Identification and analysis of trade barriers for processed food in Mercosur and Chile Central/Eastern Europe and Russia

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1 Identification and analysis of trade barriers for processed food in Mercosur and Chile Central/Eastern Europe and Russia Country Report: Prepared for Market Access Unit, DG Trade By Bureau Européen de Recherches, Brussels (Promar CEAS International) March 2001

2 TABLE OF CONTENTS General trade policy Tariff barriers Non-tariff barriers Registration, Documentation, Customs Procedures Indirect Taxation, Levies and Charges (other than Import Duties) Import Licensing State Trading Enterprises Import Cartels Standards and other Technical Requirements Trade Defence Instruments not in Conformity with the WTO Export Restrictions Subsidies Investment related measures Direct Foreign Investment Limitations Profit Repatriation Limits Foreign Exchange Measures Tax Discrimination (Direct Taxation)...10 Bureau Européen de Recherches Estonia / i

3 General trade policy Regional trade agreements and other preferential arrangements Estonia is a member of the WTO (since November 1999), and has also concluded an agreement with EFTA and a Europe Agreement 1 with the EU. It has a number of bilateral agreements with other countries, including several CEFTA 2, Ukraine and Turkey. In January 1997, the Baltic Free Trade Agreement, effective since 1995, was supplemented by an agreement on agricultural products, eliminating all tariffs and quotas on mutually traded agricultural goods. In the context of its EU accession negotiations, Estonia will not be requesting any transitional arrangements to keep the current preferential agricultural trade provisions with the other two Baltic States. In the context of the Europe Agreements, Estonia was the first country to conclude with the EU negotiations for further agri-food trade liberalisation in November 1999, including under the so-called double-zero option which extends the concessions granted by Estonia on products imported from the EU in exchange for a progressive elimination of export subsidies on EU exports to Estonia. The EU already largely enjoys duty-free access to the Estonian market. Products covered by the double zero deal are pigmeat (including sausages), poultry, eggs, cheese and apples; EU subsidies on export of these products to Estonia are to be abolished. The new concessions entered into force on 1 July In addition, negotiations on further mutual concessions for a number of processed agricultural products were also concluded between negotiators in May 2000, but the concessions have not been implemented yet. Finally, in November 2000, the EU and Estonia reached an agreement on gradual trade liberalisation for fish and fish products, entering into force in the first half of 200. Duties for fish products are reduced by 33% upon entry into force of the agreement, with a further 33% reduction in the following year and total elimination in 2 years time. Pan-European cumulation of origin: 1 2 Signed on 19 December 1997 and entered into force on 1 February 1998 this incorporates the trade provisions of a 1995 Free Trade Agreement. CEFTA consists of the Czech Republic, Slovakia, Poland, Hungary, Slovenia, Romania and Bulgaria. Bureau Européen de Recherches Estonia / 1

4 Since the beginning of 1997 new rules of origin based on the concept of pan-european cumulation have been applied in a number of Free Trade Agreements within Europe. The model of the new cumulation rules for Estonia is similar in structure and substantive provisions with that of the other associated CEECs, although these only started applying for Estonia from 1 January The Origin Protocol in the EU- Estonia agreement has been replaced by the pan-european cumulation provisions. More recently, Estonia has agreed to amendments to the system, which enters into force on 1 January The implementation of the new origin rules has two major consequences. Firstly, semifinished products originating in any country of the system and which are further processed or assembled in any other partner country may always be considered as originating products. Secondly, originating products can be traded between any of the countries involved in the system. The introduction of European cumulation should be particularly beneficial in the case of trading of originating products in the agri-food sector. The advantages of the new system of cumulation of origin for producers and traders, both in and outside the pan-european cumulation area, are significant. Customs procedures are simplified by the fact that once a product has been given European origin there is no need for the origin to be verified again. For firms established in Europe, including foreignowned firms, this means more freedom in using input material or deciding in which country to invest their production facilities. With regard to third country materials, the new rules are generally more flexible due to the fact that they provide for a general tolerance rule as well as alternative processing rules allowing more input of third country materials. Further information on the matter has been notified by the different countries involved both to the WTO Committee on Rules of Origin and, in the context of the examination of individual agreements under GATT Article XXIV, to the WTO Committee on Regional Trade Agreements Tariff barriers Estonia has a very liberal trade regime with few import duties or quantitative restrictions. On 1 January 2000, as part of the EU accession preparations, Estonia introduced MFN customs tariffs on agricultural and food products originating from countries outside the EU that do not have a free trade agreement with Estonia (which currently account for Bureau Européen de Recherches Estonia / 2

5 about one third of all imports). This replaces a previous liberal trade regime with these countries and represents some progress in aligning Estonia s tariffs with those of the EU. The MFN tariffs currently average 3.2 % on all products, 14.9 % on agricultural products, 3.1 % on fishery products and 0 % on industrial products. The highest MFN duty rates stand at 25-33% for pigmeat, 48% for poultry meat, 39% for sausages, 10% for chicken legs and wings, 59% for rye, 40-45% for barley and oats Non-tariff barriers Registration, Documentation, Customs Procedures Customs procedures are laid down in the Customs Act, which entered into force on 19 January 1998 (RT part I, No. 3, published on 9 January 1998) and subsequent 1999 amendments. The implementation however is considerably delayed and although the Act provides the legal basis for the introduction of customs tariffs, Estonia has not introduced any tariffs yet and a timetable for the progressive and effective implementation of tariffs needs to be adopted as soon as possible (Commission Progress Report, November 2000). For customs valuation issues the relevant legislation is the Customs Valuation Act, which entered into force on 1 January 1996, last amended on 21 October 1999 (RT part I, No. 83, published on 5 November 1999); also, the Procedure for Declaration, Determination and Adjustment of Customs Value, Regulation No. 29 of the Minister of Finance of 15 March 2000, which entered into force on 1 May The import and marketing of alcoholic drinks requires special registration procedures, described in detail below (under standards and other technical requirements) Indirect Taxation, Levies and Charges (other than Import Duties) Estonia levies an ad valorem tax on customs clearance operations ( procedure fee, reduced to EEK 100 from January 2001 following amendments to the State Fees Act adopted on 20 November 2000). All goods, whether imported or domestic, are subject to a Value Added Tax (VAT). The present VAT rate is 18% of the transaction value of imported goods plus any charges on imports. Amendments to the VAT Act have ended some VAT exemptions and lower rates Bureau Européen de Recherches Estonia / 3

6 previously existing in Estonian legislation, but further harmonisation to the EU acquis is necessary (i.e. some zero rates and exempt transactions still exist). Excise duties are levied on alcohol and beer. These are: beer of less than 4.7% alcohol content (EEK 6/ltr); beer of over 4.7% alcohol content (EEK 7/ltr); sparkling wine, grape wine, fermented beverages of less than 15% alcohol content (EEK 10.4/ltr); vermouth, grape wine, fermented beverages of over 15% alcohol content (EEK 15.6/ltr); cognac and armagnac (EEK 32.5/ltr); whisky (EEK 26/ltr); other spirits (EEK 65/ltr). There has been controversy over the differentiation of beer taxes depending on brewer size, which can potentially be discriminating against imported beer, but this bias has been removed with a new Act which also harmonises beer excise taxes to those applying in the EU. However, wine fermented beverages and other intermediate products will need additional legislation. Also, the tax structure on spirits (including reduced rates and exemptions ) appears not to be compatible yet with EU Directives 92/83 and 92/84 and Estonia does not currently operate a system of bonded warehouses (Directive 92/12) (source: EU industry survey). These problems should be corrected by the new Alcohol Excise Duty Act, introducing the system of warehouses for alcohol and restructuring the rates of alcohol excise, which was adopted in June Estonia s excise tax rates are scheduled to be fully harmonised to EU levels by A packaging tax is also levied, as an environmental tax, since March 1997 on alcoholic drinks and since December 1998 on soft drinks. Food and dairy products are exempted from this tax. The tax, which is set per package and litre, can be quite substantial raising the retail price of some soft drinks by as much as 25%. Glass and ceramic containers are taxed at EEK 0.5/unit plus EEK 2/ltr; plastic containers at EEK 1/unit plus EEK 2/ltr; metal at EEK 0.75/unit plus EEK 2/ltr; other materials EEK 0.25/unit plus EEK 2/ltr. However, packaging that is considered at least 40% re-usable in volume, such as returnable glass bottles, is exempt from the tariff. Given that imported packaged goods are taxed on imports while domestic producers are taxed at source, the tax can be discriminatory against foreign exporters. For example in the case of beer, this is imported in Estonia primarily in cans and accounts for over 90% of the canned beer market. Negotiations were conducted between foreign operators and the government for changes in this law. Bureau Européen de Recherches Estonia / 4

7 The VAT, import duty, excise and packaging tax is collected by customs authorities upon clearance of imported goods Import Licensing In 1998 Estonia introduced a non-automatic licensing system for imports of food products (Regulation of the Government No. 249 adopted on 5 November 1998, entered into force on 1 December 1998). The main objective has been to ensure the proper handling of food products in response to consumer concerns over food safety. Only licensed companies are allowed to import foodstuffs into Estonia. In 1999 there were 390 valid licences issued by the Ministry of Agriculture. The above regulation is now replaced by the Regulation No. 1 of the Minister of Agriculture "Order for issuing licences for importing raw material of food and foodstuffs into Estonia" (adopted on 19 January 2000, entered into force on 3 February 2000). The import and export of spirits requires licences from the Department of Commercial Licensing State Trading Enterprises The privatisation of the food industry was completed in Four of Estonia s largest dairies are reported to have been involved in price fixing in a cartel agreement, following an enquiry by the country s competition authorities. Although by law the companies could have been fined as much as 5% of their annual turnover, the authorities refrained from imposing a fine. The arrangement was made last February when the companies decided to slash the price of milk products with the aim of squeezing competition of the market. They are believed to have incurred losses of EEK 4 mn between them as a consequence. None Import Cartels Bureau Européen de Recherches Estonia / 5

8 Standards and other Technical Requirements Since January 1998, quality and compliance checks of imported foodstuffs, additives and supplements was placed in the competence of the Border Control Service under the State Veterinary and Food Inspection (Government Regulation No. 249 of 5 November 1998). In the context of EU accession negotiations, Estonia has already requested derogations until 1 January 2006 in the field of complying with EU meat processing standards and beef product labelling. Plant products are controlled by the Plant Production Control Centre. The new Food Act, which entered into force in January 2000, provides the framework law in the field of foodstuffs. This regulates the production, trade and distribution of food products, as well as health issues, consumer protection and food control. The Law is based on EU directives and represents significant progress in the harmonisation of Estonia s food legislation to the EU acquis. It includes acceptance of exporters' certificates, issued in conformity with ISO 9000 and EN 45000, at the border. As part of the country s Accession Partnership, a medium term objective is to implement the quality control systems in the sector (HACCP) and to reinforce food control administration. Although, overall, Estonia has made considerable progress in the area of food legislation, administrative structures and the strengthening of its capacity to implement and enforce the food legislation need to be strengthened (Commission Progress Report, November 2000). Special Laws regulate alcohol, meat, dairy product flows, and veterinary and phytosanitary legislation. Other ordinances include the use of additives in foodstuffs, usage and content of artificial flavourings, and respective labelling. Consumer protection in Estonia was a newly developed field with the basic principles provided in the Consumer Protection Act, effective since The Law on Competition was effected in 1998, yet there are no precedents for the application since. The following legislative acts are also relevant: Product Safety Act, entered into force on 1 September 1998 (RTI 1998, 40, 613); Technical Regulations and Standards Act, entered into force on 1 April 1999 (RTI 1999, 29, 398) Product Conformity Assessment Act, entered into force on 1 March 1999 (RTI 1997, 81, 1362); a new Product Conformity Assessment Act, which enters into force in January 2001, was adopted in November 1999 and this harmonises provisions in this field to the EU acquis Bureau Européen de Recherches Estonia / 6

9 (the Act constitutes the legal framework for the procedures of product conformity assessment and certification, including the issuing of product conformity certification documents); Government of the Republic Regulation No. 118 of 2 June 1998 Approval of the Conditions and Procedure for Issue of Declarations of Conformity and Certificates of Conformity to Products (RTI 1998, 50, 754). On manufactured goods, the EU and Estonia 3 are currently discussing an agreement on mutual recognition of conformity assessment procedures, although this is unlikely to come into effect before early This will facilitate trade in industrial goods as it introduces the principle of mutual recognition of product or industrial process standards and product certification procedures, by taking the acquis communautaire as a reference. In the food industry it can be relevant for some food processing equipment. Labelling The 1993 Consumer Protection Act and the 1995 Law on the Procedures for Labelling of Packaged Foodstuffs require retail food packages to be labelled in Estonian language with a statement of producer, origin, ingredients, additives, importer name, and best before date. These have been amended by the Food Labelling Order (No 108 of 26 May 1998) to bring legislation up to date with EU requirements (Directive 79/112 on food labelling). Registration requirements for alcoholic drinks Estonia adopted on 10 February 1999 a comprehensive Alcohol Act i (RT* I 1999, 24, 359) which sets forth product registration and production licence requirements. These requirements are in some parts overly cumbersome and appear to discriminate against imported products (source: CEPS; industry survey). Article 3 of the Act requires that any alcohol marketed in Estonia has to be entered in the State Register of Alcohol. The register includes, for example, samples of all the alcoholic beverages. The product registration requirement appears to make burdensome demands, particularly for trade in small amounts of alcoholic beverages. An alcoholic beverage can only be traded in Estonia if it conforms to a registered sample or description (art. 3.3). Any alteration to the sales packaging / label design, each new vintage, each change in the alcohol content of an alcoholic beverage or in its analytical or organoleptic characteristics means that the product must be re-registered (art. 8). Thus, any product such as wine with 3 Similar agreements have already been concluded with Hungary, the Czech Republic and Latvia, and are still in discussion with Lithuania, Slovenia and Slovakia (Protocol on European Conformity Assessment PECA). Bureau Européen de Recherches Estonia / 7

10 potentially evolving characteristics could, in principle, be excluded from the market if it does not conform with the originally registered sample. There does not seem to be a margin of flexibility to accommodate the above-mentioned changes in the characteristics of the products. The entire sample system is open to questioning, as it seems that the objectives of the legislation could be reached also with less cumbersome registration practices. The requirement is particularly burdensome for more up-market brands for which the sample price is high in comparison with the total volume of sales. Article 7 establishes the requirement to perform a quality analysis by an accredited laboratory if so decided by the special committee. The system lacks transparency and gives rise to doubts regarding possibly discriminatory application of the quality control. In addition, Article 5 (3) requires the submission of a declaration of conformity or a certificate of conformity. It is, however, unclear what this means in practice and why it is considered necessary to have the requirement of Article 5 and the requirement of Article 7 which both seem to have the objective of securing the compliance of the marketed goods with the registered samples. Importers must obtain a selling licence from the National Board of Commercial Licensing. The difference in the cost of activity licences for domestic and imported produce (as mandated by chapter 5, articles 32 and 33 of the Act) is discriminatory: For example, a three-year activity licence for the production of alcohol is EEK 110,000 ( 7,028), whereas activity licence for import of alcohol is EEK 140,000 ( 8,944). This clearly violates Estonia s obligations under GATT Article III. Geographical designation of origin A Geographical Indications Protection Act was adopted in December 1999 and several implementing regulations have been issued. This law also amends the Trademark Act by specifying the administrative liability of legal persons and enabling the protection of geographical indications against an identical or confusingly similar trademark. This should address concerns expressed by the EU spirits industry (source: industry survey) over the absence of specific legislation on the recognition and protection for geographical Bureau Européen de Recherches Estonia / 8

11 designations (which was not provided by the 1992 Act on Trademarks and the 1994 Act on Patents), although some further alignment to the EU acquis may be necessary Trade Defence Instruments not in Conformity with the WTO Estonia currently has no laws and regulations on anti-dumping and/or countervailing duties and/or the application of safeguards relevant to the WTO Agreement. Such law and relevant regulations (specifically on anti-dumping) are currently being drafted and their enactment is scheduled for January Export Restrictions The import and export of spirits requires licences from the Department of Commercial Licensing Subsidies Agriculture and the food industry are one of the focal areas where major structural reforms are to be implemented, including the adoption of the acquis in this sector, in preparation for the country s accession to the EU (EU-Estonia Joint Assessment of the Economic Policy Priorities, March 2000). Domestic support policies in the agri-food sector in recent years have generally been limited to credit measures and subsidies aimed at improving production efficiency (including for meat, dairy and fish processing) and the industry s structure, although there has been an increase since 1998 in the number of farmers receiving direct aid. In May 2000, the Ministry of Agriculture launched a new export subsidy scheme, focused on selling high quality dairy products to the EU. The scheme is managed through a newly established state-run company. It is estimated that some 140,000 tonnes of milk equivalent may qualify under the scheme, at a cost to the state of EEK 102 mn. No other export subsidies are currently in operation Investment related measures The Estonian investment climate is liberal. The annual inflow of investments has risen considerably since the early 1990's and the cumulative FDI is the highest of all Baltic Bureau Européen de Recherches Estonia / 9

12 States. An increasing share of such investments are being directed at high value added product industries such as beverages, bakeries, as well as dairies and meat packing plants. Investments in 1999 on the agri-food sector are estimated at US$ 28 million. EU investors continue to be the most important foreign investors. All foreign investment is protected by law. In the event of nationalisation or exportation the foreign investor is appropriately compensated. Moreover, on 21 July 2000 the Foreign Investment Cancellation Act came into force, creating the same investment environment for all investors and thus granting foreign investors full equal rights as with local business. Some tax incentives were re-introduced in 2000, such as corporate income tax exemption for profits reinvested in the country Direct Foreign Investment Limitations Foreign investment may take any form, including partnerships, joint stock companies and subsidiaries of foreign companies. There is no restriction to the extent of foreign participation in a company and thus wholly owned subsidiaries can be established. Estonia was the first East European country to allow foreigners to own land Profit Repatriation Limits Profits can be repatriated without restriction and there is no withholding tax on repatriated profits Foreign Exchange Measures No restrictions Tax Discrimination (Direct Taxation) Positive discrimination: contributions in-kind to share capital by foreign companies are exempt from customs duties, although they are subject to VAT. Bureau Européen de Recherches Estonia / 10

13 Other information i Commission internal database, Estonia Bureau Européen de Recherches Estonia / 11