Ukraine has told its trading partners it wants to raise maximum tariffs on hundreds of imported goods, a move that could unleash protectionist forces and may even pose a threat to the $18-trillion global trade system.
In a document marked "secret" sent to members of the World Trade Organisation last week and seen by Reuters, Ukraine says it intends to raise the limit on the tariffs it can legally impose on more than 350 goods. Based on figures in the proposal, Kiev's plan would hit overall imports worth more than $4.6-billion in 2011.
The document, which diplomats said they had received on Sept. 14, consists of 85 pages of annexes detailing the items affected. It says Ukraine is prepared "to enter into negotations and consultations" with WTO members for the concessions.
There was no response to requests for comment from Ukraine officials in Geneva or Kiev. Ukraine, a relative newcomer to the WTO whose trade deficit widened by more than 50 per cent last year to $14-billion, has already threatened to block car imports and said last year it would act to improve its terms at the WTO.
The United States said Ukraine's possible decision would raise "serious concerns," although WTO officials played down the move, which, though radical, is permissible under the agency's rules.
Some trade experts fear the plan, which would force hundreds of trade deals to be renegotiated, could trigger increasingly protectionist policies worldwide. The four-year-old global financial and economic crisis has so far not led to a rush to protectionism but, under pressure to help their producers weather the storm, governments have pounced on "unfair" moves by their rivals. The United States and Brazil were the latest to trade diplomatic blows.
WTO Director General Pascal Lamy, who forecast on Friday that world trade would grow by a mere 2.5 per cent this year, has repeatedly warned of the danger of a return to protectionism.
The WTO oversees the vast majority of global trade, running a system that assumes every country accepts legal limits on the tariffs they charge on imports to protect their businesses. If a country wants to raise the tariff ceiling on one product, it normally offers to reduce the limit on another to keep its economic openness unchanged overall.
Some diplomats say Ukraine's plan to renegotiate on so many goods – cars, trucks, agricultural machinery, meat, flowers, fruit, vegetables, washing machines and even syringes – is tantamount to reopening negotiations on its membership terms.
"We don't know what is behind Ukraine's move," said one trade diplomat. "Maybe the financial crisis. Maybe political reasons. Maybe industrial."
Longstanding WTO members typically have high ceilings and set tariffs well below the maximum, giving them wriggle-room in tough times. The tariffs of newer members, many of which were forced to accept tough terms to join the WTO, are often set right at the ceiling. Some, including Ukraine, which joined in 2008, have bristled over that constraint.
The sheer size of Ukraine's demand makes it hard to deal with, diplomats say. Other countries cannot raise their own tariffs to punish Ukraine without violating a WTO principle that member states must offer the same tariff to everybody.
"This decision raises many serious concerns and questions for us," said Carol Guthrie, spokeswoman for U.S. Trade Representative Ron Kirk in Washington, without going into details.
"We expect other WTO members may have similar concerns and questions. Only after we get additional details from Ukraine will we be able to fully evaluate the consequences of its decision and assess next steps."
WTO spokesman Keith Rockwell declined to characterize Ukraine's plans as protectionist. He said it was natural that some countries would want to renegotiate their trade deals.
"Protectionism is a loaded word. In the trying economic circumstances we are encountering today, governments face very strong pressure to act," Mr. Rockwell said.
"To this point, Ukraine's actions in this regard have not been outside the rules."
But Anwarul Hoda, a former deputy director-general of the WTO, said the way Ukraine planned to raise its tariff ceiling posed a real threat.
"If Ukraine just goes ahead and raises the duty and the others can't do anything then there would be a systemic failure," said Mr. Hoda, whose 2001 book Tariff Negotiations and Renegotiations under the GATT and the WTO is regarded as an authority on this area of the WTO rules.
Trade ministries have until Dec. 12 to respond to Kiev's proposal, but several diplomats said Ukraine's document had not given them enough information and nobody from Ukraine has yet replied to their many questions such as what new tariff ceilings Ukraine seeks, and what it might offer in return.
Ukraine's Prime Minister Mykola Azarov said last September "the time has come for us to start our negotiations with the WTO to adjust some provisions in our favour. And we will be doing this," according to Interfax news agency.
Since the election of President Viktor Yanukovich in 2010, Kiev has upset many of its trading partners with a string of aggressive positions, including obstructing bids by Yemen and Laos to join the WTO and an ongoing challenge to Australia's tough new cigarette packaging laws.
The latest proposal uses an area of WTO rules known as Article 28 of the General Agreement on Tariffs and Trade (GATT).
"It's a loophole in the GATT rules, the legal procedure," said one diplomat. "If other countries follow Ukraine, this might be big trouble."
Two lawyers said it was impossible to challenge Article 28 under the WTO's dispute settlement system. Mr. Hoda said he needed to study the case in depth before being sure.
Article 28 dates from the 1940s and was used often until the creation of the WTO in 1995 cemented efforts to liberalize global trade. Since then, it has been used about 30 times, mostly for small or technical adjustments to a country's tariffs, and almost always for fewer than 10 tariffs at a time.
Ukraine's request was "surprising for its size alone," said the European Union trade spokesman John Clancy. "Our preliminary analysis shows that the tariff increase would affect a significant amount of trade – and in particular EU exports worth almost €2-billion ($2.6-billion)," he said in an emailed response to Reuters questions.
Under Article 28, Ukraine should "pay" for tariff increases by lowering tariffs on other goods.
But Mr. Clancy said Ukraine's list was so long it could prove difficult to find enough areas where other tariffs could be cut.
At least 35 WTO members qualify to negotiate with Ukraine, including the European Union, United States, Japan, South Korea, Australia, Canada, Brazil, China and India, and the process is so complicated it would likely take years.
If negotiations don't work, Ukraine could simply raise its tariffs unilaterally, leaving its trading partners to raise their own tariffs to balance out its move. But big trading nations would find that impossible in practice.
"If you want to exercise retaliation you have to be very careful about the tariff line that you choose, in order not to hit some other trading partners," said a Geneva-based trade lawyer.
"If you get some other countries affected, then these other countries may initiate a political controversy against you," he said. "It is not as easy as one might think."
In such a situation, Mr. Hoda said, the WTO framework may not "be adequate. A small player in renegotiations is in a good position to go ahead and raise the tariffs, without any fear of reprisal or retaliation."
The EU's Mr. Clancy played down such worries and said he expected negotiations with Ukraine to succeed. "Protectionist tensions would not be in anyone's interest," he said.