Permanent Normal Trade Relations (PNTR) Status for Ukraine and U.S.-Ukrainian Economic Ties
CRS Report for Congress
Permanent Normal Trade Relations (PNTR)
Status for Ukraine and U.S.-Ukrainian
Economic Ties
William H. Cooper
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
The 109th Congress passed legislation to grant Ukraine permanent normal trade
relations (PNTR), that is nondiscriminatory, trade status. The importance of the issue
had been elevated since the “Orange Revolution” in Ukraine that led to the election of
Viktor Yushchenko as President of Ukraine. The issue before Congress was whether
to remove the requirements of Title IV of the Trade Act of 1974, including the so-called
Jackson-Vanik amendment, and authorize the President to extend unconditional
nondiscriminatory treatment to trade with Ukraine. On March 8, 2006, the House
passed (417-2) H.R. 1053, and the Senate passed (unanimous consent) it on March 9,
2006. President Bush signed it (P.L. 109-205) on March 23, 2006. This report will be
updated as events warrant.
Permanent normal trade relations (PNTR) status has been an issue in U.S.-Ukrainian
relations since the country obtained its full sovereignty with the collapse of the Soviet
Union in December 1991. Legislation to grant PNTR to Ukraine had been introduced in
previous Congresses but received no further action as critics raised concerns about some
Ukrainian trade practices, among other issues. Recently, the significance of the issue has
been elevated in the wake of the “Orange Revolution” in Ukraine that led to the election
of President Viktor Yushchenko at the end of 2004. At his April 4, 2005, Washington
summit meeting with President Yushchenko, President Bush pledged to work towards
securing PNTR for Ukraine. In his April 6, 2005 address to a joint meeting of the U.S.
Congress, President Yushchenko urged Members of Congress to grant Ukraine PNTR.
While ostensibly a trade issue, granting PNTR is seen by many as also a foreign
policy instrument to convey U.S. support for a democratically-elected leader who has
indicated his intention to strengthen ties with the United States and Western Europe and
reduce dependence on Russia. Yushchenko has made PNTR a top priority in U.S.-
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Ukrainian relations.1 At the same time, some view a debate on PNTR as an opportunity
for the Congress to weigh in on U.S. policy toward Ukraine and to make sure that U.S.
economic interests, as well as foreign policy interests, are considered.
Granting Ukraine PNTR status requires a change in law because Ukraine is denied
unconditional and permanent NTR under Title IV of the Trade Act of 1974, which
includes the so-called Jackson-Vanik amendment.
What is NTR Status and the Jackson-Vanik
Amendment?
“Normal trade relations” (NTR), or “most-favored-nation” (MFN), trade status is
used to denote nondiscriminatory treatment of a trading partner compared to that of other
countries. Only a few countries do not have NTR status in trade with the United States.
In practice, duties on the imports from a country which has been granted NTR status are
set at lower, concessional rates than those from countries that do not receive such
treatment. Thus, imports from a non-NTR country can be at a large price disadvantage
compared with imports from NTR-status countries.
Section 401 of Title IV of the Trade Act of 1974 requires the President to continue
to deny nondiscriminatory status to any country that was not receiving such treatment at
the time of the law’s enactment on January 3, 1975. In effect this meant all communist
countries, except Poland and Yugoslavia. Section 402 of Title IV, the so-called Jackson-
Vanik amendment, denies the countries eligibility for NTR status as well as access to
U.S. government financial facilities, such as the Export-Import Bank or the Overseas
Private Investment Corporation (OPIC), as long as the country denies its citizens the right
of freedom of emigration. These restrictions can be removed if the President determines
that the country is in full compliance with the freedom-of-emigration conditions set out
under the Jackson-Vanik amendment. For a country to maintain that status, the President
must reconfirm his determination of full compliance in semiannual reports (due by June
30 and December 31) to Congress. His determination can be overturned by the enactment
of a joint resolution of disapproval concerning the December 31st report.
The Jackson-Vanik amendment also permits the President to waive full compliance
with the freedom-of-emigration requirements, if he determines that such a waiver would
promote the objectives of the amendment, that is, encourage freedom of emigration. This
waiver authority is subject to annual renewal by the President and to its possible
congressional disapproval via a joint resolution. Before a country can receive NTR
treatment under either the presidential determination of full compliance or the presidential
waiver, it must have concluded a bilateral agreement that provides for, among other
things, reciprocal extension of NTR or MFN treatment. The agreement and a presidential
proclamation extending NTR status cannot go into effect unless a joint resolution
approving the agreement is enacted.
1 See CRS Report RL32845, Ukraine’s Orange Revolution and U.S. Policy, by Steven Woehrel.
The United States extended NTR treatment to Ukraine under the presidential waiver
authority beginning in June 1992 after the two countries signed and entered into force a
bilateral agreement as required under Title IV of the Trade Act of 1974. Since June
1997, Ukraine has received NTR status under the full compliance provision. Presidential
extensions of NTR status to Ukraine have met with virtually no congressional opposition.
Thus, for Ukraine permanent normal trade relations (PNTR) status is mostly symbolic
because its tariff status would not change.
While Ukraine remains subject to the Jackson-Vanik amendment, some of the other
former Soviet republics have been granted PNTR by the United States. For example
Kyrgyzstan and Georgia received PNTR in 2000. Most recently, Armenia received PNTR
in January 2005.
U.S.-Ukrainian Economic Ties
During the Cold War, U.S.-Soviet economic ties were very limited. They were
constrained by national security and foreign policy restrictions, including the Jackson-
Vanik amendment. They were also limited by Soviet economic policies of central
planning that prohibited foreign investment and tightly controlled foreign trade.
Since the collapse of the Soviet Union, Ukraine has struggled with shedding the
structures of a planned economy and building a market economy. These problems
hampered Ukraine’s economic growth early in the transition period. In the last few years,
Ukraine’s gross domestic product (GDP) has grown at fairly rapid rates, but many
observers contend that Ukraine needs to address problems with contradictory and
excessive government regulations and corruption if it is to reach its economic potential.
Ukraine remains heavily tied economically to Russia. It is highly dependent on
Russia for energy, and Russia accounts for around 18% of Ukraine’s exports and 40% of
Ukraine’s imports. However, Ukraine has been diversifying its trading partners. The EU2
has become an important trading partner.
The United States has encouraged closer economic ties with Ukraine since the
collapse of the Soviet Union. Along with granting conditional NTR status, the United
States has made government loan guarantees from the U.S. Export-Import Bank available
to U.S. exporters to Ukraine and has made insurance and credit programs from the
government-operated Overseas Private Investment Corporation (OPIC) available to U.S.
investors in the Ukraine.
Although increasing, U.S.-Ukrainian trade remains very small. In 2005, Ukraine wasthth
the 78 export market for the United States and the 75 source of imports. It accounted
for about 0.5% of total U.S. exports and 0.7% of total U.S. imports in 2005. In 2004, the
United States accounted for about 3% of Ukrainian exports and 2% of Ukrainian imports.
In 2005, over half of U.S. imports from Ukraine consisted of steel and steel products plus
coke that is used in making steel. A sharp increase in U.S. imports from Ukraine in 2004
2 Economist Intelligence Unit. Country Risk Service: Ukraine. March 2005. P. 17.
was due largely to the lifting the U.S. government restrictions on steel imports that had
been in place from March 2002 to December 2003.
Foreign investment in Ukraine is modest. Excessive government regulation, an
inadequate commercial code, corruption, lack of enforcement of property rights, and an
underdeveloped banking system have contributed to a poor investment climate.3 As of
January 1, 2005, the volume of foreign direct investment (FDI, investment in production
facilities, real estate, etc.) in Ukraine stood at $8.4 billion. Of that amount, investors from
the United States accounted for $1.2 billion, or 14%, and were the leading source of FDI
in Ukraine.4
Issues in U.S.-Ukrainian Economic Ties
Several economic issues may arise during a debate on PNTR for Ukraine. From the
U.S. perspective, one of the most serious issues is the lack of Ukrainian enforcement of
intellectual property rights (IPR). The United States Trade Representative (USTR)
identified Ukraine as a priority foreign country in 2002, 2003, and 2004, under the section
182 of the Trade act of 1974, as amended, also called “Special 301.” At this time, Ukraine
is the only country that the USTR has so identified, although other countries have been
identified as potentially problematic.5 The USTR took this action because of Ukraine’s
failure to adequately prevent the production and distribution of pirated optical disks, CDs
and CD-ROMs. As a result, the United States withdrew GSP benefits for Ukraine in
August 2001, a benefit that the United States had extended to promote trade and economic
development in Ukraine. In January 2002, the United States also imposed 100% tariffs6
under 23 tariff items with an annual value of around $75 million. On August 31, 2005,
the United States announced that it was going to lift the tariff-sanctions in recognition of
steps Ukraine had taken to improve its IPR laws. The Office of the USTR announced on
January 23, 2006, that it has restored Ukraine’s GSP benefits. 7
U.S. exporters and investors have cited other problems that plague the business
environment in Ukraine. For example, the Ukrainian government prevents foreign
banking and insurance providers from establishing branches. In addition, U.S. exporters
consider some Ukrainian government health and safety regulations and certification
procedures to be unnecessarily burdensome and government procedures for privatizing
state-owned assets to be insufficiently transparent. U.S. agricultural producers consider
3 U.S. Department of Commerce. U.S. and Foreign Commercial Service. Doing Business in
Ukraine: A Country Commercial Guide for U.S. Companies. February 2005. Not paginated.
4 Ibid and the Ukrainian Statistical Office.
5 Office of the United State Trade Representative. Special 301 Report. Washington. 2004.
6 Under “special 301,” the USTR is required to identify each year trading partners that do not
adequately protect intellectual property rights. If that country fails to remedy the situation, then
the USTR is required to apply trade sanctions commensurate with the losses to U.S. holders of
the IPR.
7 International Trade Reporter. September 8, 2005. p. 1419.
Ukraine’s restrictions on imports of American pork, poultry, and beef to be
unscientifically based and unnecessary.8
Along with the current application of the Jackson-Vanik amendment, Ukrainian
officials have raised other issues in its trade relations with the United States. Foremost
among them is the application of “nonmarket economy” (NME) status by the U.S.
Department of Commerce to trade with Ukraine. Under U.S. antidumping laws, “fair
prices” for imports from nonmarket economies are calculated differently then prices on
imports from market economies. The methodology used to make these calculations leads
to higher antidumping margins and, therefore, places imports from Ukraine at a
competitive disadvantage vis-a-vis other imports or U.S. domestic production. In August
2002, the Department of Commerce indefinitely deferred its final decision on whether to
eliminate the NME designation for Ukraine and told Ukraine it needed to resubmit its
request for such status. The Ukrainian government did so in March 2005, and the
Commerce Department granted Ukraine NME status on February 17, 2006.
Prospects, Implications and Legislation
Although PNTR has been an issue in U.S.-Ukrainian relations for many years, trade
issues and political issues such as allegations of official Ukrainian involvement in the
September 2000 murder of Ukrainian investigative journalist Georgy Gongadze had
caused U.S. political leaders to distance themselves from the regime of then-Ukrainian
President Kuchma. The election of President Viktor Yushchenko has elevated the priority
of PNTR for the Bush administration and the Congress. Support for PNTR for Ukraine
appears strong. Nevertheless, concerns about IPR protection in Ukraine and other trade
issues are likely to arise during a debate on PNTR. Some non-trade issues may arise as
well. For example, while the representatives of the Jewish community acknowledge
improvement in the lives of Ukrainian Jews, they have expressed concerns about what
they consider to be the slow pace at which Jewish community property, seized during the
Holocaust and the Soviet period, is being returned its owners.
Granting Ukraine PNTR status will have little direct impact on U.S.-Ukrainian trade.
Ukrainian imports have entered the United States on an NTR or most-favored-nation
(MFN) basis since 1992. However, Ukraine is negotiating with the United States and
other members of the World Trade Organization to enter the WTO. WTO members must
extend reciprocal MFN (PNTR) treatment to one another. If Ukraine becomes a WTO
members and the United States does not grant Ukraine PNTR, it would force the United
States to invoke the nonapplication Article XIII of the WTO agreement which would
prevent the application of the entire WTO agreement, including all of Ukraine’s
concessions) between the United States and Ukraine.
PNTR has considerable political importance to Ukraine. It would signify Ukraine’s
treatment as a “normal” country by the United States. The timing of extending PNTR
could have political implications as well, especially relating to Russia. Russian President
Putin has been pressing the United States to grant it PNTR. President Bush has pledged
8 Office of the United States Trade Representative. National Trade Estimates Report on Foreign
Trade Barriers. March 2005.
to him on several occasions to work with the Congress to obtain PNTR but legislation
introduced in the 107th and 108th Congresses to do so received no further congressional
action because of concerns regarding Russian IPR and other trade practices. The Russian
political leadership would likely be upset if Ukraine received PNTR from the United
States before Russia.
The House passed (417-2) H.R. 1053 (Gerlach), on March 8, 2006, the Senate passed
(unanimous consent) it on March 9, 2006. The President signed the bill into law on
March 23, 2006 (P.L. 109-205). H.R. 1053 authorizes the President to determine that Title
IV of the Trade Act of 1974, as amended, would no longer apply to Ukraine and to
proclaim non-discriminatory treatment (normal trade relations status) to the products of
Ukraine.9 Under H.R. 1053, once the President has taken these actions, Title IV
(including the Jackson-Vanik amendment) would no longer apply to Ukraine.
9 On April 5, 2005, Sen. McCain (AZ) introduced an amendment (S.Amdt. 267) to S. 600, a bill
to authorize funding for the State Department, that would eliminate the Jackson-Vanik
requirements for Ukraine. The amendment is pending at this writing.