Moldavian wine industry, legal implications and economic opportunities after the DCFTA

Moldavian wine industry, legal implications and economic opportunities after the DCFTA Luciano SANGIOVANNI, Eva SANGIOVANNI Academy of Economic Studies of Moldova sangluci@yahoo.it The Moldavian wine industry is the main sector for the national economy and a point of great national pride for this small landlocked country located in south east of Europe. This country has a huge wine potential thanks to an excellent climate and land, which makes it possible for Moldova to produce a lot of wine of a very good quality. At the moment the Moldavian wine sector is suffering stagnation and a reorientation of its market base, because of the Russian embargo of the late 2013. Historically Moldova was exporting the vast majority of its production to Russia and the other nation forming the CIS, in 2006 before the first Russian embargo on Moldavian wines, 52.8 % of the total production of wine was exported to Russia alone and 85.2 % to the CIS as a whole, after the embargo took place the total level of production of wine decreased dramatically from 240 millions liters in 2005 to 140 million in 2006 and export collapsed from 313 millions euros to 138 millions euros. As a consequence Moldavian companies started to invest to modernize their factories but most important a lot of firms tried to diversify their markets of export towards Europe, the USA and recently toward the Far East in particular China. For Moldova wine is a key sector of the economy, the extension of vineyards are 148500 hectares and the total production is 124200 tons of wine and it contributes to 3.2 % of GDP and to 7.5 % of the total national export. The country boosts the highest density in the world of vineyard. Moldova has 100 types of grapes of which 73 % of European origin 17 % Caucasians and 10 % they are authentic Moldavian, which represent of point of great strength and unicity for the Moldavian wines. Another big pride for Moldova in the field of wine is for certain the 2 big underground cellars in Cricova and Milestii Mici which are 2 cities made inside a cave at a 150 meters under the earth where you can find all the best conditions to keep wine. These 2 cities are a great tourist attractions that if correctly advertised around the world can became a very important site for foreigners to visit, and develop in this way also a wine tourism sector in Moldova. 3b_sangiovanni_sangiovanni.docx Page 1/13

Moldova is already one of the largest producers of wine in the world but unfortunately it is not so known, this field of the economy can give a huge boast to the economic growth of the country, create jobs and opportunities but it is much needed to diversify the export base and to create a brand clearly recognizable by foreign consumers. In this regard one of the main event that characterized Moldavian politics in the last years was the signing of the Association Agreement with the European Union in which is included the DCFTA (Deep and comprehensive free trade agreement) which create the base to set up a free trade area between Moldova and the European Union which opens the European market, the largest in the world, to Moldavian goods and in particular to its wine and agribusiness product in general. This is a huge opportunity and probably a turning point in recent Moldavian history, and is very important to understand the potentiality of growth of this agreement and to exploit it to the full. Moldova now has the unique opportunity to trade without barriers with the largest free trade area of the world and this can mean huge increase in export and jobs for the Moldavian people. My idea is to study all the implication that my arise from a legal standpoint and to analyze the economic effect this DCFTA will have on the Moldavian wine sector and the agribusiness in general, which is the backbone of the economy of this country. Moldova will need to comply with European standards in order to export its product and this will be certainly a major challenge for its company system but also an opportunity of modernization and growth. What is an Association Agreement? The Association agreement is the main tool the European Union has to bring countries of the eastern partnership (Moldova, Georgia, Ukraine, Belarus, Armenia and Azerbaijan close to EU standards and regulations in different sector of social life. It comprises 4 general chapters: Common foreign and security policy, Justice and Home affairs, and the Deep and Comprehensive Free Trade Area (DCFTA) and a fourth chapter which includes issues related with environment, science, transportation and education. The main difference between the Association Agreements Eastern Partnership countries are negotiating and others agreements the EU has made with third countries is the DCFTA. In signing this, Eastern Partnership members 3b_sangiovanni_sangiovanni.docx Page 2/13

will be committing themselves to adopting specific pieces of EU legislation in trade, consumer protection, and environmental regulation. Countries that sign a DCFTA must adopt some 350 EU laws within a ten-year timeframe. As a reward for the compliance with the EU laws signatories of the DCFTA will have access to a market of 500 million consumers with a combined economy of 12.9 trillion euros annually, the largest in the world. After an Eastern Partnership country signs its Association Agreement, it must be ratified by the parliaments of all EU member states, a process that can take several years. In the meantime, there would be a provisional application of parts of the agreement, such as trade, once an Eastern Partnership signatory ratifies the agreement and the European Parliament has given its assent. Moldova finishes its negotiations in June 2014 and a provisional application started in September 2014. In the negations between the EU and Moldova were some issues related with the action plan to liberalize visa (which happened in May 2014) and for the breakaway region of Trasnistria. The trade part of the agreement will be in place for Trasnistrian companies as far as companies will comply in their business life to the EU standards. It has to be stressed anyway that the Association agreement do not offer a path toward membership in the EU for the countries that signed it, like in the case of countries in the Western Balkans but it offers a lot more in comparisons with the Association Agreement the EU signed with countries such as Morocco and Tunisia which clearly exclude any possible future membership. Just as an example it took 12 years for Croatia to become a full member of the EU after the signing of the association Agreement. And Turkey is still waiting. The association agreement is basically a roadmap of reforms, is a real program of work for the government to reform Moldova, to bring the country in line with the EU. The political purpose of the agreement is to make a clear choice of values namely: democracy, the rule of law, and human rights which are typical European values Instead the economic purpose is to modernize and increase productivity of the Moldavian economy by boosting trade and reforming the regulation of the business life according to the best European practices. Moldova has a great potential to become an attractive place to do business as long as the business environment improves and institutions became stronger. 3b_sangiovanni_sangiovanni.docx Page 3/13

The EU has now opened its market for tariff free imports from Moldova. This means new competitive opportunities for Moldova s economy, while preserving the most vulnerable domestic sectors from a sudden competitive shock, since Moldova will remove its tariffs on European imports gradually over a period up to ten years. In the last 2 years Moldova s export started to diversify thanks to the opening up of the European market mitigating the losses from the Russian embargo on wines and agricultural products of the end of 2013. Financial assistance is available from European financial institutions to help for technical support and investment where heavy adjustment cost are needed. The DCFTA is not a magic cure for Moldova s economy but certainly offers the possibility of establishing a sound and efficient governance for the national economy. Political purposes of the Association Agreement The association agreement represents a major turning point for Moldova in order to improve its record on very important values in order to be considered a mature democracy, values on which the European Union was created by the founding fathers. The institution in Moldova are overall considered fragile even though its human rights record are improving already and the electoral process in general is competitive and fair. The human rights in the breakaway region of Trasnsnistria are still considered problematic in particular for liberty of education. Rule of law Moldova s fight against corruption is a major issue in order to make the Association Agreement to succeed; The strategy s implementation is monitored by a group Consisting of the National Anti corruption Centre, the EU Delegation and the donor community. There have been big improvements in any case in the legislation against corruption Foreign and security policy The Association agreement between the EU and Moldova has also objectives in the field of foreign policy and it main goal is to align Moldova s foreign and security policy with the EU. The Transnistrian conflict has played a mayor role in shaping up Moldavian foreign and security policy, the most significant operational programmed is the EU Border 3b_sangiovanni_sangiovanni.docx Page 4/13

Assistance Mission, which facilitates practical cooperation over the borders Of Moldova and Ukraine with the Transnistrian region, while contributing to the broader objective of settling the conflict and implementation now of The DCFTA. The mission participates in trilateral meetings together with Moldovan and Ukrainian Authorities on the assessment of common border security and customs cooperation DCFTA Now is important to understand what the DCFTA is and which topics are covered in order to create a free trade area that works properly. 1) Tariffs It s clear that first step in order to create a free trade area is to liberalize tariffs.since the start of the provisional application of the DCFTA on September 1 2014 the European Union has liberalized tariffs on imports of goods from Moldova on almost all goods, with few exceptions for agricultural products. On the other hand EU, wanted ho help the private sector of Moldova, has granted a transitional period to Moldova to liberalize its own market for European goods, this means Moldova s industry, including the wine industry, has the opportunity to boast their export to the European market without facing the full competition on the home market. Moldova s export towards EU since the provisional DCFTA took place increased for several products, including grapes but also for plums barley and other products, however for some sector of the agribusiness, such as meat, the main obstacles is the fact that Moldavian companies do not comply with EU food safety regulations. It is worth noting that Trasnistria too can participate to the DCFTA, and trough free trade it may be also possible to try to make the two sides closer. The DCFTA includes also different trade defense measures in order to protect national industry from damages that the other party may bring: 1) anti dumping 2) anti subsidy 3) safeguard measures Anti dumping is the main instrument, it happens when a company is exporting a product which it sells at a lower price than on its home market. If this case happens the government of the country importing the good may act when there is a material injury to the domestic production. Anyway this provision is very rarely used in the EU-Moldova trade relationship. 3b_sangiovanni_sangiovanni.docx Page 5/13

2) Costumes It is evident that in order to develop to the full extent a free trade area it is needed to have a customs service which is efficient and do not delay the commercial procedures. The provisions of the DCFTA are detailed, in general Moldova and the EU commits to the customs legislation to be stable, transparent and non discriminatory, Moldova commits itself to align its custom code to the one of the EU Moldova has adopted certain measures to facilitate its customs Procedures in line with EU practices (a new combined nomenclature of Goods, a blue lane, IPR protection, etc.). Provision that has been introduced in order to put in line Moldova s legislation with the one in the European Union includes the reduction of permissions acts required for export, implementing the authorized economic operator (AEO) concept, the electronic customs declaration, preparing for the New Computerized Transit System And introducing measures to fight corruption. 3) Technical standards for industrial goods Given the fact tariffs between European Union and Moldova will disappear progressively, the main barriers to trade will be technical standards.in order to overcome these possible barriers to free trade Moldova is committed to adopt relevant European legislation in the field. The European systems for industrial goods is made of two different lines of provisions: 1) EU harmonization laws which covers the general methodology and approximately 30 directives which covers broad industrial groups 2) around 5000 specific harmonized standards that provide everything needed to fulfill all the safety and health requirements. Moldova at the moment is doing some progress in adopting certain general and certain detailed EU directives, but everything is going very slow.there are also some resistant in using European standard in place of Ghost standards that are used by many Moldavian companies to trade with Russia and other CIS countries. 4) Food safety regulations Food safety which is called officially Sanitary and Phytosanitary measures are rules followed for trading in food and agricultural products. There are 235 EU directives and regulations covering the issue of which 78 directives are for veterinary requirements, 48 are for safety of agri-food products, 27 directives are for animal feed and 10 directives are for OGM. 3b_sangiovanni_sangiovanni.docx Page 6/13

Given the very high cost to comply with this measures Moldova in the association agreement got an exemption for very small farms. The European Union anyway supports some projects aiming at improving the food safety control system.very important is going to be to make the National Agency for Food safety (ANSA) to work properly and to improve the laboratory infrastructure. For example at the moment Moldova is experiencing big problems for exporting products of animal origin because of the lack of infrastructure in the laboratory and for the lack of international accreditation 5) Services The service sector is becoming very important for the Moldavian economy too and now represents 60 % of the national GDP. The Association Agreement foresees 3 main situations in the service sectors: 1) Establishment this means the right of one party to establish businesses in the other party 2) cross border supply of services, for instance software outsourcing etc 3) the temporary presence of individuals of one side in the other side for business purposes. In general the main principle is to accept the free trade in services but there are very important limitations in particular from the European Union side. 6) Public Procurement Public procurement is also of great importance for both the economy of the European Union and for Moldova accounting for large share of GDP in both cases. The DCFTA provides for gradual liberalization of the public procurement market of both parties with the condition that Moldova aligns its legislation in the issue to the one of the European Union. Moldova needs to undertake measures in order to have a market that is fair, transparent with sound competition and gets the best value for the taxpayer s money. The DCFTA defines the standards in order to win public procurement: principle of non discrimination 2) equal treatment 3) transparency 4) proportionality. Moldova has already taken very important steps to align itself with EU policies with a new law on public procurement adopted in 2015. Further reforms are needed in order to bring Moldova in line with the best European and international practices 3b_sangiovanni_sangiovanni.docx Page 7/13

7) Intellectual property rights Intellectual property protection has always been very important, at the moment with an economy that is more and more knowledge based the importance, if possible, has grown further. Moldova has committed to modernize its legislation for the protection of intellectual property and this in turn will create a better and secure legal environment for companies that will spur the much needed foreign investments in the Moldavian economy. The Intellectual property law covers several aspects of the matter 1) copyright 2) trademarks 3) design and patents 4) geographic indication which is very important in the wine and champagne business for instance The legal framework in Moldova in the Intellectual property rights protection is more or less in line with EU and international practices 8) Competition policy An effective competition policy is very important in order to keep an efficient economy, the so called antitrust policies started in the United States at the end of the 1800 and now they are present in every modern capitalistic economy. Competition policy assures better prices for consumers with better quality and wider choice Moldova after the signing of the DCFTA needs to have a legislation that effectively addresses anti competitive cartels, mergers and abuse of dominant position by corporations. These legislation needs to be enforced by an independent authority in a transparent way. Moldova since 2012 is getting help from the European Union and the single member states to strengthen its capacity to enforce competition law. The Competition council which is the authority that enforces the competition law has a wide range of possible interventions 1) Decision 2) Regulation 3) Prohibition 4) Intervention and inspection 5) Sanctions related to competition state aid and advertising 3b_sangiovanni_sangiovanni.docx Page 8/13

In 2015 the 2 main areas of infractions in the competition policy were: 1) abuse of dominant position 2) inaction of public authorities that restrict or distort competition Any new legislation needs to get the approval of the Competition Council in order to enter into force 9) Statistics The DCFTA in its provisions include also a modern statistical system that is considered important to provide all the information to the Institutions in order to take the rights decisions in specific issues. The Association agreement includes also other chapter such as a 1) very important financial assistance to Moldova trough grants directly from EU budget 2) It envisage at least in the long term the possibility of Moldova to adopt all the legislation in the banking and financial markets sector 3) transport sector 4) Energy 5) Environment 6) Digital sector 7) Consumer protection 8) Company law 10) Agriculture The EU supports agriculture and rural development in Moldova, with an important Program ( E N PARD ) approved in 2016. The agricultural sector in Moldova is very important and has a great potential to increase its export toward the European Union, the wine sector in particular boost great tradition and world records. 11) Employment and social policies 12) Education training and Culture 13) Science technology and Space 14) EU Agencies and Programes 15) Cross border Cooperation 16 ) Civil Society There is also another chapter covering Legal and Institution provision Autonomous Trade Preference Moldova before of signing the Association Agreement obtained a preferential treatment in its relationship with the EU trough the Autonomous 3b_sangiovanni_sangiovanni.docx Page 9/13

Trade Preference that was granted with the Council Regulation n 55/2008 on January 21 2008. The European Neighborhood Policy Action Plan (ENP Action Plan) for Moldova, which was agreed in 2005, foresaw the possibility to consider granting Moldova additional Autonomous Trade Preferences (ATPs), provided that Moldova substantially improved its system of controls and certification of origin of goods. In 2006 Moldova reformed its customs legislation and a satisfactory level of implementation of the new legislation was reached at the beginning of 2007 The enlargement of the European Union towards Romania had some negative effects on some Moldavian product. Under the Autonomous Trade Preference Moldova had the possibility to export without tariffs industrial products and to some extent also agricultural products, including wine, according to fixed quotas decided for each year. The total import level from Moldova in the European Union was, and still is very low, 0.03 %, at the time then opening up the European market to Moldova s product would not have damaged by any measurement local industry, but on the other hand would have helped the Moldavian wine and private economic sector in general to increase its export level and therefore Moldova s economic growth. The level of integration under the Autonomous trade Preference was related at Moldova s commitments to align to European legislation and values The possibility for Moldova to benefit from the Autonomous Trade Preference was also strictly linked to the compliance of the principle of the rules of origins of the products The reasons for temporary suspension of preferences should include serious violations of the rules for the entitlement to the preferential arrangements such as fraud or failure to provide administrative cooperation for the verification of origin of goods, and failure to engage in complies with the priorities of the ENP Action Plan. In the Autonomous Trade Preference was also included the possibility to return to the reintroduction of Common Customs Tariffs for products causing or threatening to cause difficulties to a producer of the European Union. The Autonomous trade Preference was not opening the Moldavian market to European products, it was only a way from Europe to try to spur Moldavian export and develop the economy in this way, given the fact that import from Moldova in general was not that relevant and was not threatening European producers in general. 3b_sangiovanni_sangiovanni.docx Page 10/13

Obviously The Autonomous Trade Preference did not have also any political purposes and in general was just envisaging the possibility of helping the Moldavian economy trough export without any goal of deeper integration of the 2 parties. The DCFTA went much further in integration between the European Union and Moldova but in any case it is important to analyze the differences of the 2 agreements in legal terms and also the different impact on the Moldavian economy and in particular for the wine industry. Legislation in the Wine sector The wine industry like I stressed in the introduction it is very important for the Moldavian economy and after the DCFTA a lot changed. Moldova was hit by 2 Russian embargoes on wines, back in 2006 and in the fall of 2013. In 2012 Moldova was at 14 th position in the world as a wine producers but after the new embargo experience a new decline in production that cost at least 6.6 millions US dollars to the country, according figures released by the Government. This event showed how vulnerable is the Moldavian wine industry and the economy in general to external factors, furthermore for Moldova s producers export is much more interesting that domestic markets in fact the wine production is almost 3 times higher than wine consumption in the country, this means exist a surplus that is needed to be exported. Taking all this into consideration it is crucial to find new markets to stabilize Moldova export and allow wine producers to market abroad their surplus of production. The DCFTA is basically all about this; it allows wine producers to freely export their production in the largest market of the world. Members of the Council of the European Union decided on December 17 th 2013 to open European market to Moldavian production, as a measure against the embargo Russia introduced a couple of weeks before, from January 1 2014 in advance in comparison of the DCFTA that started to work only in September 2014. Immediately became much easier for Moldova to export its wine, for instance was abolished the need to get an authorization from the Chambers of authorizations in order to get a license needed for export in the European Union. Another good effect after the liberalization of the EU market was the dramatic reduction in price of certificate of conformity which was an administrative barrier particularly heavy for small producers. 3b_sangiovanni_sangiovanni.docx Page 11/13

Moldova needs to pursue the diversification of the market and for sure the opportunity the DCFTA gives needs to be exploited to the the full. According to several studies after one year of its introduction the DCFTA brought several improvements for Moldova s export In general: 1) Total export from Moldova decreased 14.8 % (September 2014 August 2015) but if we differentiate export for geographical regions export toward EU was much more stable with a slight reduction of 1.4 % while export to traditional partners in the CIS countries decreased more drastically. 2) Furthermore if we tale into consideration agri-food business export toward the EU in the same period increased 10.8 % that in part compensated the dramatic fall in export toward Russia where the drop was 73 % 3) In order for Moldova to experience a bigger leap in export will be needed to meet requirements for non tariff barriers such as Sanitary and Phytosanitaty rules that are reducing the capacity of export in many field in particular for meat 4) During the first year of application many sectors of the agri-food find new stable markets for their export such as Spain Sweden and Bulgaria for grapes and even more impressive Moldova was able to sell wine to countries such as France and Portugal. 5) Despite big fear that after the DCFTA European export may boom was widespread they instead decrease by 16.4 % 6) We can say overall the first effect of the DCFTA on the Moldavian economy and in particular in the wine and agri food sector was positive even though the country needs to create a better business environment and comply with different sanitary and phytosanitary rules to benefit to the full of the free trade agreement The European Union now is the main commercial partner of Moldova representing 59 % of the total export of the country. Aim of the thesis In this thesis I want to study in details all the legal implications arising from the DCFTA for the Moldavian wine industry in particular, but also for the agribusiness sector in general, and to understand the economic impact these new legal framework may have. It would be also interesting to study the differences between the Autonomous Trade preference and the DCFTA in legal terms and also in its impact on the wine sector. 3b_sangiovanni_sangiovanni.docx Page 12/13

Legal provision very often do influence business life and can change how the climate in the private sector is, so it is crucial to understand it and to analyze thorough the situation. Moldova on the other hand needs a change in its business climate in order to attract more investments from abroad, and certainly the legal framework plays a very important role, and I hope with my research to contribute to an analysis of the state of the art and to come up also with some useful ideas. References: 1) DCFTA one year after Expert Group 2) What exactly is an EU-Moldova Association Agreement Rikard Joswiak 3) An assessment of viability of exporting Moldavian wines in the US: Necessity or Opportunity? 4) The DCFTA between Moldova and the EU- A Risk Assessment Jorg Radeke German Economic Team Moldova 5) Council regulation 55/2008 6) Moldova and Europe a short guide by Michael Emerson and Denis Cenusa 7 Assessing the potential of Moldova s Agri-Food Products in the context of EU Neighborhood Liliana Cimpoies Cornel Coser Universitatea Agrara din Stat din Moldova 8) Moldova Agri-Food sector dilemma East or West? Alexandru Stratan Director National Institute for Economic Research 9) Ending the cat and mouse embargo game. Making use of EU funds to steer West the Moldovan agricultural export Archive of European Integration University of Pittsburgh 3b_sangiovanni_sangiovanni.docx Page 13/13