technical barriers to trade, public procurement, establishment, trade in services and electronic commerce, trade-related energy, competition, trade and sustainable development. The Committee assessed the development of bilateral trade after two years of implementation of the DCFTA. The Georgian side expressed concerns about their trade deficit with the EU and declining trade trends in 2016. The latter were related inter alia to decreasing world prices for commodities and did not impact the volumes traded between Parties. Both Partners raised their respective concerns related to the implementation of the commitments on approximation with the EU law in particular in the area of sanitary and phytosanitary measures, technical barriers to trade, intellectual property rights and instructed the specialized Sub-Committees to continue to seek solutions. Both sides underlined the importance of EU financial and technical assistance in the implementation of the DCFTA, notably projects aimed at supporting both the Georgian administration and the SMEs to align with the acquis and reap the benefits from the Agreement. The 2nd Customs Sub-Committee met in Batumi on 20 April 2016. The discussion focused on: the legislative and policy developments, including Georgia's progress report on the implementation of DCFTA customs provisions, information about initiatives in strengthening the fight against terrorism financing to be shared by the Parties; strategic framework for EU-Georgia Customs Cooperation; Georgia's prospects for accession to the Convention on a Common Transit Procedure; risk management and fight against fraud; rules of origin; customs enforcement of intellectual property rights. The 2nd Geographical Indications (GIs) Sub-Committee took place in Brussels on 10 November 2016. The committee discussed updates of the lists of EU Geographical Indications for agricultural products and foodstuffs, wines, spirit drinks and aromatized wines. During the meeting the Parties adopted a Decision amending Annex XVII-C (list of EU agricultural products and foodstuffs other than wine and spirits to be protected in Georgia) and part B of Annex XVII-D (list of spirit drinks of the EU to be protected in Georgia) of the DCFTA. The provisions on exchange of information on all the updates on EU as well as Georgian GIs (new ones, removals from the list, modifications) were also discussed in view of the need for each Party to have the possibility to run objection procedures for the new names and for any other procedures necessary for the next update of GI Annexes to the DCFTA. The 1st Trade and Sustainable Development (TSD) Sub-Committee took place on 30 November 2016. The discussions highlighted the importance of the TSD chapter implementation also for the non-governmental stakeholders and civil society. EU underlined that the process of implementation of the free trade agreements taking care about sustainable development and inclusiveness belong to its trade policy, notably due to a growing political and public perception of the importance of the environmental and labour provisions in EU agreements. The meeting was also an occasion to note Georgia's progress in implementing the fundamental International Labour Organisation (ILO) conventions, to welcome cooperation by both Parties on sustainable development and in particular on environmental aspects and encourage Georgia to ratify the Paris Agreement on Climate Change. The 2nd Sanitary and Phytosanitary Sub-Committee met in Tbilisi on 7 March 2017. Both Parties signed a decision to modify Annex XI-B of the DCFTA to include the list of EU sanitary, phytosanitary and animal welfare legislative measures to which Georgia decided to approximate its domestic legislation. The approximation list is to serve as a reference document for the implementation of Chapter 4 Sanitary and Phytosanitary Measures of Title IV of the Association Agreement. The discussion also focused on: progress in reforms in the SPS area and a timeframe for legislative approximation submitted by Georgian authorities (including a timetable for preparing the tables of correspondence for already approximated legislation); improvement in the food safety control system and animal health situation, in particular the strengthening of the National Food Agency's (NFA) role in ensuring overall food safety; as well as on a potential of Georgia in exports of goods to foreign markets. 5. IMPLEMENTATION OF THE PROVISIONS ON TRADE AND SUSTAINABLE DEVELOPMENT As indicated in point 4, the Trade and Sustainable Development Sub-Committee gathered for the first time in Brussels on 30 November 2016. At the same time discussions were held with the Civil Society Forum and the Domestic Advisory Groups. Discussion on the content of the TSD Sub-Committee's work plan for the next 3-4 years also took place. Both Parties highlighted the importance of the TSD Chapter, and noted some progress in implementing the fundamental labour conventions. It was underlined that in a number of specific areas more efforts need to be undertaken to effectively implement the fundamental ILO conventions, notably with regards to child labour and freedom of association and collective bargaining and to establish a comprehensive labour inspection system.. Tripartite discussions on labour policy enforcement, labour inspections and occupation and health and safety need to be strengthened. The EU welcomed the cooperation on environmental aspects of the TSD Chapter, encouraging Georgia to adopt the Environmental Assessment Code. The EU reminded that it had ratified the Paris Agreement, enabling a rapid entry into force in time for the COP in Marrakesh (the first meeting of the Parties to the Paris Agreement). Georgia was encouraged to ratify the Paris Agreement but stressed the challenges in its implementation. The representatives of Georgian underlined the developments in the forestry sector. Final draft of the Forestry Code had been elaborated by the Government with the aim to be submitted to the Parliament in 2017. Sustainable forestry management and risk assessment are being developed along with wildlife trade and other biodiversity aspects. The draft law on biodiversity was prepared in 2016 and will undergo public hearings in order to be adopted in 2017. 6. SPECIFIC AREAS SUBJECT TO REPORTING OR MONITORING 6.1. Entry price system and anti-circumvention mechanism In 2015-2016 there was no overshooting for products subject to entry price (Annex II-B of the Association Agreement). When it comes to agricultural products subject to anti-circumvention mechanism, none of the trigger levels were exceeded in 2015 or in 2016, due to the low trade levels for those products. Worth to note, that in the analysed period there were no imports of products to be potentially affected by anti-circumvention mechanism with exception of poultry. 6.2. Use of unilateral EU preferences under GSP+ Between 1 January 2014 and 31 August 2016 Georgia benefited from the General System of Preferences (GSP) i.e. its GSP+ scheme, a special incentive whereby the EU rewards sustainable development and good governance in some of its trade partners. As the unilateral trade preferences under GSP+ started to apply already several months before the provisional application of the DCFTA (on 1 September 2014), this transition period allowed Georgian exporting companies to adjust to a new and reciprocal preferential trade regime provided within the free trade area with the EU.

The data for 2015 and 2016 shows that out of the total imports from Georgia to the EU (EUR 741 and 541 million respectively), 44% (2015) and 47% (2016) (EUR 324 and 254 million) qualified for a preferential treatment under the GSP+ scheme. Out of these figures, 83% (2015) and 2.6% (2016) of eligible products (worth EUR 270 and 6.6 million respectively) entered the EU using the GSP+ preferences and the related rules of origin. This diminishing trend in GSP+ use was caused by the move of Georgian exports to the free trade regime under DCFTA accompanied by different rules of origin as well as – more generally - by decrease in value of exports caused by a drop in commodity prices on international markets. 7. MAIN OPEN ISSUES AND FOLLOW-UP ACTIONS Without prejudice to a general commitment to achieve economic integration with the EU, during the DCFTA negotiations Georgian authorities applied a back-loading strategy, setting itself longer deadlines for gradual approximation with the EU acquis (up to 8 years from the entry into force of the Agreement) in such areas like technical regulations, sanitary and phytosanitary measures (SPS), public procurement and services. As a result the intensification of the approximation process should be noted only in 2017. The only approximation commitments for 2015-2016 concerned the submission (6 months after the entry into force of the Agreement) of a list of the EU sanitary and phytosanitary, animal welfare and other legislative measures for approximation as well as completion of approximation to the two EU legal acts on anti-money laundering and the Regulation on customs enforcement of IPR (not yet adopted). The list of the EU SPS acquis that Georgia will approximate was submitted to the EU in December 2015 and formally adopted by the EU-Georgia SPS Sub-Committee on 7 March 2017. The very long deadlines for building compliance with the EU SPS system has been committed by Georgia, to the extent that about 45% of the legal acts will be subject to approximation only after 2020 (35 legal acts in case of veterinary measures, 41 on food safety and 46 in case of plant protection). The institutional capacity in terms of food safety control still needs to be enhanced. A number of Georgian establishments are authorized to export fruits, vegetables, honey and as from mid-2017 also fishery products to the EU. In terms of technical regulations and standards, Georgia has committed to approximate by the end of 2018 its legislation on horizontal quality infrastructure to that of the EU as well as to several EU New and Global Approach Directives. In this field reform efforts should be intensified. Better situation is observed as concerns adoption of technical standards (over 95% of the existing Georgian Standards are International or European Standards). Market surveillance system needs strengthening. As concerns institutional capacity building Georgia needs to speed up enhancement of certification/accreditation infrastructure. The institutional part in public procurement approximation has been accomplished. Both Parties should formally adopt a roadmap developed by the Government and State Procurement Agency (GSPA). The roadmap will be a point of reference and facilitate the implementation of Public Procurement Chapter of the DCFTA, including on alignment of the Georgian legislation to the EU acquis in this area. The institutional capacity needs to be built within the GSPA and the contracting authorities. After having submitted a written request in 2015 Georgia has been invited on 28 September 2016 to accede to the Convention on pan-Euro-Mediterranean preferential rules of origin (PEM Convention) and formally joined it on 1 July 2017. Georgia officially became a Contracting Party to the Energy Community Treaty on 1 July 2017. The Protocol of Accession to the Energy Community Treaty commits Georgia to approximate its legislation to key energy and energy-related EU acquis between 2017 and 2020. On 4 January 2016, Georgia ratified the WTO Trade Facilitation Agreement which is in force since February 2017 and contains commitments on simplifying border procedures and modernization of customs techniques and instruments and customs control. An unresolved issue for the time being is the application of the DCFTA to the breakaway territories of Abkhazia and Southern Ossetia. According to Article 429 (Territorial application) of the Association Agreement, conditions enabling effective implementation of the DCFTA need to be created in either Abkhazia or South Ossetia for the AA/DCFTA to be able to be applied in those areas. 8. CONCLUSIONS After two years of the DCFTA implementation by both Partners, it should be underlined that external trade and FDI remain key for the overall economic growth of a small open economy like Georgia. Economic slowdown in some key trading partners in the region (Russia, Turkey, and Azerbaijan) and the double-dip recession from which the EU was recovering created a relatively adverse external environment for Georgia's trade in 2016. The EU is constantly encouraging Georgia to accelerate the necessary reforms, notably in SPS area as they would not only enhance the food safety in the country but also facilitate and determine effective access to the EU market for agricultural products. In the medium term, the benefits from legislative approximation to the EU acquis should translate into an increase of bilateral trade, and especially grow in Georgia's exports to the EU. Notwithstanding the new products like kiwi and blueberries which have started to be exported to the EU, Georgia has an untapped trade potential not only in relation to trade in goods, but also services and public procurement. Trade diversification and the enhancement of regional trade should also be an advantage for Georgia to diversify its economy. The continuation of the DCFTA implementation, notably through regulatory approximation (that has a dynamic character due to developments of EU acquis) and institutional capacity building will require continuous efforts by Georgian authorities as well as on the EU side in terms of assisting Georgia in this process. To this end the Association Committee in Trade configuration as well as the specialised Sub-Committees established under DCFTA will be the main fora for discussions and comprehensive evaluation of that progress. Simultaneously, in order to effectively enhance export from Georgia, the EU delivers financial and technical support to the reforms and administrative capacity building in trade-related areas like TBT (e.g. standardization and metrology infrastructure; accreditation and surveillance system), SPS (notably in institutional capacity building in food safety control) as well as in promotion of producers organizations, value chain optimization and the SMEs development. As concerns the latter Georgia started (together with Moldova and Ukraine) to benefit from the EU4Business support , including the DCFTA Facility for SMEs (EUR 200 million for all three countries).



ANNUAL REPORT ON THE IMPLEMENTATION OF THE DEEP AND COMPREHENSIVE FREE TRADE AREA (DCFTA) BETWEEN THE EU AND THE REPUBLIC OF MOLDOVA

1. INTRODUCTION On 27 June 2014 the European Union and the Republic of Moldova (hereafter 'Moldova') signed an ambitious Association Agreement (AA) with a Deep and Comprehensive Free Trade Area (DCFTA) as its integral part. The DCFTA as the main economic pillar of the Association Agreement has been provisionally applied since 1 September 2014. Following completion of the ratification process, the Association Agreement fully entered into force on 1 July 2016. In November 2015, Moldova announced that the conditions had been fulfilled for DCFTA application on the entirety of its internationally recognised territory, on this basis allowing to keep the EU market open to goods from the breakaway region Transnistria (to this end the trade facilitation measures are in force since January 2016). It should be emphasized that in the preamble of Association Agreement the EU acknowledges the European aspirations of the Republic of Moldova and welcomes its European choice. Simultaneously both partners take into account that the AA will not prejudice and leaves open, the way for future progressive developments in EU-Moldova relations. The Association Agreement provides for deepening of political association and gradual economic integration between Moldova and the EU, based on shared values and principles i.e. democracy and the rule of law, respect for human rights and fundamental freedoms, as well as a free market economy. Furthermore, the Agreement is to contribute to the socioeconomic development of Moldova through an ambitious reform agenda and enhanced economic cooperation with the EU in key fields such as sustainable development, trade, transport and environment, employment and social policy, financial management. In energy sector both sides acknowledged the need for enhanced energy cooperation and implementation of the Energy Community Treaty (Moldova joined it on 1 May 2010) and committed to enhance the security of energy supply, facilitating the development of infrastructures, increasing market integration and regulatory approximation with key elements of the EU acquis and promoting energy efficiency and renewable energy. Good governance and institutional capacity building including in the public administration have been recognized as horizontal areas of common interest and cooperation. The Deep and Comprehensive Free Trade Area (Title V of the Association Agreement) covers two main components: 1) A gradual, reciprocal market opening (removal/reduction of tariff and elimination of non-tariff barriers to trade) by both partners with a timeline asymmetry benefiting Moldova; 2) A far-reaching dynamic regulatory approximation with EU laws in trade-related areas which should stimulate competition, create a new predictable environment for business cooperation, development of trade and investment, and hence contribute to economic restructuring, modernization and diversification of Moldovan economy. Due to the concept of dynamic regulatory approximation embedded in the DCFTA, Moldova has to ensure the effective implementation of the approximated domestic law and undertake any action necessary to reflect the development in the EU acquis in its domestic law in the trade-related areas. The EU on its side shall inform Moldova of any final European Commission proposals to adopt or amend EU legislation relevant for Moldova's approximation obligations. As a result of the above mentioned commitments after the start of the provisional application of the DCFTA in September 2014, several annexes to the Association Agreement which include the lists of EU laws as well as the deadlines for approximation by Moldova have been amended. The modifications introduced before the end of 2016 by means of the Joint Decisions of the Association bodies relate to the following Annexes: 1) XXIV-B (sanitary, phytosanitary and animal welfare law), 2) XXX-C (geographical indications (GIs): list of EU agricultural products and foodstuffs other than wine and spirits to be protected in Moldova) and XXX-D (GIs: list of EU wines to be protected in Moldova), 3) XVI (technical regulations: horizontal legislative framework, the New Approach and Global Approach as well as sectorial legislation), 4) XXIX (public procurement). Moreover, Protocol II to the Association Agreement concerning the definition of the concept of 'originating products' and methods of administrative cooperation has been replaced by the updated one and the list of arbitrators for dispute settlement (in accordance with Article 404) as well as the list of experts for a consultation Panel on issues covered by the Trade and Sustainable Development Chapter (in accordance with Article 379(3) of the Association Agreement) have also been adopted. This is the first report on the implementation of the EU-Moldova DCFTA presented as part of the annual Report on implementation of FTAs concluded by the EU. Moreover, it has been prepared in accordance with the provisions of the Regulation implementing the safeguard clause and the anti-circumvention mechanism. In addition to providing an overview of the statistics on the evolution of EU-Moldova trade, information about the application of trade defence measures and anti-circumvention mechanism has been included. The progress in regulatory approximation in trade-related areas as well as activities of the specific Association Committee in Trade configuration and the assisting Sub-Committees established to monitor the implementation of the DCFTA, are presented in the report. 2. METHODOLOGY USED FOR THE ANALYSIS The analysis of the bilateral trade in goods between the EU and Moldova is based on Eurostat data for the two years of DCFTA implementation i.e. 2015-2016 compared with 2014 as a year preceding the DCFTA provisional application, which started on 1 September 2014. As regards trade in services and investment, the analysis is based on data for 2014-2015. It should be noted, however, that the dynamics of trade flows cannot be attributed solely to the DCFTA implementation, as other internal and external factors may also influence bilateral trade. Though the figures provided below give an indication of how the DCFTA has worked between September 2014 and the end of 2016. The summary of the activities of the association bodies covers the calendar year 2016. 3. EVOLUTION OF TRADE (YEAR-TO-YEAR AND SINCE THE START OF PROVISIONAL APPLICATION) 3.1. Trade in goods 3.1.1. The scope of trade liberalization At the start of the DCFTA provisional application on 1 September 2014, the European Union eliminated all customs duties on goods imported from Moldova. Six agricultural products i.e. apples, table grapes, plums, grape juice, garlic and tomatoes are subject to annual duty-free tariff rate quotas (TRQs). Twenty agricultural products (fruits and vegetables) are covered by the system of entry prices for which the ad valorem component of the import duty has been exempted. Import of 14 groups of agricultural and processed agricultural products (pig meat, poultry, dairy products and processed dairy products, cereals, cigarettes, sugar processed goods and sweet corn) is duty-free but monitored under anti-circumvention mechanism (if the imports to the EU reaches certain agreed levels the EU may temporarily suspend the preferential treatment of the products concerned). Similarly, Moldova liberalised import duties on 93.6% of tariff lines for goods imported from the EU at the start of provisional application of the DCFTA. 1% of tariff lines (for agricultural products) are covered by preferential tariff rate quotas. Customs duties on 4.8% of products in terms of tariff lines are to be liberalised in stages (3, 5, 7 or 10 years; the longest liberalisation period has been reserved for agricultural and food products). This schedule of tariff elimination reflects an asymmetric market opening for the benefit of Moldova.

3.1.2. Overall evolution of trade in goods in 2014-2016 According to Eurostat data for 2016, the EU is a key trade partner of Moldova, accounting for 55% of its total trade (66% of the total exports and 49% of Moldova's total imports). In terms of the share in overall Moldovan exports, the EU is followed by Russia (10%) and Belarus (6%). Moldova is the EU's 68th trade partner and accounts for 0.1% of the EU's total trade. In 2016 (after contracting in the wake of the banking crisis and recession in 2014-2015), the total bilateral trade between the EU and Moldova resumed and grew by 1.5% on a year-on-year basis to EUR 3.3 billion. EU exports have decreased by 2% from EUR 2.07 billion to EUR 2.02 billion while EU imports from Moldova have increased in that period by 7.7% from EUR 1.2 to EUR 1.31 billion (see Table 1). Table 1: EU trade in goods with Moldova, 2014-2016 (million EUR) EU trade with Moldova 2014 2015 % change 2015/2014 2016 % change 2016/2015 % change 2016/2014 EU Exports 2,352 2,070 -12.0 2,026 -2.0 -13.0 EU Imports 1,160 1,223 5.0 1,317 7.7 13.5 Total trade 3,512 3,293 -6.0 3,343 1.5 -5.0 Trade balance +1,192 +847 - +708 - - Source: Eurostat COMEXT. In 2014-2016 EU exports to Moldova decreased by 13% due to declining domestic demand, domestic problems (fraud in banking sector) and economic difficulties in the region. In the same time EU imports from Moldova experienced an increase of 13.5% (from EUR 1.1 billion to EUR 1.3 billion). This has been driven by a better export performance of Moldovan companies as concerns certain agricultural products, but also machinery, furniture and clothing articles (see point 3.1.3). In 2016 the EU trade balance with Moldova has remained positive but declined since 2014 from EUR 1.2 billion to EUR 0.7 billion. It was a result of the changing trade structure characterized by growing share of goods with high value added in its exports to Moldova (i.e. machinery and appliances, mineral products, chemical products and transport equipment), whereas its imports from Moldova have been dominated by agricultural goods and beverages, machinery and appliances, textiles and textile articles (see point 3.1.3.). The EU's share in the total Moldovan exports has been steadily increasing since the start of the provisional application of the DCFTA, from 54% in 2014 to 63% in 2015 and 66% in 2016. The EU's share in the total Moldovan imports has also increased from 48% in 2014 to 49% in 2016. The EU's share in the total trade of Moldova has similarly increased in that period from 50% to 55%. The EU and Moldova have agreed on a review clause which stipulates that after the entry into force of the DCFTA, the Parties may consider accelerating and broadening the scope of the elimination of customs duties on their bilateral trade. During the third year after the entry into force of the Agreement, the Parties shall assess the situation, taking account of the pattern of trade in agricultural products, the particular sensitivities of such products and the development of agricultural policy on both sides. They shall examine, in the Association Committee in Trade configuration, on an appropriate reciprocal basis, the opportunities for granting each other further concessions with a view to improving liberalisation of trade in agricultural products, in particular those subject to TRQs. 3.1.3. The structure of the EU-Moldova trade The main product categories (according to the Sections of the Harmonized System Nomenclature – HS) exported by the EU to Moldova in 2016 were machinery and appliances, mineral products, chemical products and transport equipment. Machinery and appliances (Section XVI) accounted for 19% of the total EU exports to Moldova (EUR 382 million). Exports have decreased by 8% since 2014 (from EUR 416 million), although they have stabilised at a similar level as in 2015. Mineral products (Section V) accounted for 16% of the total EU exports to Moldova (EUR 321 million) and their exports have decreased by 31% since 2014, when they stood at EUR 469 million. Chemical product (Section VI) accounted for 11% of the total EU exports to Moldova in 2016 (EUR 223 million) and their exports have remained at a similar level as in 2014, and have increased by 3% compared to 2015. Transport equipment (Section XVII) accounted for 9% of the total EU exports to Moldova (EUR 183 million) and its exports have decreased by 37% compared to 2014, although a 10% increase can be observed when compared to 2015. It should be emphasized that EU exports in certain key sectors have declined in 2014-2015 in large part due to the weak performance of the Moldovan economy which in 2016 has been slowly climbing back from a recession in 2015 (when GDP shrunk by 0.5%, net FDI by 22% and remittances by 25%). This was visible in Moldova's trade with the world which dropped. Trade appears to be resuming in 2016, with EU exports slightly decreasing by 2% year-on-year, compared to 11% decrease in 2015. Prior to that, exports had grown by 3.2% in 2014. The main products in EU imports from Moldova in 2016 were agricultural goods and beverages, machinery and appliances, textiles and textile articles and miscellaneous manufactured articles. Vegetable products (HS Section II) accounted for 23% of the total EU imports from Moldova (EUR 303 million) and their imports have increased by 50% since 2014, with a 26% increase compared to 2015. Top imported products include fruits and nuts (walnuts), cereals, oil seeds (sunflower seeds) and crude sunflower seed oil. Machinery and appliances (Section XVI) accounted for 17.5% of the total EU imports from Moldova (EUR 231 million), and textiles and textile articles, with a similar share of the total EU imports (EUR 230 million). Imports of machinery and appliances have increased by 18% since 2014, with 3% year-on-year increase in 2015-2016. The foodstuffs, beverages and tobacco (Section IV) accounted for 11% of the total EU imports from Moldova (EUR 146 million). Imports of this product category have increased by 56% since 2014, mainly due to an increase in the imports of beverages, spirits and vinegar by 76%. Finally, miscellaneous manufactured articles (Section XX) accounted for 8.5% of the total EU imports from Moldova. The biggest share in this category has been recorded for furniture, the imports of which increased by 53% since 2014 to EUR 109 million. 3.2. Establishment, trade in services and investments 3.2.1. Market access related to establishment and trade in services In the DCFTA the EU and Moldova laid down the necessary arrangements for the progressive reciprocal liberalization of establishment and trade in services and for cooperation on electronic commerce. Both Partners committed the freedom of establishment by granting each other national treatment and most favoured-nation treatment (subject to several reservations specified by EU Member States and a few reservations by Moldova) as well as liberalization of cross-border supply of services (by granting each other national treatment) with several limitations and reservations on both sides). In four services sectors (postal and courier services, telecommunication, financial services and international maritime transport services), Moldova recognized the importance of gradual (lasting between 3 and 8 years) approximation of its existing and future legislation to the list of the EU acquis (in case of financial services also to the international best practice and standards). Both Parties agreed on a review clause with a view of liberalizing establishment (regular review), cross-border supply of services (regular review) and capital movement (by the end of the fifth year following the date of entry into force of the DCFTA). This review shall take into account, inter alia, the process of gradual approximation foreseen in the Agreements and its impact on the elimination of remaining obstacles to cross border supply of services between the parties. 3.2.2. EU trade in services with Moldova

The total trade in services between the EU and Moldova has more than doubled between 2006 and 2015. The same trends were observed in imports and in exports (see Table 2). In 2015 compared to 2014, EU exports of services to Moldova have increased by 3% (from EUR 521 million to 616 million). EU imports have increased in the same time by 17% (from EUR 565 million to EUR 660 million). Table 2: EU trade in services with Moldova, 2014-2015 (million EUR) EU trade with Moldova 2014 2015 % change 2015/2014 EU Exports 596 616 3.0 EU Imports 565 660 17.0 Total trade 1,161 1,276 10.0 Trade Balance 31 -44 - Source: Eurostat COMEXT. Trade in services remained overall in balance in 2015, with EU imports worth EUR 660 million and EU exports accounting for EUR 616 million. Main sub-sectors of services exported by Moldova to the world are: transport, travel, telecommunications, computer and information services as well as manufacturing services on physical inputs owned by others. In terms of imports, the most important sub-sectors belong to transport and travel-related services. 3.2.3. EU foreign investments with Moldova Foreign direct investments (FDI) in Moldova have been traditionally dominated by the EU Member States (53% of FDI stock in 2014), followed by the Russian Federation (9.2%), the US, Switzerland, Turkey and Ukraine. Almost 30% of FDI stock was allocated to financial intermediation, followed by the manufacturing sector (22.4%), wholesale and retail trade (14.2%); real estate (11%); transport, storage and communication (10.3%); electricity, gas and water supply (7.1%). In 2015 the FDI stocks originating from EU (see Table 3) amounted to approximately EUR 1 billion, a similar level as in 2014.



Table 3: EU foreign direct investments with Moldova, 2014-2015 (million EUR) Foreign Direct Investment stocks 2014 2015 Moldova in EU28 (inward) 62 84 EU28 in Moldova (outward) 1,002 1,007 Net investment stocks 940 923 Foreign Direct Investment flows 2014 2015 Moldova into EU28 (inward) 9 15 EU28 into Moldova (outward) 51 116 Net investment flows 42 111 Source: Eurostat. Direct investment flows from EU have increased to EUR 116 million in 2015, following a sharp decrease in the context of the banking fraud scandal in 2014 (to EUR 51 million in 2014 from EUR 264 million in 2013). There is untapped potential related to the level of foreign direct investments in Moldova which badly needs them for modernization and diversification of the economy. The effective fight against corruption, policy stability and improved access to finance would certainly attract more investors. To this end The Investment Attraction Strategy for the Promotion of Exports for 2016-2020 has been adopted by the Government of Moldova on 25 April 2016. It has been designed to contribute to the enhancement and structural diversification of Moldovan exports which have traditionally heavily relied on several commodities only. More productive and diversified exports will be the key in stabilizing the trade balance, creating new jobs and ensuring sustainable economic development of the country. 3.3. Market access in public procurement The DCFTA envisages mutual access to public procurement markets on the basis of the principle of national treatment at national, regional and local level for public contracts and concessions in the traditional sectors as well as in the utilities sector. It provides for a gradual approximation (in four phases up to 2022) of the public procurement legislation in Moldova with the EU public procurement acquis, accompanied with an institutional reform and the creation of an efficient public procurement system based on the principles governing public procurement in the EU. The implementation of each phase shall be evaluated by the Association Committee in Trade Configuration and, following a positive assessment, will provide for the reciprocal granting of market access as set out in Annex XXIX to the AA. The completion of the first phase by Moldova (foreseen for 2016) that may lead to the reciprocal opening of market for supplies for central government authorities is pending. 3.4. Trade preferences utilisation rate The preference utilisation rate (PUR) on imports into the EU from Moldova has amounted to around 89% in 2014, reaching 91% in 2015 and 88% in 2016. At HS Section, the highest overall PURs are found in Live animals and animal products (Section I) and Animal or vegetable fats and oils (Section III) at 100%, as well as in Prepared foodstuffs, beverages, spirits and tobacco (Section IV) and Footwear (Section XII) at 99%. The lowest overall PURs (below 50%) are found in Wood and articles of wood (Section IX), Mineral products (Section V) and Optical, photographic and measuring instruments (Section XVIII). 3.5. Utilization of the annual duty-free tariff rate quotas In accordance with Annex XV-B of the Association Agreement the EU applies annual duty-free tariff rate quotas (TRQs) for 6 agricultural product categories imported from Moldova: tomatoes, garlic, table grapes, apples, plums and grape juice. Only the TRQs for table grapes and plums were used in 2016 (100% and 75% utilization respectively).

4. ACTIVITIES OF THE IMPLEMENTATION BODIES IN 2016 The main body under the institutional framework of the EU-Moldova Association Agreement is the Association Council (at ministerial level), which is supported by the Association Committee (at senior civil servant level) in supervising and monitoring the application and implementation of AA. Due to the importance of the trade and trade-related part of the AA (i.e. DCFTA) a dedicated Association Committee in Trade configuration (ACTC) has also been established. The ACTC is assisted by 4 specialised Sub-Committees at experts' level: (1) the Sanitary and Phytosanitary Sub-Committee; (2) the Customs Sub-Committee; (3) the Geographical Indications Sub-Committee; and (4) the Trade and Sustainable Development Sub-Committee. In 2016 the ACTC and the Sub-Committee meetings took place in Brussels. The 3rd Association Committee in Trade Configuration met on 19 October 2016. Both Parties reviewed progress made in all DCFTA chapters, including trade in goods, sanitary and phytosanitary measures, intellectual property rights, customs and trade facilitation, technical barriers to trade, public procurement, establishment, trade in services and electronic commerce, trade-related energy, competition, trade and sustainable development. The Committee also assessed the development of bilateral trade after two years of implementation of the DCFTA. The Moldovan side presented the progress achieved in the approximation of its legislation to that of the EU in all relevant chapters. The EU stressed the need for Moldovan authorities to focus on the implementation and enforcement of new laws and the strengthening of its institutions so as to provide visible benefits to businesses and citizens. The representatives of Moldova requested the EU to examine the possibility to increase the trigger level for a number of agricultural products such as grapes and plums. The EU side expressed concerns about Moldova failing to meet the SPS requirements for exports of poultry meat and eggs and weak diagnostic and surveillance capabilities for animal diseases. Both sides underlined the importance of the EU financial assistance for the implementation of the DCFTA which aims at supporting both the Moldovan administration and the companies (notably SMEs) in aligning with the acquis and reap the benefits of the Agreement. The 2nd Sub-Committee on Sanitary and Phytosanitary measures (SPS Sub-Committee), which met on 1 June 2016, saw the appointment of new SPS focal points as well as discussion on the action plan/roadmap for the reorganisation of laboratories and possibilities for EU technical assistance. Discussions touched upon the need to accelerate accreditation of animal health laboratories and establish a common channel of communication and action on African swine fever. The Sub-Committee also adopted the SPS reform plan reflected in the list of EU legal acts to which Moldova will approximate its legislation, as an Annex to the Association Agreement. The 3rd Sub-Committee on Customs and Trade Facilitation took place on 6 October 2016. The Parties discussed legislative developments in the EU, customs cooperation, the concept of authorized economic operator, and fight against fraud. An update of the relevant DCFTA regulatory approximation Annex was touched upon, as the new reference to the Union Customs Code is now in force. Following Moldova's adherence to the Pan Euro-Mediterranean Convention on preferential rules of origin (PEM) on 1 September 2015, the replacement of the bilateral rules of origin protocol by a link to the PEM Convention was also discussed. The 3rd Geographical Indications (GIs) Sub-Committee, which met on 18 October 2016, touched upon relevant food quality issues, endorsed new GI products that have been approved by the legislators on both sides, and amended Annexes XXX-C and XXX-D. Both sides discussed the latest developments in the "Prosecco" Court case. In that context the EU urged Moldovan authorities to pursue in all instances the respect for the terms of the Association Agreement in what concerns the protection of EU GIs. The Moldovan side informed about priority actions being undertaken to prevent future cases of breach of the AA on protection of GIs, such as training of judges on EU law and raising the awareness of economic operators on the need to protect GIs. Technical assistance in the field of GIs was also discussed. As regards the 2nd Trade and Sustainable Development (TSD) Sub-Committee meeting -see point 5. 5. IMPLEMENTATION OF THE PROVISIONS ON TRADE AND SUSTAINABLE DEVELOPMENT The Trade and Sustainable Development (TSD) Sub-Committee has been established under TSD Chapter of the AA and met twice before the end of 2016. During the meeting on 17 October 2016, the Parties reviewed the state of play in the implementation of labour and environment provisions of the TSD Chapter, including the ratification and implementation of international conventions and other multilateral treaties. The situation of the State Labour Inspectorate appeared as highly problematic in view of the implementation of the ILO labour standards. Discussion on the content of a TSD work plan for the next 3-4 years also took place. The Sub-Committee meeting was followed by the Joint Civil Society Dialogue Forum. Both the Parties and civil society representatives made a statement about the implementation of the TSD Chapter, and agreed that a more focused, sectorial approach is needed for its implementation. It was also agreed that civil society should be consulted on the priority topics identified in the draft work plan. 6. SPECIFIC AREAS SUBJECT TO REPORTING OR MONITORING Anti-circumvention mechanism Fourteen groups of agricultural and processed agricultural products included in Annex XV-C (pig meat, poultry, dairy products and processed dairy products, cereals, cigarettes, sugar processed goods and sweet corn) are imported duty-free from Moldova to the EU but their imports are monitored under anti-circumvention mechanism (the EU may temporarily suspend the preferential treatment of the products concerned if the imports to the EU reaches certain trigger volumes and is not justified and reflected in the increased production capacity of Moldova). In 2016 those levels were exceeded for wheat, barley, maize, sugar and processed cereals. The information provided about the increased production in Moldova in that period was accepted by the European Commission therefore exports exceeding those trigger volumes could continue to benefit from preferential treatment by the EU. Twenty agricultural products (fruits and vegetables) are covered by the system of entry prices for which the ad valorem component of the import duty is exempted. Some fresh apricots, cherries, peaches and some grapes were imported into the EU in 2016 being subject to the entry price. 7. MAIN OPEN ISSUES AND FOLLOW-UP ACTIONS In view of a desire to achieve gradual economic integration with the EU internal market, inter alia, through the DCFTA, Moldova agreed on far-reaching market access liberalization and regulatory approximation and, notably in the areas that are instrumental (like technical as well sanitary and phytosanitary (SPS) standards) in effective benefiting from the opportunities created by the gradual market opening for goods, services and public procurement. To this end Moldova has very ambitious legal approximation commitments and the first three years of DCFTA implementation require the most extensive work. In terms of SPS measures Moldova timely submitted a list of the EU sanitary and phytosanitary, animal welfare and other laws which it will approximate its legislation with. This list, which was jointly adopted in June 2016, serves as a reference for the implementation of the SPS Chapter by the end of 2020. Moldovan authorities need to further reinforce the institutional capacity of the National Food Safety Agency (ANSA) with the aim to eliminate the appearing delays in the regulatory approximation timetable as well as enhance law enforcement. The legislative and governance measures should also be intensified in order the relevant enterprises were able to receive authorisations for exports e.g. fish, eggs and egg products to the EU. Moldova adopted a very ambitious plan of reforms in technical barriers to trade (TBT) up to 2021 which was endorsed by the Decision of the Association Committee in Trade configuration in October 2016. While the reform plan was prepared by Moldova on time, the work on the approximation of sectorial legislation in TBT area should continue and delays caused either by the complexity of legislation or lack of financial resources to implement it, should be addressed. Investments in quality infrastructure should be enhanced and institutional capacity improved. The Roadmap for initiating the negotiations of the Agreement on Conformity Assessment and Acceptance of Industrial Products (ACAA) was approved in 2016 and in January 2017 submitted to the EU together with the table of correspondence for horizontal legislation for the European Commission's assessment. Moldovan authorities have chosen 3 product sectors to be covered by future ACAA: construction products, toys and low voltage equipment. Moldova consolidated its Reform Strategy in Public Procurement ("a comprehensive roadmap") on which the Association Committee in Trade configuration will need to give a favourable opinion in 2017. In 2017, Moldova will also run a pilot project for e-procurement. Phase 2 reforms are to be completed by the end of 2019. Good governance in public procurement needs to equally be reinforced by strengthening the administrative capacity of the Public Procurement Agency and ensuring the independence of the review body. The latter i.e. the National Complaint Settlement Agency (NCSA) has been created in December 2016 and is accountable to the Parliament. It is important to make it fully operational. Worth to underline that Moldova became a Member of the WTO Government Procurement Agreement (GPA) on 14 July 2016. With regards to implementation of Trade-related energy Chapter of the DCFTA, the independence of the energy regulator has not been ensured yet and hampers governance of the sector, including for investors from the EU. Market practices and lack of transparency in the electricity distribution sector are also concerns that need to be addressed.

On services, Moldova is making progress in postal services reform but has yet to deliver on the 2016 approximation commitments in the international maritime transport. Delays have also occurred in telecommunications services. Legal approximation in financial services has become secondary in the face of major corruption crisis in the banking sector, resolution of which depends on restoring the fundamentals of good governance among key institutions. An update of Annex XXVIII-A (Rules applicable to financial services with regards to anti-money laundering), Annex XXVIII-B (Rules applicable to telecommunication services) and Annex XXVIII-D (Rules applicable to international maritime transport) is foreseen for 2017. As concerns financial services, due to the last financial crisis and significant changes related to the regulation of the EU financial sector and notably more centralized supervisory framework which does not have legal authority to act beyond the EU borders, it is not feasible for Moldova to implement in full EU acquis in this area. On the other hand Moldova can take inspiration from the EU law to design its own regulatory and supervisory frameworks conducive to financial stability. Moldovan legislation on protection of intellectual property rights (IPR) has been harmonized with the WTO TRIPS Agreement and EU law (Directive 2004/48/EC and Regulation 608/2013 on customs enforcement of IPR). The protection of EU geographical indications has to be enhanced in line with commitments undertaken in the DCFTA. To this end, the Moldovan authorities should undertake necessary actions in order to ensure the protection of the GI "Prosseco". On 24 June 2016, Moldova ratified the WTO Trade Facilitation Agreement (in force since February 2017) which contains commitments on simplifying border procedures and modernization of customs techniques and instruments and customs control. The EU Authorised Economic Operator recognition pilot project that is being implemented at the Moldova-Romania border crossing point since July 2015 has been extended to 2017. In the context of approximation of competition policy to the EU standards, the Moldovan Competition Council (set up in 2012) is well advanced in setting up the framework for competition enforcement and state aid control. The new competition law and the state aid law were adopted in 2012 and most of the implementing regulations are in place. The electronic state aid notification and monitoring system has been established. The priorities for future work include approving a National Program on Competition and State Aid. In the years 2017-2022 full alignment of aid schemes with EU state aid rules is to take place. 8. CONCLUSIONS After two years of implementation of the trade-related part of Association Agreement, one can conclude that the EU-Moldova DCFTA has been working well. In 2014-2016 the EU share in the total Moldovan trade has increased from 50% to 55% and EU imports from Moldova grew by 13.5% reaching EUR 1.3 billion. Compared to the decade before the implementation of the Association Agreement/DCFTA, exports from Moldova have increased significantly: the value of exported goods was 3.5-4 times as high in 2015 as it had been in 2005. Access to the EU market is of key importance to the economy of Moldova. Examples of companies across a wide range of sectors testify to the benefits of free trade with the EU. Among successful ones there are producers of juices and conserved fruit and vegetables (the DCFTA has brought grow in sales by up to 25%) as well as alcoholic beverages, notably wines (exports to the EU increased several times). Products from Moldova are appreciated by the most prestigious brands in the EU, for example, Moldovan electrical cables are used by European car brands, such as Audi, BMW, Mercedes-Benz, Maserati, Mini and Porsche. Apparel factories in Moldova also sew clothes for European luxury brands including Giorgio Armani. Good progress has been made in implementing the DCFTA in terms of regulatory approximation despite political and economic turbulence. With extensive support from the EU, Moldova has adopted a number of trade-related reforms, including for example the plan for SPS reform and the roadmaps for the approximation of legislation in TBT and public procurement. However, further reform efforts are needed to improve the rule of law and the business environment, which is still negatively affected by prevalent corruption, as well as inconsistent policy making. Strong implementation and enforcement measures are needed in order to deliver tangible results for business, consumers and citizens. Weak governance and institutional capacity and/or absence of regulatory independence slow down the trade-related reforms, notably in the fields of food safety, procurement and energy market regulation. In this regard, the specialised Sub-Committees established to implement the DCFTA will continue to discuss and seek solutions to the implementation and market access issues, with the aim to produce tangible results. In the medium-term, the benefits from approximation of Moldova's legal framework to the EU acquis as well as development of export capacity, notably by small and medium-size enterprises (SMEs) supported by EU4Business actions (including the DCFTA Facility for SMEs – EUR 200 million for Georgia, Moldova and Ukraine) should translate into an increase in bilateral trade, and notably growth in exports from Moldova to the EU. The accession of Moldova to the Pan-Euro-Mediterranean (PEM) Convention on Rules of Origin on 1 September 2015, allowing for cumulation of origin of products, may also positively contribute to foreign trade performance of this country. The country has an untapped export potential in particular in agricultural products. The attraction of FDIs (notably green field investments) pursued currently in accordance with governmental strategy for 2016-2020 should contribute to the diversification of production and trade, and hence intensification of regional trade.



ANNUAL REPORT ON THE IMPLEMENTATION OF THE DEEP AND COMPREHENSIVE FREE TRADE AREA (DCFTA) BETWEEN THE EU AND UKRAINE 1. INTRODUCTION Due to the fact that the ratification process of the EU-Ukraine Association Agreement by all EU Member States has been pending, on 1 January 2016 both Parties have started to implement a Deep and Comprehensive Free Trade Area (DCFTA) on a provisional basis. The DCFTA is the main economic pillar of the Association Agreement (AA), the political and cooperation provisions of which have been provisionally applied since 1 November 2014. It should be emphasized that in the AA the EU acknowledged the European aspirations of Ukraine and welcomed its European choice. Simultaneously both sides took into account that this Agreement would not prejudice and leave open future developments in EU-Ukraine relations. The Association Agreement, with the DCFTA as its integral part, provides for deepening of political association and gradual economic integration between the EU and Ukraine, based on shared values and principles i.e. democracy and the rule of law, good governance, respect for human rights and fundamental freedoms, as well as free market economy which would facilitate the participation of Ukraine in the EU policies. Furthermore, the Agreement establishes conditions for enhanced economic and trade relations leading towards Ukraine's gradual integration in the EU internal market through the Deep and Comprehensive Free Trade Area as stipulated in Title IV (Trade and Trade-related Matters) of the AA and linked to the broader process of progressive approximation of its legislation to that of the Union. The AA also supports Ukrainian efforts to complete the transition into a functioning market economy and hence to create a new climate conducive to economic relations between the Parties. Taking into account the geopolitical location of Ukraine and its energy transit capacity, both sides committed to intensifying energy cooperation, building on the commitment to implement the Energy Community Treaty of 2005 (Ukraine joined it on 1 February 2011), enhancing energy security, facilitating the development of appropriate infrastructure and increasing market integration and regulatory approximation towards key elements of the EU acquis. The Deep and Comprehensive Free Trade Area (Title IV of the Association Agreement) covers two main components: 1) Gradual, reciprocal market opening (elimination/reduction of tariffs and elimination of non-tariff barriers to trade) by both Partners with a timeline asymmetry benefiting Ukraine; 2) Far-reaching regulatory approximation to the EU law in trade-related areas which should stimulate competition, create new predictable environment for business cooperation, development of trade and attracting foreign investments, and hence contribute to economic restructuring and modernization of Ukrainian economy. Due to a concept of dynamic and extensive regulatory approximation embedded in the DCFTA, Ukraine has to ensure the effective implementation and enforcement of the approximated domestic law and undertake any action necessary to reflect the development in the EU acquis in its legislation in the trade-related areas. The EU on its side shall inform Ukraine about the development in its legal framework. In follow up to the above mentioned commitments, after the start of provisional application of the DCFTA, several Annexes to the AA which include the lists of EU laws, as well as the deadlines for approximation by Ukraine, are being amended with the aim to bring them up to date with the EU legislation. After having completed the internal procedures on both sides, the Annexes will be jointly adopted by the EU-Ukraine Association Committee in Trade configuration (ACTC) or by the thematic Sub-Committees. The joint decisions are imminent as concerns: -Update of Annex XXI and a favourable opinion regarding comprehensive roadmap on public procurement; -Addition of Annex V (a list of provisions of the EU acquis regarding sanitary, phytosanitary and animal welfare to which Ukraine intends to approximate its domestic legislation; it is a reference document (Comprehensive SPS Strategy) for the implementation of Chapter IV Sanitary and Phytosanitary Measures (SPS) to the Association Agreement.

This is the first report on the implementation of the EU-Ukraine DCFTA, prepared as part of the annual Report on implementation of FTAs concluded by the EU. Apart from a general overview of the statistics and evolution of trade between both Partners, a progress in regulatory approximation in trade-related areas as well as activities of the Association Committee in Trade configuration and the Sub-Committees, established under the DCFTA to monitor the process of its implementation, are presented here. 2. METHODOLOGY USED FOR THE ANALYSIS The analysis of the bilateral trade in goods between the EU and Ukraine is based on a comparison of the Eurostat data for 2016, i.e. the first year of DCFTA provisional implementation by both Partners with three preceding years. As regards trade in services and investment, the analysis is based on annual data for 2013-2015. It should be noted however, that trade flows dynamics cannot be attributed solely to the DCFTA implementation, as also other internal and external factors may influence bilateral trade. Though the figures provided below give an indication of how the DCFTA has worked so far. 3. EVOLUTION OF TRADE (YEAR-TO-YEAR AND SINCE THE START OF PROVISIONAL APPLICATION) 3.1. Trade in goods 3.1.1. Scope of trade liberalization The scope and timeline of tariff elimination/reduction in trade in goods between Ukraine and the EU is more complex and the longest in comparison to other DCFTA Partners. Pursuant to the provisions of the DCFTA, the EU and Ukraine are to establish a free trade area over a transitional period of a maximum of 10 years. Based on an asymmetry approach the transitional period for customs duty elimination will be applied by Ukraine until 2026 (in 2-11 equal stages) and will result in market opening for 96.5% tariff lines for products imported from the EU (97.7% in terms of import value). The EU will open its market earlier than Ukraine i.e. in 2023 for 95.8% of tariff lines (97.9% in value) for products imported from Ukraine also by applying similar staging. For certain categories of products both sides decided only to reduce customs duties by 20-60% in 6, 8 or 11 annual stages. Taking also into account the reduction of duties for certain products and the annual duty-free tariff rate quotas (TRQs) applied indefinitely by both sides, it means that certain number of products is excluded from full liberalization and will remain dutiable; nevertheless the market access will be improved for them. In case of Ukraine it concerns 367 products (animal and vegetable products, animal and vegetable fats and oils, prepared foodstuffs and beverages); on the EU side – 400 goods (live animals, vegetable products, prepared food, and certain chemicals). The specific commitments for Ukraine and the EU are described below. The schedule of market opening by the Ukraine foresees that the country has liberalized access to its market for over 70% of EU products (including almost 38% tariff lines liberalized earlier on MFN basis) immediately after the start of DCFTA application or gradually in stages i.e. between 3 and 7 years (with exception of cars where 10-year transitional period has been foreseen – see below). In general, longer protection is envisaged for agricultural products (Chapters 1-24 of the Combined Nomenclature - CN) and for several goods in those Chapters only certain reduction of tariffs (between 20% and 60%) will be accomplished after 5, 7 or 10 years (e.g. for some species of fish and fish products and sausages). Interestingly, the highest average preferential tariff at the end of implementation period will be sugars and sugar confectionary (CN Chapter 17). Ukraine will protect its car sector during 10-year transitional period (it concerns several categories of passenger cars under CN 8703) and simultaneously has a right to apply during 15-year period a special safeguard measure in the form of higher (MFN) duty on cars imported from the EU if as a result of the reduction or elimination of customs duty under AA cars are imported into Ukraine in such increased quantities, in absolute terms (trigger levels apply) or relative to domestic production, and under such conditions as to cause serious injury to a domestic industry producing like products. Special conditions will also apply during 5 years to worn clothing and other worn articles (CN 6309 00 00) imported from the EU to Ukraine. To this end, as from 1 January 2017 Ukraine shall, within 5 years, gradually reduce duties on imports during the first four years and shall abolish them not later than the end of the fifth year. The minimum entry price will apply in that period. As concerns agricultural goods, Ukraine applies (indefinitely) the duty-free TRQs for 3 product groups imported from the EU: pork meat, poultry meat and sugar products (91 tariff lines on CN 8-digit level). In terms of export duties applied on MFN basis to 5 categories of products (livestock, raw hides, certain oil seeds as well as waste and scrap of ferrous and non-ferrous metals), Ukraine committed eliminating them over a transitional period up to 2026 but also maintained the right to apply, during 15 years starting in 2017 (for sunflower seeds in 2016) a safeguard measure (for raw hide materials, sunflower seeds and certain metal waste and scrap) in the form of a surcharge to the export duty if their exports to the EU exceed a trigger level. While anticipating the (provisional) application of the DCFTA that was signed on 27 June 2014, as well as in view of the unprecedented security, political and economic challenges faced by Ukraine and in order to support its economy, the EU unilaterally started, on 23 April 2014, the reduction or elimination of tariffs on goods originating in Ukraine. It was done in line with the schedule of concessions foreseen in Annex I-A of the Association AA/DCFTA. In general, import duties for Ukrainian products covering around 90% of tariff lines were abolished (including 25% of tariff lines liberalized earlier on MFN basis) and almost all of them are to be subsequently liberalized in 3, 5 or 7 stages (the longest 7-year period has been foreseen for such products as glassware, fertilizers, goods from aluminium, certain motor vehicles, bicycles, certain radio and TV equipment). The tariffs on imports of agricultural and food products from Ukraine were abolished by the EU at the start of DCFTA application with exception of 36 agricultural product groups (more than 320 tariff lines - CN 8-digit level) which are (indefinitely) subject to annual duty-free TRQs: meat (beef, pork, sheep, and poultry), milk and dairy, eggs, honey etc.; plant products: grains (wheat, barley, oat, maize), mushrooms, garlic, processed food and other products: sugar and products, grape and apple juice, sweet corn, processed tomatoes, ethanol, cigarettes etc. The TRQ amount is allocated on a first-come, first-served basis except for some cases where a system of import licences is applied by the EU. After the quantity covered by zero duty has been exhausted the MFN rate applies. The EU maintains its minimum entry price system for products covered by 28 tariff lines (CN 8-digit level) i.e. for different types of fruits and vegetables e.g. apples and pears, tomatoes and cucumbers. Those products are subject to a specific duty in addition to its ad valorem tariff if their price is below the minimum entry price. The EU and Ukraine agreed on a review clause related to trade in goods which may be requested by either Party 5 years after the entry into force of the Agreement whereby both sides may consider accelerating and broadening the scope of the elimination of tariffs on trade between themselves. The decision on that matter should be taken by the Association Committee in Trade configuration. 3.1.2. Overall evolution of trade in goods in 2013-2016 According to Eurostat data for 2016, 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. Ukraine is the 26th trade partner of the EU (with around 0.9% share in the EU's total trade). Overall, in 2016 - comparing to 2015 - the total trade between the EU and Ukraine increased by 10.1% (from EUR 26.9 billion to 29.6 billion) while EU imports from Ukraine grew by 1.9% (from EUR 12.8 to 13.1 billion) and EU export to Ukraine increased by 17.6% (from EUR 14.0 billion to 16.6 billion). Apart from the on-going economic reforms (under pressure of International Monetary Fund (IMF) and the EU), it was also an effect of the favourable situation on global commodity markets and a drop in prices of energy resources as well as good weather conditions contributing to high grain harvests and hence increased exports of cereals. In spite of this positive results Ukraine's imports from the EU, similarly to its total trade, have not regained the levels of 2013, whereas Ukrainian exports to the EU almost returned to values recorded in 2013-2014 (see Table 1). This may be a sign that the economic situation in Ukraine is stabilising (in 2016 GDP grew by around 2%) after the economic crisis of 2014-2015 when the illegal annexation of Crimea and the on-going conflict provoked by Russian Federation (RF) in Eastern Ukraine coupled with an unfavourable global economic environment (low commodity prices on global markets and slow GDP growth in emerging countries) and resulted in cumulative decline by over 16% of Ukrainian GDP and having a negative impact on foreign trade, including with the EU (less sharply though). It also needs to be recalled that already in 2012-2014 Ukraine has been facing certain trade restrictive measures imposed by Russia. Moreover, as from 1 January 2016 Russian Federation suspended (indefinitely) the application of the Commonwealth of Independent States FTA, hence reintroduced MFN tariffs on imports from Ukraine (as a response to the start of provisional application of the EU-Ukraine DCFTA), introduced an embargo (extended until the end of 2018) on imports of agricultural products in the follow-up to Ukraine's adherence to EU sanctions against Russia as well as started to apply the road and railway transit restrictions on exports from Ukraine to the Central Asia. All these restrictions strongly contributed to the drop in overall exports from Ukraine to the world, including to the Russian Federation (noted since 2012 but accelerated over last years) which used to be its first trading partner for more than two decades (drop in trade from EUR 40.5 billion in 2014 to EUR 32.9 billion in 2016). The reversal of the negative trend in exports from Ukraine to the EU should therefore be seen as a positive sign of a slow but successfull reorientation of its exports towards the EU. The EU share in the total Ukrainian exports has been steadily increasing in the last few years, i.e. from 26.5% in 2013 to 31.5% in 2014, 34.1% in 2015 and 37.9% in 2016. The EU share in Ukrainian imports has also increased from 35.1% in 2013 to 38.8% in 2014, 40.9% in 2015 and to 43.9% in 2016. The EU share in the total Ukrainian trade (imports plus exports) has similarly grown in 2013-2016 from 31.2% to 41.0%. Since 2013 the EU regularly reinforced its position as the first trading partner of Ukraine (which was not the case in 2012). This trend was supported by the EU autonomous trade preferences (ATMs) which were applied as from April 2014, in anticipation of the DCFTA (provisional) application.

Table 1: EU trade in goods with Ukraine, 2013-2016 (million EUR) EU trade with UA 2013 2014 % change 2014/ 2013 2015 % change 2015/ 2014 2016 % change 2016/ 2015 % change 2016/ 2013 EU exports 23,889 16,986 -28.9 14,039 -17.3 16,503 17.6 -30.9 EU imports 13,882 13,731 -1.1 12,833 -6.5 13,078 1.9 -5.8 Total trade 37,771 30,717 -18.7 26,872 -12.5 29,581 10.1 -21.7 Trade balance +10,017 +3,255 - +1,206 - +3,425 - - Source: Eurostat COMEXT. The EU continues to have a positive trade balance with Ukraine as a result of the trade structure characterized by growing share of goods with higher value added in its exports (i.e. transport equipment, machinery and appliances, chemical products), whereas its imports from Ukraine are dominated by base metals, cereals and mineral products (see point 3.1.3.). 3.1.3. The structure of the EU-Ukraine trade The main product categories (by Sections of Harmonized System Nomenclature – HS) exported by the EU to Ukraine in 2016 were: machinery and appliances, chemical products, transport equipment as well as mineral products, plastics, rubber and articles thereof. Machinery and appliances (Section XVI) accounted for 26.1% of the total EU exports to Ukraine and increased considerably on year-on-year basis (by 26.1% - from EUR 3.3 billion to 4.3 billion). Chemical product (Section VI) accounted for 16.8% (EUR 223 million) and their exports by the EU grew by 16.3% (from EUR 2.4 billion to 2.8 billion). Transport equipment (Section XVII) was the next in this ranking and accounted for 10.7% and its exports increased by 69% compared to 2015 (from EUR 1 billion to 1.7 billion). Mineral products (Section V) amounted to 6.5% (EUR 1.1 billion) but their exports dropped by 21% comparing to 2015, when they stood at EUR 1.4 million. EU exports in most of the products sectors increased in 2015-2016 due - in large part - to a recovery of the Ukrainian economy which is slowly climbing back from a recession in 2015, when the gross domestic product (GDP) shrunk by 9.9% and the net foreign direct investments (FDI) decreased from EUR 8.2 billion in 2012 to 3 billion in 2015. The traditional driving forces in Ukrainian exports are raw materials and semi-finished products mainly from the agro-food sector and metallurgical industry. The main products in EU imports from Ukraine in 2016 were base metals, vegetable products i.e. mainly cereals, mineral products and machinery and appliances. Base metals and articles thereof (Section XV) accounted for 22.1% of the total EU imports from Ukraine (EUR 2.9 billion) and maintained almost the same level as in 2015. Vegetable products (Section II) accounted for 16.0% of the total EU imports (EUR 2.0 billion; down from EUR 2.6 billion in 2015). Mineral products (Section V) reached a slightly lower share than in 2015 amounting to 12.8% of the total EU imports from Ukraine (EUR 16.7 billion; approximately the same level as year before). EU imports of machinery and appliances have increased by 13.2% reaching EUR 1.5 billion and represented 11.5% of the total EU imports from Ukraine. From the categories of products most widely imported from Ukraine, machinery and appliances were characterised by the highest positive dynamic together with animal or vegetable fats and oils (Section III) recording a growth by 67% on year-on year basis and reaching EUR 1.1 billion in 2016. The increased dynamic of exports of machinery and appliances from Ukraine to the EU should be seen as a positive sign as they represent a higher added value goods compared to the large portion of the remaining products mainly from agro-food sector, metallurgical industry and raw materials. 3.2. Establishment, trade in services and investments 3.2.1. Market access related to establishment and trade in services In the DCFTA the EU and Ukraine laid down necessary arrangements for the progressive reciprocal liberalization of establishment and cross-border trade in services and for cooperation in electronic commerce. To this end they committed the freedom of establishment by granting each other national treatment and most favoured-nation treatment (subject to several reservations specified by EU Member States and few reservations by Ukraine) as well as liberalization of cross-border supply of services (by granting each other national treatment) with several limitations and reservations on both sides). In four services sectors (postal and courier services, telecommunication, financial services and international maritime transport services) both Parties recognized the importance of the gradual approximation of Ukraine’s existing and future legislation to the list of the EU acquis (in case of financial services also to the international best practice and standards). The expansion of the internal market may be envisaged for those four sectors once Ukraine effectively implements the EU acquis (foreseen within 2 up to 7 years after the entry into force of the Agreement). The EU and Ukraine agreed on a review clause with a view of liberalizing establishment (regular review), cross-border supply of services (regular review) and capital movement (by the end of the fifth year following the date of entry into force of the DCFTA). This review shall take into account, inter alia, the process of gradual approximation foreseen in the Agreements and its impact on the elimination of remaining obstacles to cross border supply of services between the parties. 3.2.2. EU trade in services with Ukraine After the decline in 2014 for similar reasons as trade in goods, the total bilateral trade in services between the EU and Ukraine increased by 5.2% in 2015 (to EUR 7.7 billion) compared to 2014 (EUR 7.3 billion).

Table 2: EU trade in services with Ukraine, 2013-2015 (billion EUR) EU trade with Ukraine 2013 2014 % change 2014/2013 2015 % change 2015/2014 EU exports 5.1 4.7 -7.9 5.0 6.3 EU imports 2.9 2.6 -31.0 2.7 3.0 Total trade 8.0 7.3 -20.5 7.7 5.2 Trade balance +2.2 +2.1 - +2.3 - Source: European Commission, DG Trade. EU exports of services grew in that period by 6.3% (to EUR 5.0 billion) compared to 2014 (EUR 4.7 billion). EU imports increased in the same time by 3% (from EUR 2.6 billion to 2.7 billion). In accordance with the WTO statistics (2015) the structure of services exports by Ukraine (11.1 billion) to the world has been dominated by transport, telecommunications, computer and information services as well as other business services. On import side (9.7 billion) travel services, transport and other business services have been top ranking. In the analysed period the balance of trade in services was positive for the EU and stayed at similar level. 3.2.3. EU foreign investment with Ukraine

The EU is the biggest foreign investor in Ukraine accounting for more than 75% of the total inward stocks (though this share may be overstated given the share of Cyprus in inward foreign direct investment (FDI) stocks). According to Eurostat, in 2015 EU FDI stocks in Ukraine amounted to approximately EUR 16.1 billion, down from 17.3 billion in 2014 and 21.6 billion in 2013. The investment flow from EU into Ukraine amounted to EUR 116 million in 2015 and was far from returning to 2013-2014 levels. A certain increases in 2015 are to a large extent explained by recapitalization of Ukrainian banks with foreign capital, whereas green-field investments remain at low level. According to OECD data (October 2015), Cyprus has traditionally been the biggest source (27.7%) - in terms of inward FDI stocks in Ukraine - followed by the Netherlands (13.0%), Germany (12.4%), Russian Federation (6.7%), Austria (6.0%) and UK (4.4%). In terms of sectorial structure in mid-2015 the total inward stocks were dominated by financial services (26.5%), manufacturing (26.2%), and trade and repair (13%). After the military conflict provoked by Russia in the Eastern Ukraine has started, the FDI, including from the EU, fell sharply and - due to continuing high political risk of investing - are far from recovering, despite the macroeconomic stabilization and some improvement in business climate in Ukraine. Table 3: EU foreign direct investment with Ukraine, 2013-2015 (billion EUR) Foreign direct investment stocks 2013 2014 2015 Ukraine in EU28 (inward) 1.3 3.0 0.4 EU28 in Ukraine (outward) 21.6 17.3 16.1 Stocks: balance 20.3 14.3 15.8 Foreign direct investment flows 2013 2014 2015 Ukraine into EU28 (inward) 0.6 0.4 -2,7 EU28 into Ukraine (outward) 0.0 -1.9 0.1 Flows: balance -0.6 -2.3 2.7 Source: European Commission, DG Trade. Notwithstanding the uncertainty around that conflict, Ukrainian authorities have to address the long-standing barriers that impact negatively the process of attracting foreign investors who are preoccupied with widespread corruption, lack of trust in judiciary, unpredictable currency and regulatory changes. 3.3. Reciprocal market access in public procurement The DCFTA envisages mutual access to public procurement markets on the basis of national treatment at national, regional and local level for public contracts and concessions in the traditional sector as well as in the utilities sector. It provides for the progressive approximation (in 5 phases up to 2024) of the public procurement legislation in Ukraine with the EU public procurement acquis, accompanied by institutional reform and creation of an efficient public procurement system based on the principles governing public procurement in the EU. The implementation of each phase shall be evaluated by the Association Committee in Trade configuration, and, following a positive assessment, will be linked to the reciprocal granting of market access as set out in Annex XXI-A to the AA. The completion of the first phase (foreseen for 2016) and leading to reciprocal opening of market for supplies for central government authorities is pending. 3.4. Trade preferences utilisation rate The preference utilisation rate (PUR) on imports into the EU from Ukraine had amounted to around 87% in 2014-2015 and increased to 89% in 2016. At HS Section level, the highest PURs are found in Animal or vegetable fats (Section III) at 99%, Articles of stone, plaster, cement, asbestos (Section XII) at 96% as well as Chemical products (Section VI) and Wood and wood products (Section IX) at 95%. The lowest overall PURs (below 50%) have been recorded in Arms and ammunition (Section XIX), Pearls (semi-)precious stones and metals (Section XIV), Animal and animal products (Section I) and Optical, photographic and precision instruments (Section XVIII). 3.5. Utilization of the annual duty free tariff rate quotas In 2016, out of annual duty-free tariff rate quotas (TRQs) for 36 agricultural product groups imported from Ukraine to the EU only 11 were fully used and concerned following products: honey; oats; sugar; groats, pellets, grains; malt and gluten; preserved tomatoes; grape and apple juice; poultry meat; common wheat, flour and pellets; barley flour and pellets; maize, flour and pellets. For some products such as: sheep, pork and beef meat, garlic, mushrooms, dairy products (e.g. buttermilk, cream, yogurt, milk cream and condensed milk, eggs and albumins) the TRQs were not utilised at all due to the lack of alignment with EU SPS requirements or enough marketing capacity. 4. ACTIVITIES OF THE IMPLEMENTATION BODIES BY MID-2017 The main body under institutional framework of the Association Agreement is the Association Council (at ministerial level) which is supported by the Association Committee (at senior civil servant level) in supervising and monitoring the application and implementation of AA. Due to the importance of the trade and trade related part of the AA (i.e. DCFTA), a dedicated Association Committee in Trade configuration (ACTC) has also been established. The ACTC is assisted by four specialised Sub-Committees at experts' level: the Sanitary and Phytosanitary Sub-Committee; the Customs Sub-Committee; the Geographical Indications Sub-Committee; and the Trade and Sustainable Development Sub-Committee. The Association Committee in Trade configuration met for the first time in Kyiv on 12-13 April 2016, so only 3 months after the start of provisional application of the DCFTA both Parties analysed the statistics on bilateral trade flows and exchanged information on their respective trade policies. It was also an occasion to look at the state of play in all DCFTA chapters, including trade in goods, sanitary and phytosanitary measures, intellectual property rights, customs and trade facilitation, technical barriers to trade, public procurement, establishment, trade in services and electronic commerce, trade-related energy, competition, trade and sustainable development, transparency and communication. The Ukrainian authorities presented the progress achieved in the approximation of its legislation to that of the EU and on the in