Andrey Devyatkov: Enhancing compliance: Transnistria’s advance in fulfilling DCFTA provisions

On June, 1 the government of Transnistria published an ordinance on amending Common Customs Tariff of the break-away republic with regard to imported goods for the timeframe 2017-2018. The Transnistrian media presented it as one of the initiatives of the authorities to improve conditions for local businesses in terms of reducing administrative barriers for external trade. Besides, the minister for economic development argued that import duties were eliminated now for more than 1900 commodity nomenclature codes, so as for now 52 % of Common Customs Tariff is fully free from any duties.

At first glance it seemed to be a purely technical issue. But a press release of the government quoted also the foreign affairs minister Ignatiev arguing that this decision is aimed first of all at reducing tariff barriers for goods imported from the EU countries what would allegedly allow Tiraspol to avoid any additional restrictions for its exporters on the EU market. So there is much politics in this document.

To understand the situation let us start from the very beginning. Since the Association Agreement between Moldova and the EU was negotiated in 2014, there has constantly been one important uncertainty factor, namely Transnistria. Tiraspol refused to participate in the Deep and Comprehensive Free Trade Area (DCFTA) hoping to keep previous trade regime of Autonomous Trade Preferences (within which it had been trading with the EU since 2008 like the right-bank Moldova with a minimum of tariff barriers).

But while creating the free trade area with Chisinau, Brussels was not ready to grant any specific status to Transnistria which de jure is seen as an integral part of Moldova. Besides, the key irritating factor for the EU was the existence of quite high import duties in Transnistria (about 15-20 % for many types of commodities) what created significant asymmetry in trade regime. That’s why Brussels demanded from Transnistria to adjust to a new reality and harmonize its import tariffs with those used by the whole Moldova. Otherwise the EU was ready practically to expel Tiraspol from the system of preferential trade. It would be a great challenge for Transnistria because some branches of regional economy are heavily dependent on EU market (rolled steel, textiles, footwear).

In December 2015 the sides reached an agreement which obliged Tiraspol to drastically reduce import duties  and cooperate with Chisinau in such areas as phytosanitary and veterinary control, technical regulation, border management etc. The document has never been published. According to the information of the Transnistrian Chamber of Commerce, Transnistria committed to eliminate or reduce import duties for 2500 commodity nomenclature codes until January, 1 2017. Another 2500 would have to follow until January, 1 2018. Only due to these transient conditions Tiraspol managed to keep preferential trade with the EU.

To evaluate how Tiraspol has been carrying out its obligations, let us produce a table which would demonstrate the changes in import duties since the beginning of 2015. As major reference points we will take the variants of Common Customs Tariff, introduced by the Transnistrian government for the timeframe of 2015-2016 in February 2015 (so before the agreement with the EU) and for the timeframe 2017-2018 in September 2016. Exactly the last variant of September 2016 was amended by the decision of the government on June, 1.

This article will not analyze the issue about how Transnistria is cooperating in terms of phytosanitary and veterinary control, as well as technical regulation and border management. The information about these spheres is not transparent enough in comparison with customs duties. Besides, exactly the issue with customs duties used to irritate Brussels the most.

To begin with, it could be argued that the first legislation act passed by the Transnistrian government in September 2016 seemed to fail in meeting commitments negotiated with the EU. As our table shows, import duties were not eliminated practically for none of the nomenclature codes. Nevertheless, some success could be indicated: the government definitely reduced very high tariffs for such products as meat, vegetables, meal, sausage, closing, foot ware, so the average tariff decreased from 15-20 to 10-15 %.

But recently Transnistria began to face a new challenge in its external trade, namely the establishment of joint Ukrainian-Moldovan border control. Due to the fact that exactly Brussels is an actor on which the advance of the joint border control depends technically and financially, Tiraspol seems to pay now much more attention to its commitments agreed with Brussels. Therefore the regulation amending the Common Customs Tariff can be well understood in this context. Not to forget is also about the fact that the region received at the end of 2016 a new president – Vadim Krasnoselsky, who is well connected with the parliamentary majority as well as business leaders, first of all company “Sheriff”. So it is of huge importance for the new government to keep the preferential trade with the EU.

What did this regulation change? Firstly, this document foresees a separate tariff for all goods imported from the EU. In regulations passed previously the tariff system related to all external partners without any differentiation among them. Secondly, this separate tariff is fully eliminated for some nomenclature codes. It refers to the following categories:

– basic products of organic and inorganic chemistry (alkalis, acids, oxides etc.)

– instruments;

– the larger half of exotic fruits and nuts (except walnuts, bananas, ananas);

– some sorts of meat (lamb, goat, horse, monkeys etc.) and processed meat;

– leather, fur goods, headwear;

– printed goods.

Besides, excise duty for beer was drastically decreased – from 0,3 to 0,05 dollar per liter.

It seems to be that these categories were chosen because they are not so sensitive – in purely fiscal terms and in terms of interests of local producers.

Berlin Economics GmbH made an analysis in 2015 which showed that estimated impact of an import tariff reduction for the whole Customs Tariff would amount to 4.3% of government revenues or 1.3% of GDP. That’s why the government cannot afford itself any revolutionary move in terms of reducing customs duties. The problem is particularly acute in the context of current socioeconomic crisis in the break-away republic. So the authorities decided to eliminate predominantly those categories of imported goods which are not sensitive from the fiscal point of view.

The second reason for keeping import tariffs is namely the protection of local producers, first of all in such areas as clothing, footwear, cement, electrical equipment, metal production.

As far as one can judge, Tiraspol seems to have fulfilled the obligation in eliminating the first part of existing tariff barriers. Due to the fact that Transnistria used to have 0 tariff for such goods as grain and fertilizers in the past, the liberalization of additional 1900 nomenclature codes was enough for that. But what’s next?

Firstly, Tiraspol could eliminate tariffs for such products which are meaningful only in fiscal terms, but not in terms of protecting local producers. We could mention such categories as jewelry, cosmetic products, ananas and bananas, cars.

Secondly, Transnistria will have to reduce tariffs for those branches which the authorities would like to protect. The right-bank while being interested in protecting somehow the same branches, keeps a minimal level of tariff shelter in this situation (like 3,33 %). For the left bank it relates to clothing, footwear, cement, vegetables, furniture, where the tariffs vary currently from 10 to 20 %.

A great challenge for Tiraspol is to tackle those branches which are not protected at all within DCFTA but which are of huge importance for the left bank. Many items of electrical equipment, metal products, steelwork and spirits should be mentioned. Probably Transnistria will be able to keep some level of tariff shelter in this case. At the same time it is hardly useful for Tiraspol to keep tariffs for such a large amount of items within these types of goods. Not everything from them is produced locally.

To keep some level of tariff shelter could be also possible in case of some food branches where Chisinau negotiated with the EU some import quotas to protect the local producers. It relates predominantly to meat (cattle meat, pork and chicken, sausage) and milk products which are usually protected in various countries by such mechanism. It is now hard to understand how the quotas which are negotiated by Chisinau (apparently only for the right bank) could be used for Transnistria too. So Tiraspol seems to have here some room for maneuver.

To sum up, we should argue that due to its decisions to liberalize fully a half of its import Transnistria managed to meet its commitment of the first round of adjustment to DCFTA. Transnistria is increasingly integrating into regional trade realities. But until the beginning of the next year a huge work should be done to close gaps in the budget (which will emerge in case of any further tariff reductions) and probably to convince the European Commission of the necessity to keep some tariff shelter for certain types of goods.

Table 1. Customs duties on selected goods imported to Transnistria

Articolul este publicat în cadrul proiectului „Dosarele conflictului transnistrean. Soluții pentru dezvoltarea societății pe cele două maluri ale Nistrului” este finanțat de către Ministerul Afacerilor Externe (MAE) prin programul României de cooperare pentru dezvoltare (RoAid) și implementat cu sprijinul Programului Națiunilor Unite pentru Dezvoltare (UNDP) – Centrul Regional pentru Europa și Asia Centrală.