On March 19, 2024, Bill C-57, An Act to implement the 2023 Free Trade Agreement between Canada and Ukraine (the New CUFTA) received royal assent, introducing a modernized version of the Canada-Ukraine Free Trade Agreement. Negotiated against the backdrop of the ongoing Russian invasion of Ukraine, the New CUFTA aims to strengthen economic relations between Canada and Ukraine and create opportunities for economic development by further reducing barriers to reciprocal trade in goods and services. The updated Agreement will come into force on the first day of the second month after both parties have completed the necessary procedures to ratify, which will likely occur in 2024.
The New CUFTA is an update of the original agreement that entered into force on August 1, 2017, which included a provision (Article 19.2) that committed the parties to review, and potentially expand, the agreement within two years of its entry into force. Since the original agreement already eliminated tariffs on the vast majority of products traded between the parties, the modernization talks focused on expanding the agreement to cover services and investment and addressing non-tariff barriers to trade. The New CUFTA maintains the market access for goods (tariff reduction) from the previous agreement and introduces new chapters on cross-border trade in services, investment, financial services, telecommunications, and regulatory practices. The New CUFTA also emphasizes inclusive trade, integrating chapters on trade and gender, trade and Indigenous Peoples, and trade and small and medium-sized enterprises (SMEs), as well as updating certain aspects of existing chapters.
Preferential market access under free trade agreements are generally limited to goods that "originate" within the countries that are part of the agreement. When a product is entirely manufactured within a specific country—using locally sourced plants, animals, or minerals—there are no complications regarding its origin. However, determining the origin becomes complex when a product contains imported materials or resources. Typically, free trade agreements allow materials sourced from other party states to the agreement to contribute to the qualifying status of the item, a principle known as bilateral cumulation.
The New CUFTA also introduces the concept of diagonal or cross cumulation, allowing materials to be sourced from countries beyond Canada and Ukraine with which both countries have their own free trade agreements, without affecting the origin status of the final product. This rule allows manufacturers to access a wider range of global supply chains and enhances their competitiveness. The following list of common free trade agreement countries is specified in the New CUFTA:
(i) the Member States of the European Free Trade Association;
(ii) the Member States of the European Union;
(iii) the State of Israel; and
(iv) the United Kingdom of Great Britain and Northern Ireland.
This list may be revised.
The New CUFTA's approach to cumulation marks a significant evolution from traditional bilateral cumulation, reflecting the modern trend in free trade agreements that recognize a more interconnected global trading system and offering tangible benefits for economic growth and development between Canada and Ukraine.
The original CUFTA did not contain an investment protection chapter, although Canada and Ukraine have had a separate Foreign Investment Protection and Promotion Agreement in place since the mid-1990s. The New CUFTA offers a comprehensive framework for investments between Canada and Ukraine, including the definition of "investment", protection of investments, national treatment, most-favored-nation treatment, treatment in case of armed conflict, expropriation, and investor-state dispute settlement mechanisms.
Furthermore, the provisions for dealing with instances of armed conflict and expropriation provide assurance against political and security risks, offering a safeguard for investments in volatile situations (such as the current Russian invasion of Ukraine). The investor-state dispute settlement mechanisms offer a process for resolving disputes, which reinforces investor confidence by ensuring that grievances can be addressed effectively and fairly, avoiding the uncertainties of local courts. This investment framework is important for fostering a stable and attractive investment climate, encouraging significant capital flows between Canada and Ukraine, and ultimately contributing to the economic development and prosperity of both nations by facilitating investments in key sectors, enhancing job creation, and fostering innovation.
The carve-outs for non-conforming measures for investment and cross-border trade in services protections (see next section) are implemented through a "negative list" approach that circumscribes and clearly identifies measures or sectors that are exempt from the agreement's requirements.
The New CUFTA provides a framework to regulate international trade in services between Ukraine and Canada, detailing the scope of services covered, national treatment, most-favored-nation treatment, and market access without restrictions on the number of service suppliers or transactions. It encompasses a broad spectrum of service sectors, guaranteeing equal treatment for service providers from both nations (national treatment), ensuring that service suppliers receive as favorable treatment as any third country (most-favored-nation treatment), and facilitating market access by eliminating quotas on the number of service suppliers or transactions. This regulatory framework aims to establish an open and competitive market environment, fostering cross-border collaboration and promoting growth in the services sector. As a result, it enhances economic interconnectedness and improves the efficiency of service delivery between the two countries.
The new Development and Administration of Measures chapter also sets guidelines for licensing and professional qualification requirements to ensure that such requirements are transparent and fair and do not represent barriers to trade in services.
For financial institutions and investors within the territories of Canada and Ukraine, the agreement aims to ensure a stable and transparent regulatory environment for the cross-border financial services necessary to support investment. Specifically, the agreement:
The New CUFTA recognizes the importance of the digital trade and aims to establish an environment conducive to its expansion. Specifically, the New CUFTA:
The New CUFTA includes commitments to combat climate change, promote a circular economy, reduce pollution, manage chemicals responsibly, and minimize plastic pollution and waste. It also introduces anti-corruption regulations, requiring various administrative measures to prevent bribery and other corrupt practices, enhancing transparency and integrity in public services, and encouraging private sector and civil society involvement in anti-corruption efforts. These commitments include:
The New CUFTA has been designed to be more inclusive by focusing on the following initiatives:
The labour chapter in the New CUFTA is updated to strengthen labour protections and working conditions in both countries, including a requirement to ban imports of goods produced in whole or in part with forced or compulsory labour or with child labour (already in place in Canada since 2020 under the Customs Tariff, which was expanded to include child labour in 2024), incorporation of International Labour Organization principles and definitions, and requirements to ensure appropriate, transparent and accessible processes for investigations into alleged violations of labour laws and dispute resolution.
On April 10, 2024, the Ukrainian Parliament adopted a Draft Law that ratifies the New CUFTA, which is awaiting the President of Ukraine's signature. With the implementation bill already passed by Canada's Parliament, this means that the updated agreement will likely enter into force in the coming months.
With increased focus on trade and investment, along with Canada's ongoing military assistance to Ukraine in relation to the Russian invasion of Ukraine, the New CUFTA marks a new chapter in Canada-Ukraine relations. It is, however, also important to recall that certain geographic territories of Ukraine, namely the Russian-occupied territories of Crimea, Donetsk, Luhansk, Kherson, and Zaporizhzhia regions, are subject to Canadian economic sanctions. The sanctions restrict the ability of Canadians or persons in Canada to do business in, or engage in financial transactions with, these Russian-occupied regions. Caution should be exercised, and risk-based due diligence performed, on all prospective transactions that involve or may involve persons or entities located in the targeted regions.
To discuss the business opportunities the New CUFTA presents for companies and investors or compliance with the requirements of the agreement or other trade-related regulations, please contact the authors or any member of the Bennett Jones International Trade & Investment group.