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MARKET ACCESS ANALYSISTO IDENTIFY BARRIERS

IN CHINA AND IN RUSSIA AFFECTINGTHE EU TEXTILES INDUSTRY

Final Report

Franklin DEHOUSSE /Katelyne GHEMAR /Tsonka IOTSOVA

CENTRE D’ETUDES ECONOMIQUES ET INSTITUTIONNELLES - C.E.E.I.

Brussels – 10/04/2000

CEEI –CHINA/RUSSIA FINAL REPORT 10/04/00 2

MARKET ACCESS ANALYSISTO IDENTIFY BARRIERS

IN CHINA AND IN RUSSIA AFFECTINGTHE EU TEXTILES INDUSTRY

Final Report

Franklin DEHOUSSE / Katelyne GHEMAR / Tsonka IOTSOVA

This Report was prepared with financial assistance from the Commission of theEuropean Communities. The views expressed herein are those of the Consultant, and

do not representany official view of the Commission


TABLE OF CONTENTS

EXECUTIVE SUMMARY

PART 1:

TRADE AND INVESTMENT BARRIERS IDENTIFIED BY THE EU TEXTILESINDUSTRY

PART 2:

CHINA

PART 3:

RUSSIA


EXECUTIVE SUMMARY

Objectives

Russian and Chinese markets have been investigated to map out trade obstaclesmet by Community exporters. These barriers hamper Community exports of textilesand clothing products and/or supplies of raw materials (CN Chapters 50 – 63). Thestudy aims to fulfil three objectives: (1) to identify trade obstacles implemented bythese countries; (2) to evaluate the impact such barriers have on EU exports, (3) toassess the compatibility of these restrictions under the terms of international orbilateral agreements.

Work Methodology

In the first phase, the consultant collected information from the EU textiles industry(individual companies, National associations, EURATEX) and Commission servicesin order to identify the most damaging restrictions. In the second phase, moredetailed research was carried out in both countries (missions to China and Russia).In the third phase, a detailed analysis was made on the identified restrictions.

A mission was conducted in China from 29 November to 10 December 1999. Amission to Russia took place from 24 January to 30 January 2000. These missionsaimed at meeting both National administrations and third countries operators(importers and other contacts). After the missions, a legal analysis was conductedon the measures identified as most damaging by the industry.

The main findings

Three fundamental comments must be made:

• EU exporters suffer in both markets from a total lack of transparency of importand export rules, which affects differently their trade flows with China and Russia.

• EU exporters face a large variety of trade restrictions in both markets. Some ofthese measures are of horizontal nature (local taxes for Joint Ventures,implementation of customs duties, customs procedures) while others arespecifically applicable to textiles and clothing (labelling, certification, quotas fortextile products, export restrictions).

• The impact of these measures is much more stringent in China than in Russiawhere exports have much developed, despite the implementation of several traderestrictions.


1. The lack of transparency affects the EU productsbefore and after clearance

The lack of transparency is by far the main obstacle encountered byEU textile and clothing companies in China and Russia. This affectseach step to be followed by the EU producer before shipping thegoods, by the forwarder agent and the Third country importer duringclearance, and the distributor during the retail.

1.1. Before clearance

• the nature of documents for clearance: this can change from one day to another,without prior notification to the EU exporter or the importer.

• the pre-shipment inspections to be conducted, including certification inspections• the exact requirements to be affixed on the labels: in both countries regulations

have set up drastic requirements, which would completely hamper exports if fullyimplemented by Customs Authorities.

• the compliance of requirements concerning certification of products is unclear inparticular in Russia where there are many different certification schemes.Products benefit or suffer from a complete “case by case” approach.

• the exact amount of import duties to be paid: EU companies have often littleinformation on the real level of total import duties charged on their products andthe problems occurring during clearance.

• the nature of products subject to quotas, and therefore to import licence: InChina, the exact positions for which quotas are implemented, their quantitativelevel and the criteria on which the import licenses could be delivered are nottransparent.

1.2. During clearance

• Customs Authorities require constantly new documents. Suddenly new types ofimport authorisations are required for a specific product (China) or importdocuments are requested in specific format (Russia). These practices delayexports and constitute strong disincentives for EU exporters.

• The implementation of minimum or reference prices for certain products is alsoseen as uncertain and blackmail by certain EU exporters. This involves moreparticularly imports of fabrics in Russia. However, valuation remains a strongconcern for China.

• There are physical checks on imported goods concerning the productcomposition, the compliance of labelling and certification rules.


1.3. After clearance

• Controls conducted on imported goods are often reported to be stringent incertain cases: This is for instance the case for labels and certificates in Russia.

• Distribution schemes are not transparent neither in Russia nor in China, wheremany restrictions remain and will hamper potential exports of clothing products.

2. There are both horizontal and specific restrictions

2.1. In China, more trade barriers were identified

• China implements a large variety of trade restrictions affecting either (1) theimport of textile products, (2) the processing of textile products by EU companiesand their distribution on the domestic market or (3) the export of some rawmaterials. Some barriers are of horizontal nature, the rest being specificallyapplied for textiles.

a) Horizontal measures

These measures also affect EU exports or investments in other industrial sectors.

• Changes in customs rules: in particular affecting inward processing rules, whileimporters are classified among different categories.

• Export performance rates for Joint Ventures (JV): it is alleged that different exportperformance levels are implemented.

• Local taxes: EU–Chinese JV and EU companies are required to pay anincreasing number and amount of local taxes, which are alleged not be chargedequally on local producers.

• Distribution rules still hamper the development of independent shops selling EUoutlets.

• State trading affects in particular the supply and the costs of raw materials for EUsilk producers and the distribution of EU products imported into China. Despiterecent changes, it is still problematic for EU producers.

b) Measures affecting textiles

• Import quotas are enforced on about 50 tariff lines. The delivery process ofimport license hampers dramatically (1) direct imports of EU products, (2) EUcompanies having realised huge investment to produce and distribute on thedomestic market with imported raw materials subject to quotas. The quotaimplementation is considered by far by various EU producers as the main tradebarrier.

• Labelling rules: contain strict requirements. However, their implementation is notreported to be damaging EU exports but could constitute a serious obstacle iffully implemented by Chinese Authorities.

• Export restrictions: are still felt discriminatory by EU silk producers.


2.2. In Russia, priorities are certification, customs rules and tariffs

a) Horizontal measures

• Changes in Customs rules: this affects the implementation of customs duties(specific duties), the nature of import documents, the implementation of minimumimport prices (affecting other sectors).

• Rules on distribution: they impede EU producers to distribute themselves theirproducts.

b) Measures affecting textiles

• Tariffs and specific duties: their level is too high and complaints focus on thenon-transparency of the dual calculation system.

• Certification: is felt to be a strong disincentive for some EU exporters, inparticular SME, which will export little quantities and are not used to certificationschemes. However, it has to be stressed that EU companies got used to theircertification schemes over the years under the current system and therefore fearany changes, which could affect the precarious equilibrium they might have foundon that issue with their customers and with Russian Authorities.

• New rules for certification could be soon implemented: The 1999 766 Decree isnot yet implemented. It concerns a limited number of textile products for which aDeclaration of conformity could be made. These rules are presented as animprovement by the Russian authorities. However, EU operators fear theirimplementation for several reasons. For instance, a Foreigner cannot do theDeclaration. Another inconvenient for EU operator is the need to register thedeclaration in a Gosstandart accredited body.

• Transparency: The main problem affecting namely the certification of textileproducts in Russia is the lack of transparency. The implementation rules areoften not made public immediately and EU operators face difficulties to obtain therelevant information.

3. The impact of trade measures affects more severely exports to China

• The trade restrictions in China aim at protecting the domestic industry from EUexports of quality products. Restrictions affecting JV aim at hindering them todistribute their products on the domestic market, and, in certain cases toconstrain them to use Chinese raw materials instead of imported inputs.Changing clearance procedures also target specific products (e.g. requirement ofan import authorisation on synthetic fabrics). This affects and restricts EU tradeflows. This also explains why EU exports to China remain rather limited whereasChina has become our first supplier in textile and clothing products.


• Conversely, exports of EU products to Russia have constantly increased over theyears and are recovering after the 1998 crisis. Trade balance in textile andclothing products remain largely positive. Therefore, import measures applied fortextile products are more felt by EU operators as an illustration of the Russiantrading system, than as a voluntary protectionist policy. This explains why the EUindustry itself is sometimes reluctant to criticise openly the import regime and inparticular the certification system. Big EU exporting companies got used to it andfear a new regulatory system, which would allow more corruption, lesstransparency, and new problems that will hinder their exports.


PART 1

TRADE AND INVESTMENT BARRIERSIDENTIFIED BY THE EU TEXTILES INDUSTRY


TABLE OF CONTENTS

§1. ORGANISATION OF RESEARCH

1.1. The objectives of the study

1.2. The questionnaire to the EU textiles industry

1.3. The meetings with the textiles EU industry

1.4. The Preliminary Report

1.5. The missions to China and Russia

1.6. The legal analysis

§2. RESULTS OF CONSULTATIONS WITH THE EU TEXTILESINDUSTRIES

2.1. The problems identified for China

2.2. The problems identified for Russia


PART 1: TRADE AND INVESTMENT BARRIERS IDENTIFIED BY THEEU TEXTILES INDUSTRY

§ 1. ORGANISATION OF RESEARCH

1.1. The objectives of the study

• CEEI research methodology has been adapted to the objectives of the study. Thefirst objective is to identify obstacles implemented by China and Russia. Thesecond objective is to evaluate the impact of such barriers on EU exports oftextile products and EU supply of raw materials. The third objective is to assessthe compatibility of these restrictions under the terms of internationalagreements.

• According to these objectives, in cooperation with the Commission, the first stageof the research was focused on drafting and distributing a standard questionnaireto EU operators, developing geographical files and organising meetings with EUoperators in order to gather precise data on identified barriers. During the secondstage, field missions were organised in China and Russia. The third stage wasdevoted to legal analysis and drafting of the Final Report.

1.2. The questionnaire to the EU textiles industry

• The first task carried out by the consultant was the identification of trade barriersto the EU industry in countries under review and the evaluation of these barriersimpact on producers. For this purpose, a questionnaire was drafted in co-operation with EURATEX and the Commission and sent to EURATEX Membersand individual companies which had already mentioned having difficulties toexport to these markets (1998-1999 CEEI Textile Market Access Study 1).

• The questionnaires aimed at giving a preliminary overview of problems (barriers)encountered by European operators when exporting their products or importingtheir raw materials. The Industry was invited to give its comments on the barriersit is encountering and the impact barriers have on their individual business.

• The questionnaire presented a selection of barriers with practical examples.Operators were also invited to define the scope of problems encountered (traderestrictions, administrative problems, additional costs).

1 "Market Access Study to identify trade barriers affecting the EU textiles industry in certain thirdcountry markets" Final Report: 23 March 1999.EC site: (http: //www.europa.eu.int/comm/trade/mk_access/legis.htm).


• Operators were requested to indicate the possible effects of identified barriers ontheir own situation (additional costs, markets and production losses…). Thequestionnaire was meant to be a starting point followed up by interviews.

1.3. The meetings with the EU textiles industry

1.3.1. The meetings with textile companies

• CEEI attended meetings with EU companies who had returned completedquestionnaires in order to obtain more details on barriers, which had beensignalled. Some other companies preferred having a meeting with the consultantinstead of completing the questionnaire.

• These meetings were organised with management representatives and, in certaincases, with persons in charge of customs procedures. These conversations werefruitful because they pointed out specific and practical cases of problemsencountered by the companies:

- When preparing the import documentation (certification, products compositionissues);

- When having invested in the countries under review, problems encountered bythe local staff with Third countries Authorities;

- Additional costs caused by the implementation of technical barriers or requestedinspections (pre-shipment, certification, labelling issues);The meetings were organised with companies of different textile sub-sectors(carpets, fabrics, and apparel).

1.3.2. The meetings with textile associations

• Co-operation with EURATEX was followed on a continuous basis. Contactsdeveloped with EURATEX representatives enabled the consultant to be providedwith:

- Basic information on the main problems registered by this associationet European level;

- Information on persons and companies of the textile and apparelindustry to be contacted.

• The consultant received full support from EURATEX during the research. Inaddition, meetings were organised with the most motivated and representativeIndustry associations. These associations know their export oriented members(those who answered questionnaires). They can also gather operators fromdifferent sub-sectors of the textiles industry. They distributed the questionnairesto the most oriented export companies.


1. The first mission was organised by the Finnish Textiles and Clothing Association(28 October – 1 November 1999). This mission mainly focused on the problemsof access to the Russian market. The association organised various meetingsand visits to Finnish companies exporting to Russia and having developed aninteresting export practice to this market.

2. Two missions took place in Milan (11 November and 22 November 1999) in orderto meet the Representatives of the Italian Industry (Federtessile, AssociationSerica Italiana) and individual companies which have developed their exports toor have made investments in China.

3. Contacts organised with the support of French Knitting Association. .

4. Contacts were also taken with the German Knitting association.

5. Several contacts were developed with the European Carpet Association (ECA)and the Belgium Textile Association (FEBELTEX).

6. These meetings gave CEEI more precise information on trade practices andbarriers. There were successful and gave the opportunity of further contacts withenterprises and their agents or customers. This helped the consultant to organiseinterviews in the countries under review.

1.3.3. Meetings with Commission services

• The consultant arranged several meetings with various Commission officials inthe different services concerned by the study:

- Meetings with DG Trade, Textile Unit and Market Access Unit- Meetings with DG Enterprises representatives (textiles and TBT)- Meetings with EC Delegations in China and Russia.

1.4. The Preliminary Report

• The Preliminary report was delivered to the Commission services on 3 January2000. This report summarised the results of the research phase with the EUtextiles industry (questionnaires, meetings, personal interviews). It alsopresented the main outcomes of the mission conducted in China.

1.5. The missions to China and Russia

• CEEI missions were organised as follows:


1. The first mission took place from 29 November to 10 December 1999 to Chinaand Hongkong.

2. The second mission took place in Moscow and St Petersburg from 24 January to2 February 2000.

• During these missions, the consultant has conducted interviews with thecompetent national authorities (commerce, industry, customs) and some privatesector representatives (importers, distribution, forwarders, Customs agents). Theobjective was to get a more precise idea on the implementation of barriersidentified by the industry and to gather the legal and administrative informationnecessary to the constitution of the legal files.

• Entities and persons interviewed during these missions are as follows:

Mission to China Persons /AuthoritiesHong-Kong EC Delegation: meetings with Head of Delegation, Trade counsellors.

PEE French Embassy: meetings with Head of Post, trade counsellorsPEE French Embassy: meetings with several agents and importers ofFrench productsEC Delegation/Spanish Chamber of Commerce: meeting with importers

Shanghai EU/Chinese JVEU/Chinese JVPEE French Embassy: Trade counsellorImporter of EU fabrics, agent of EU companyForwarder importing inputs for EU companiesVisit to Department stores

Beijing EC Delegation: meetings with Trade counsellor and Trade adviserMOFTECCustoms AuthoritiesChina National Import Export Corporation (CNSIEC)EU/Chinese JV importing textiles and ClothingChinese Import export cpy importing EU fabricsEU Forwarder AgentDebriefing Meeting with EU Member StatesSIQ (State agency for commodity inspections)


Mission to Russia Persons /AuthoritiesMoscow EC Delegation: meetings with Trade counsellor

Meeting with EU Member States Trade attachesGosstandart AuthoritiesCustoms AuthoritiesMinistry of EconomyImporters of EU garments (several meetings)Importer and retailer of EU productsGosstandart Accredited BodyInstituto Commerciale Estero (ICE)Importer of EU fabrics

St Petersburg Institute for Testing and CertificationImporter of EU fabricsImporter of EU apparel productsImporter of EU apparel products

1.6. The legal analysis

• In parallel to desk and field research, a study on legal bilateral and multilateralagreements was carried out (WTO agreements, and bilateral trade agreementsof the European Community with China and Russia). Even if the provisions of theWTO agreements cannot yet be presently invoked in a trade dispute, a legalanalysis is illustrated by regulations and texts implementing identified barrierscollected by the consultant during the research. The legal assessment of theimplementation of some measures can be interesting during negotiations andafter accession. In addition, in the case of Russia, some provisions of the GATTare applicable in accordance with the Partnership and Co-operation Agreementconcluded between the Russian federation and the EU.

• The study attaches particular importance to the bilateral agreements concludedwith China and Russia. Concerning China, the two textile agreements provide thelegal basis for protection of the EU operators, which can be used before Chineseaccession to WTO. Concerning Russia, the Partnership and Co-operationagreement contents provisions concerning not only trade-related issues but alsoprovisions related to the approximation of laws, intellectual property andinvestment. This allows a deeper analysis of the Russian foreign trade policy andmeasures taken by Russian side for the implementation of the agreement.

• The bilateral agreement on textile products with Russia has abolished allquantitative restrictions between the two parties. The double licensing systemhas been maintained. It was necessary to examine if the non-tariff measures(certification) applied to the import of textile products into Russia have not beenimplemented to hamper the free trade between parties; and in occurrence howthey can be eliminated.

• The final stage of the research has been focused on the analysis of the findingsof CEEI missions and taking into account the needs expressed by the


Commission and the EU industry. The objective is to constitute detailed files onboth countries, each identified restriction has been assessed as follows in part II(China) and part III (Russia) of the present Report:

(1) explanation of the measures based on legal texts and description given bythird country authorities (referred as "Measures");

(2) implementation of the measures in the third country, based on interviewsconducted with importers, agents of EU products and customs agents(referred as "Implementation");

(3) a legal comment on its compatibility under the present internationalagreements (referred as "Legality").


§2. RESULTS OF CONSULTATIONS WITHTHE EU TEXTILES INDUSTRIES

• Consultations with the EU textile industries started with the distribution of thequestionnaire to EURATEX national and sector associations and individualcompanies. In addition, interviews with EU companies have been conducted. Atthe end of the first stage, CEEI compiled a short list of identified barriers on thebasis of the information provided in returned questionnaires and interviews.

• This Chapter gives a preliminary overview on barriers currently identified by EUoperators in questionnaires, meetings and personal interviews. Some generalcomments can be made:

• According to both EU exporters and importers of EU products in both markets,trade flows are hampered by a constant insecurity on the identity ofrequirements for clearance affecting the shipments to be imported. Thesechange drastically from one day to another. This lack of transparency on theimport conditions (documents, taxes) discourages many EU exporters as well astheir customers.

• As expected, there is a huge gap between theory and practice : the theoreticallegal requirements for import and practice may differ significantly. However, andparadoxically, some of these discrepancies enable sometimes imports to takeplace. Generally, in both countries, the mere level of customs duties is by itselfthe main trade barrier in direct flows. This report insists on some importrequirements and explains the implementation schemes as described ininterviews with EU exporters and importers of EU products.

2.1. The problems identified for China

• EU operators identified China as a country with important restrictions hamperingeither the import of finished products (textiles and clothing) or the export of someraw materials (silk). China is a problematic market where EU exporters areencountering increased difficulties They reported a large variety of trade barriers:

• Customs duties and additional import taxes are allegedly the most importantobstacle to EU direct exports of apparel and of textile fabrics. In addition to thecustoms duties, EU operators also indicated various additional import taxes,which raise the level of total import duties (namely a consumer tax and an importsurcharge, and a registration fee).

• Customs formalities are complex, cumbersome, heavy and costly. They arementioned as a major difficulty encountered by some EU operators and theirclients (in OPT schemes). Various problems were reported:


- Constant changes in customs regulations resulting in blockage orrejection of goods (involving in particular specific authorisations forimporting certain items).

- Documentation: general complaints about documents for clearance.- Excessive clearance delays. In particular when problems arise with

documents.- Customs valuation: several operators complained about the

implementation of a minimum import price system for textiles andapparel products

- Wrong classification (systematic for some products – blended fabrics).

• Import restrictions : Problems lay primarily in quotas and import licenses.

- Quotas: are implemented on about 50 HS positions and alleged ofhampering the import of several textile items (wool and cotton fabrics,synthetic yarns) and considered as the main trade barrier by some EUoperators.

- Import Licenses required for several products, including the import ofsamples of certain products (decoration fabrics).

• Technical barriers: Operators mentioned difficulties in several areas:

- Quality and conformity controls alleged to be problematic and result inadditional costs for importers of EU products.

- Test and certification issues conducted by different authorities forimported and domestic products. Discriminatory control betweenimported and domestic products for certification purposes. Proceduresfor imported products allegedly more expensive and morecumbersome.

- Sanitary regulation quarantine inspection on imported products.- Labelling regulation: according to some EU companies, the

requirements hamper exports and result in significant additional costs.These include the name of the exporter, the name and fiscalregistration number of the importer. EU producers often do not knowthe importer when labelling their products. They force the producer tomake a different label, which results in additional costs2. (Translation oflabels, requirements on product composition and importer data inChinese) .

• Investment barriers: They result of the implementation of trade obstacles or newobstacles faced once the investment has been realised:

- Export performances: according to EU operators, different exportperformance levels are implemented for EU textiles JV (from 50% to70%). This impedes the penetration of the local market with productsprocessed in the EU Chinese/JV.

2 For instance, an EU apparel company estimated the cost of each label at 1.30 EURO. It sufferedlosses resulting from this barrier at about 130.000 EURO/year.


Quotas: on the remaining percentage for which distribution and saleson the local market are authorised, JV can be subject to the quotassystem for the import of their inputs, which in practice hinders stronglythe sales on the local market.

- Local taxes: EU/Chinese JV or EU companies are requested to pay anincreasing number and amount of local taxes. EU companies claim thatthese taxes are not perceived on an equal way to domestic producers.These taxes (including the difficulty to recover the VAT for otherservices and items than the raw materials) can amount 10% the JVCompany turnover.

- Credit restrictions combined with import guarantees discourageimporters from buying EU products. EU exporters complain about thenon-convertibility of the Chinese currency, which makes transactionsinsecure for small and medium size enterprises.

• Export restrictions: these affect in particular the export of the silk raw materials(raw silk and thrown silk yarn):

- Export licence fee: estimated to be 1 – 3%.- Other export fees: non-total VAT refund (-2%), inspection fees (2%).- Double price system for raw silk different prices applied to raw silk

materials exported to EU weavers and to Chinese textile and apparelindustry.

• Other problems mentioned , notably new rules for OPT (significant financialguarantee). Credit restrictions (difficulties in obtaining credit) and absence ofprotection of intellectual property rights were also indicated as highlyproblematic.

2.2. The problems identified for Russia

• Trade barriers – tariff barriers, import taxes, customs formalities, certification,sanitary regulations and labeling - in conjunction with the difficulties to cope withthe local authorities and the endemic corruption make normal exports to Russiadifficult and in some cases almost impossible.

• Even if current trade flows demonstrate positive trade balance in textileproducts in 1998 and in 1999, after the crisis; EU exporters complained aboutseveral restrictions.

• Customs duties and additional import taxes are considered by various EUindustry operators as the most important obstacle to EU exports of textiles andclothing products. EU products are alleged to be affected by import dutiesbetween 15% and 60% of CIF value. Complexity of the dual system of calculation


of import duties is often criticised. The system of minimum duty/kg (specific duty)renders the transparency of the calculation method rather difficult for EUexporters.

All questionnaires and interviews emphasise the lack of information. They alsounderline the unpredictability of the final duties charged by Customs authorities.In addition to VAT (about 20%), other import duties are allegedly collected byCustoms: files fees, clearance duties, additional VAT and fees for importerregistration are levied, but their amount and existence are variable according tothe EU operators.

Some operators estimated the total impact of import duties 30% - 70% of theproduction value. The uncertainty concerning the exact amount of all taxesprevent a lot of EU companies from seeking business opportunities in Russia,despite the enormous perspectives offered by this market. This situationgenerates insecurity and considerably harms business. Operators must oftenresort to under-evaluation and under-billing of their products

• Customs formalities In addition to endemic corruption, theft and constanthassle, operators reported many difficulties with Russian Customs. Formalitiesare complex, cumbersome, heavy and costly. Given the peculiarity of customsprocedures in Russia, they are conducted exclusively by Russian importers andtheir brokers. This explains why the EU industry has little information on theseprocedures. Various problems were reported:

- Documents and formalities are complex and numerous, most documents arewritten in Russian and have to be filled in also in Russian.

- Clearance delays are excessive and depend to a large extent of the blackpayment given to some customs officials. Problems related to the customvaluation occur in connection with the implementation of a minimum importprice by Customs authorities that are competent to determine the value ofimported products. The existence of minimum import prices prevents sales ofcertain items and stocks to Russia.

- Wrong classification of the products seems occasional, but a number ofoperators declared that it is a way to oblige them to pay higher customsduties.

- Several operators have also mentioned problems with the determination ofthe origin of the products and the use of the rules of origin.

- Pre-shipment inspection: the goods are sometimes subject to a pre-shipmentinspection. It delays exports and the additional costs are estimated between1000 and 2200 EURO.

• Certification (GOSSTANDART Certificate and Hygienic Conclusion)

Non transparency: these procedures are reported to be excessively complex,burdensome and costly. Each EU company follows its ("via crucis") scheme forcertification. Different implementation schemes among Member Statescompanies reflect the non-transparency in the rules as in their implementation by


Russian authorities. Procedures for imported products are allegedly moreexpensive and more cumbersome than for domestic products.

Costs of the procedure are also reported to be excessive.

Non rationality of the process: under current rules, the EU producer can obtainthe production certificate for duration of three years. Once obtained, thiscertificate remains valid for 3 years, even if the EU producer changes the originor the quality of the item processed (e.g. fabrics). However, if the importer or theexporters wants a "shipment certificate", he is obliged to request it for everyshipment.

Controls: EU operators are allegedly subject to controls much more often thanlocal producers. In general, EU companies denounced the discrimination intreatment between European products and Russian products.

Restrictive rules of GOSSTANDARD regulations, which require a new certificateif the percentage of used materials has changed in a non-significant way. Anumber of companies find the rules of Russian certification very complicate andover prescriptive. The high costs of the certification prohibit the company to selltheir stock from other border countries, because it would be too expensive andtoo long to get a new certificate for a small quantity.

Delays for obtaining a certificate: it can last two weeks to several months.

The validity period of the certificate varies according to the nature and thecomplexity of the product. Some EU operators had obtained a certificate for aduration of three years, while others were requested to get a certificate for everyshipment for the same type of product.

Absence of equitable judicial recourse: the GOSTSTANDARD (regulatory body)is competent in case of disputes or conflicts between participants in thecertification procedure. EU Operators fear partiality if a legal dispute arises.

However, according to other EU exporters (FIN, DE), the certification procedurehad recently improved (EU companies get used to the procedures, increasingnumber of entities in charge of the verification, creation of a co-financed EU-Russian institute of certification in St Petersburg…).

Sanitary regulations: The legislation concerning the hygiene conclusion isunclear for the EU companies. They reported having supported importantadditional costs (e.g. between 6000 and 10 000FF, a loss of about 50,000-DM foranother operator). This combined with particularly unpredictable customsclearing deadlines is of great concern for producers exporting large numbers ofarticles.

Other problems mentioned:


• Labelling regulation result in significant additional costs for EU companies whoaffix the labels already in the country of shipment. Requirements concerning theidentity of the importer and of the person responsible of the packaging or thenumber of certificate of conformity are considered excessive. However, this is nota practice followed in all Member States companies. These specific requirementsforce the producer to make a different label, which results in additional costs3.(Translation of labels, requirements on product composition and importer data inRussian)

• Investment barriers: Companies willing to invest in Russia face many difficulties.The Federation Law on investment is very strict and they also should respectdifferent regional laws and negotiate with local authorities for preferentialtreatment.

• Advance payments (FIN) are prohibited under Russian Law.

• Protection of drawings and models: Even if Russia has adopted an advancedlegislation on protection of drawing and models, the EU industry and theircustomers claim that it is not implemented. The EU operators are worrying aboutthe increasing number of illegal copies of their production.

• Cost of export licenses for OPT: Finnish operators complained about theexcessive extra costs of getting export licences for products re-exported to theEU as processed products under the OPT scheme (about 1000 DM/category ofproducts and item.

Impact of trade barriers on EU exports

• The impact of all measures implemented by Russia increase the price of theproducts sometimes by more than 50%. Nevertheless, the most importantproblem is not only the advantage granted to local production, but theimplementation of import rules. Various companies work with Russia only withterms - delivery "ex factory" and cash payment. For a large number ofcompanies, this is the easier way to penetrate the Russian market without havingto go trough all administrative prescriptions and customs formalities.

• Russian clients are often small companies without the necessary organisation tocreate a distribution system covering the whole country. EU operators are obligedto deal with a large number of intermediaries for small quantities of products.

3 For example, an EU apparel company estimated the cost of each label at 1.30 EURO. It sufferedlosses resulting from this barrier at about 130.000 EURO/year.


PART 2

CHINA


TABLE OF CONTENTS

§1. GENERAL CONDITIONS OF IMPORT OF EU TEXTILESAND CLOTHING PRODUCTS

1.1. Trade flows

1.2. Problems identified by EU companies

§2. IMPORT DUTIES

2.1. Measures

2.2. Implementation

2.3. Legality

§3. IMPORT QUOTAS

3.1. Measures

3.2. Implementation

3.3. Legality

§4. CLEARANCE PROCEDURES

4.1. Measures

4.2. Implementation

4.3. Legality


§5. TECHNICAL BARRIERS

5.1. Measures

5.2. Implementation

5.3. Legality

§6. RESTRICTIONS AFFECTING EU JV

6.1. Measures

6.2. Legality

§7. EXPORT RESTRICTIONS

7.1. Measures

7.2. Implementation

7.3. Legality

§8. OTHER RESTRICTIONS

8.1. Measures

8.2. Legality


§ 1. GENERAL CONDITIONS OF IMPORT OF EU TEXTILES ANDCLOTHING PRODUCTS

1.1. Trade flows

• Trade in textile and clothing products between China and the EU is regulated bytwo bilateral agreements on trade in textile products covering textile products andsilk products4. Under these agreements, exports of textile and clothing productsfrom China are limited to the quantities provided in the Agreements.

• The EU is China's first export market and China remains its main supplier oftextile and clothing products. In 1998, imports of Chinese textile and clothingproducts into the EU reached 6 995 Mio Euro (1 642 Mio for textiles and 5 353Mio for clothing). China remaining the first EU supplier in clothing products invalue terms. It is also the forth supplier of textiles after Turkey, India and USA.The imports from Hong Kong reached 2 680 Mio Euro (60 Mio for textiles and 2620 for clothing). Together China and Hong Kong represent 16,7% of EU importsof textile products5.

• Conversely, the level of EU exports of textiles and clothing products to Chinaremains modest. In 1998, exports of textile products to China reached only 252Mio Euro (216 Mio for textiles and 36 for clothing). China is the 31st export marketfor EU. The trade balance is largely negative. Exports to Hong Kong amounted to1 199 Mio Euro for the same period (716 for textiles and 483 for clothing). Theexports to China and Hong Kong amount only 4,2% of the total EU exports oftextile and clothing products.

• According to importers, the high level of tariffs explains that an important part ofEU products is reportedly still exported through Hong-Kong (about 60%). Theproducts are imported smoothly and quickly at 0% in Hong-Kong and thenexported to the Popular Republic of China.

• The volume of trade concerned by direct traffic remains consequently limited. Itcovers mainly IPT operations. EU fabrics are imported duty free into China,processed into apparel products under subcontracting activities. They are re-exported to the EU or to other export markets. IPT schemes are still veryattractive due to low wages.

4The Agreements with China are: the Agreement on trade in textile products between the Communityand China – MFA (modified 20 November 1998-OJEC 1999 L12/27) and the Agreement between theEC and China concerning the products non covered by the MFA (signed in 1995). They were modifiedby the Agreement signed by Exchange of Letters between the EC and the Republic of China (OJEC1999, L 345).5 Eurostat trade data for 1998. See also: PR China: textile and clothing sector and its export potential,OETH, 1999, p. 90.



• As explained above (see Part 1), the main trade obstacles are:

- the high level of customs duties- the implementation of import quotas- some restrictions affecting Joint Ventures- the export measures hampering the access to raw materials

• These measures are treated below, together with other problems identified duringthe mission conducted by CEEI in China (26 November – 10 December 1999).

§2. IMPORT DUTIES

2.1. Measures

Customs duties remain too high

• Level of applied tariffs is still rather high despite the 1999 reduction. They rangefrom 0% to 41%: yarn about 12%, fabrics 14 - 34 % and apparel 25 - 35%. Tariffsare applied ad valorem. Peaks concern in particular woven synthetic fabrics(36%), carpets (30%) raw and carded wool (41%).

• A system of tariff quotas, called "in quota interim duty rate" was enforced on 1st

January 1999. It is applied to a limited number of products by Customsauthorities. For textiles, it only covers raw wool and wool tops, for which importquantitative limits have already been fixed. These products can therefore beimported (in direct trade for internal consumption) at 1% or 3%6 (instead 41%) inthe limits of the quantitative restriction (quota) existing for this product. Customsauthorities were quite reluctant to talk about this system.

VAT is the only official import tax additional to the Customs duty

• It was confirmed during the mission that VAT (17%) is the only official import taxcharged by Customs authorities at the moment of clearance. It is collected on thefollowing result: CIF value + Customs duties. Importers complained that there isdiscrimination among domestic and imported products (for which VAT is onlycharged on the value of the local product).

6 Can be imported at 1%: HS 51011100, 51011900, 51011200, 51012100, 51012900, 51013000,51031010. Can be imported at 3% : HS 51051000, 51052100, 51052900.


2.2. Implementation

Impact of total import duties is significant for EU companies

• It is still surprising to note that several EU companies estimate the impact ofimport duties about 100% of the total CIF value of the product. In interviewsconducted with importers and customs agents, additional surcharges arementioned:

- An additional fee between 3% and 5% is due to the State Owned TradeCorporations (FTC). Imports to China can only be done by officially accreditedimport-export corporations or by JV. If the clients are fully Chinese (e.g.apparel companies) but are not authorised to import their inputs for theirproduction, the EU operators must use the services of the import-exportcompanies.

- In various cases, the importer must support significant costs of storagewhen the documents required by Customs have suddenly changed, withoutprior notice, until he could have find out about the exact nature of thedocument required. In various recent cases involving EU products, additionalcosts (tariffs + VAT + agent fees + storage and harbour delays) reached120% of CIF value. It had taken several weeks to importers to find out theexact nature of the document to be provided.

2.3. Legality

2.3.1. Existence of import-export corporations

• The prohibitions of free access for individuals and companies to engage directimport is not in conformity with article XI§1 of GATT. According to this article, "noprohibitions and restrictions other then duties, taxes or others charges shall beinstituted by a contracting party on importation or exportation of any product".According to the note attached to articles XI, XII, XIII, XIV and XVII, the termsimport restrictions and export restrictions include restrictions made effective bystate-trading operations. The existing of the import-export corporations is incontradiction with this provision, because it restricts the free access of individualsto engage direct export and import. The existing of this state trade system shouldbe eliminated after China accession to WTO. The system also createsdiscrimination between Chinese importers, Joint Ventures and foreign importers.

• The additional fee paid to import-export corporations is also not in conformity withthe requirements imposed by article VIII of GATT. Foreign companies are obligedto pay 3-5% of the value of the imported products. According to article VIII, GATTall fees and charges connected to import or export shall be limited to theapproximate cost of the services rendered. Taxes paid to import-exportcorporations are ad-valorem taxes and they have to be transformed or eliminated


even if the transitional period requested by China for the elimination of theimport-export corporation is accepted.

2.3.2. Non-transparency of clearance procedure and the level of import duties

• According to article X of GATT, laws, judicial decisions and administrativeregulations related to the rate of duties or warehouse inspection and otherrequirements for import and export should be published in order not to prejudicethe legitimate interest of particular enterprises. A number of EU operators haveexpressed their impression that not all the administrative regulations related tothe level of import duties and to documents requested during clearance arepublished and they support additional costs.

2.3.3. VAT

• The application of VAT on the value of the product after the calculation ofcustoms duties can be criticised under article III GATT. In accordance with thisarticle, parties should not use internal taxes and other internal charges in order toafford protection to domestic products. The application of VAT on the value of theproducts after the addition of import duties is discriminatory because importedproducts become much more expensive and not competitive. VAT is applied onCIF value for the national production.

§3. IMPORT QUOTAS

3.1. Measures

Regulation on quotas is dramatically non transparent

• The mission in China confirmed the total lack of transparency of the quotassystem for textiles. Authorities were extremely reluctant to provideinformation on :

- The exact tariff positions for which quotas are still implemented : Chinahas notified the existence of import quotas for some 50 HS tariff lines. Theseinclude unprocessed wool products (9) 7, cotton products (2) 8 and syntheticyarns (30) 9. It has not been possible to obtain from MOFTEC representativesan official list of products currently subject to quotas. Despite the indication

7 51011100, 51011900, 51012100, 51012900, 51011300, 51031010, 51051000, 51052100, 51052900,51052900.8 52011000, 52030000.9 54022000, 54023310, 54023390, 54023900, 54024400, 54024300, 54024900, 54025200, 54025900,54026200, 54026900, 54033310, 54041010, 55011200, 5501300, 55032000, 55033000, 55062000,55063000, 55092100, 55092200, 55093200, 55095100, 55095200, 55095300, 5509590055096100,55096900.


given that the list has made public to the European Commission, the MemberStates Embassies and the EC Delegation have no or very little informationabout these quotas. According to importers, quotas are not implemented forsome items, such as cotton fabrics. Quotas would be implemented for rawwool, combed wool, synthetic fibres, polyester yarns, and polyacrilic fibres.

Customs authorities use an internal document (tariff code "blue book") listingfor each tariff position the applicable import authorisations, licences orrestrictions. This internal document is not made public by customs authorities(not published) but, it can be consulted, in certain cases, at the request ofimporters. According to various sources, it indicates the positions for whichCustoms Authorities are entitled to request import licenses (and thereforepossibly subject to quotas). These tariff lines mainly correspond to theproducts already notified with some differences 10.However, it was reported that some tariff positions do not appear in theCustoms list: (51052900, 51052900, 54024400, 54024300 54023900,54024900; 54025200, 54026900, 54041010, 55011200, 55096100), whileother positions are allegedly included in the Customs list: (54023990,54024200, 54024300, 54024990, 54025990, 54026990, 54041000,55012000, 55021000, 55093100, 55096200). This increase the existingconfusion on the identity of quotas currently implemented.

- The quantitative level of quotas : is not known and made public by Chineseauthorities. Levels are fixed yearly by the State Planning Commission onbasis of proposals made by MOFTEC and the domestic industry.

- The criteria on which import licences are delivered : various EU exportersand EU JV complained about the non-transparency of the licence issuingsystem. If some importers can be provided with a sufficient number oflicenses, EU JV claim they are discriminated compared to domestic producersand also with other foreign non-EU JV producing the same items (whichreceive more licenses).

3.2. Implementation

Implementation of Quotas is a significant trade and investment barrier

(1) Quotas hamper the development of EU direct exports on the products forwhich they are implemented.

(2) The implementation itself restricts the import of the products under licenseand forces the importer to use Chinese input.

(3) Quotas restrict the production process of EU JV and impede them to distributetheir products on the local market.

10 51011100, 51011900, 51012100, 51012900, 51011300, 51031010, 51051000, 51052100, ,.520100, 520300. 54022000, 54023310, 54023390, 54023990; 54024200, 54024300; 54024990,54025990, 54026200, 54026990, 54033310, 54041000, 55012000, 55013000, 55021000, 55032000,55033000, 55062000, 55063000, 55092100, 55092200, 55093100, 55093200, 55095100, 55095200,55095300, 55095900, 55096200, 55096900.


(1) Restriction of direct EU exports : there is a limited development of exportsfor some products subject to Chinese import quotas (e.g. woollen fabrics).

(2) Implementation is aimed at protecting Chinese items : a very goodillustration is the implementation of the import quota for raw wool and wooltops. Chinese and EU JV desiring to produce wool yarns with EU wool topsfor the domestic industry have to request an import license to MOFTEC or touse Chinese wool tops. Chinese – EU Joint ventures producing wool topshave to either use Chinese raw wool or to request import license to importtheir usual quality of raw wool.

The State Planning Commission fixes the quota for wool at the beginning ofthe year. The quantities are then communicated to MOFTEC, which deliversthe import licenses. The quota is divided into two (or three) parts. The firstpart is attributed at the beginning of the year. Nobody knows when theremaining quantities will be attributed. This provokes speculations on theprice of the local raw materials. In 1999, Chinese authorities waited until theend of auction sales of Chinese raw wool (July) to distribute the second partof the import quota. Increased competition among foreign investors forced tolook for Chinese wool. This also increased very much the price of thisdomestic commodity, which became above 20% more expensive thanAustralian wool (of better quality). In addition, the late allocation of theremaining quota (December 1999) renders in practice the import almostimpossible (time duration for product purchase and transport to the mill inChina often last too long (2 months). In the case of wool, the Australian woolis sold on auctions after beginning of the year. All companies were forced torush into wool purchases in January 2000 and to build up stocks, which resultin additional costs.

(3) Quotas implementation impedes distribution of EU JV products for localmarket : when EU JV have difficulties to buy local raw materials (at expensiveprices and for a non suitable quality) and do not get enough import licensesfor their production for local market, they are forced to produce for export.They can therefore import raw wool or wool tops free of quotas and importduties. However, they fail in their objective to penetrate the local market(which has motivated their investment into China). In addition, they mightencounter other difficulties with the import regime for processing goods(Inward processing Trade as explained below).

3.3. Legality

• The EU operators complain about the non-transparent management of quotasand import licences, which aims to protect national production. This situation is incontradiction with article X of GATT. This provision requires that "all laws,regulations and decisions on requirements, restrictions or prohibitions on imports


and exports should be published in order to enable governments and traders tobecome acquainted with them".

• Moreover, according to article 11 of EC-China Agreement on textile products,China should encourage and facilitate the importation on its market of textileproducts listed in annexes I and II of the Agreement, originating in theCommunity. For this, "China should take measures to reduce the disequilibrium inits textile trade with the Community". Current situation where EU joint venturesface difficulties to receive import licences for products listed in the annexesbecause of the non-transparency of Chinese legislation is in contradiction withthis provision.

• Where quotas and quantitative restrictions are still implemented under GATT,they should be managed according to article XIII (non-discriminatoryadministration of quantitative restrictions). After elimination of quotas, Chinecould try to implement a number of non-tariffs trade barriers (technical regulation,labelling) in order to maintain the protection of domestic production actuallyguaranteed by import quotas and licences.


4.1. Measures

• According to Chinese Customs Law, the documents required for clearance are asfollows:

- Commercial invoice,- Packing list- Bill of lading- Contract- And in certain cases certificate of origin.

4.2. Implementation

The main problems arise with the import authorisation

• The import documentation in itself is not a significant problem for EU operators.However, sometimes the authorities are very slow to make a full check of thedocumentation. Therefore, this creates delays and losses for the producers.

• The problems lay primarily in the presentation of the appropriate importauthorisation (import license or other type of authorisation). In practice, theimporter has to request the Customs, for each import, IF he is entitled (or not) toimport. For some textile items, an import license is required (mentioned in the


Customs code as "1"). Import license is normally required when the product issubject to quotas. However, EU exporters complained also about import licencesrequired even for sample hanger. For other specific products, which areconsidered as "sensitive products", another type of import document can beasked by Customs under specific instructions of Central Power. Some textileproducts (such as polyester fabrics) are reportedly considered as being underspecial commodity restriction in 1999. Importers are requested to undergospecific registration, which means to ask for a new special import authorisation.

Customs denied still implementing a minimum import price system for textiles

• Several operators mentioned that Customs are applying a minimum importprice system for textiles. When the price declared on the invoice is below thereference value (regularly updated by them), they charge a penalty, which canexceed the difference between the import duties charged on the declared valueand those calculated on the basis of the minimum import price. This wasconfirmed by importers and EU agents interviewed in Shanghai, Beijing andHong-Kong. However, the Customs authorities denied the implementation of suchminimum import price. They insisted firmly that they fully respect the WTOAgreement of customs valuation.

In some cases, Customs create additional problems

• Various cases of difficulties during the clearance process are reported. Forinstance, in January 2000, Chinese Authorities have tried to stop import of rawsilk in order to control the price of this commodity. Customs Authorities madeproblems with sanitary and hygiene certificates blocking during three months theimport of products originating in China, which had been already exported inEurope and reshipped to China.

4.3. Legality

4.3.1. Transparency of the customs clearance

• Transparency of documents and procedures for Customs clearance is requiredby article X of the GATT. After accession, China should apply this provision andadopt clear rules concerning documentation and inspections for customsclearance.

4.3.2. Customs valuation

• If confirmed, the application of secret minimum import prices probably goesagainst article VII of GATT and the Agreement on customs valuation. Accordingto these provisions, the value of the product for customs proposes should not bebased on the value of merchandises of national origin but should be determinedin accordance with the rules provided in article VII of GATT or the Agreement of


Customs valuation. The value of the products for customs clearance cannot bebased on arbitrary or fictitious values. Rules and practices used by customs toascertain value of the products for customs proposes should be given sufficientpublicity to enable traders to estimate this value. According to EU operators,China implements secret minimum import prices for some imported textileproducts in order to protect domestic production and this practice is verydamageable for EU exporters. Minimum import prices should be eliminated byChina before accession to WTO.

§5. TECHNICAL BARRIERS

5.1. Measures

• Under Chinese Law, commodity inspections have to be carried out on textile andclothing domestic and imported products. Raw materials (raw silk and raw silkyarns) are also to be inspected before exports.

• The main legal texts implementing these commodity inspections for textile andclothing products are:The Law of the People's Republic of China on Import and Export CommodityInspection of 1989: this Law was enforced on 1 August 1989. It establishes theprinciples of Commodity inspection and that the State Administration forCommodity shall adjust and publish a list of Import Export Commodities subject toinspection (art. 4).Regulation for the Implementation of the Law of the People's Republic of Chinaon Import and Export Commodity Inspection. It was enforced in 1992. It describesthe rules for implementation of Import and Export Commodities Inspections byChinese Authorities11.

•5.2. Implementation

Technical barriers are less damaging in practice than expected

• EU operators mainly complained about the implementation of certification rulesand labelling rules. However, the interviews with importers revealed that:

- Commodity inspections, certification procedures and sanitary controlsare not specifically considered by importers as a problem as such. However,EU operators reported difficulties in their implementation. Under the Law onInspection of imported goods of 27 February 1999, these controls are carried,out randomly by SIC (Sanitary Quarantine Inspection Bureau). Complaintsfocus on the discretionary power of Chinese Authorities, which render controls

11 Laws and regulations for entry-exit inspection and quarantine of the people's republic of China,1999.


burdensome and time consuming.

- Labelling : according to SIC and Customs, there are no specific requirementsfor textiles. SIC does not verify the conformity of labelling requirements.Customs are entitled to do it. However, it seems that these controls are notconducted by Customs. This means that the required label (with importer dataetc…) can be affixed in practice at a later stage, when the product isdistributed.

5.3. Legality

• Two different authorities are competent in China for conformity assessment. Thefirst one (State Administration of Import and Export commodity inspection) isconducting controls for imported and exported goods. The second one (Chinesebureau of technical supervision) is responsible for inspection on domesticproducts. Accordingly, there are two sets of regulations applied to domestic andimported products. A large number of imported products can be subject tomandatory inspection. Even, if the procedure is not extremely burdensome for EUoperators, some discrimination between products is not excluded.

• This situation is not in conformity with article III of GATT and article 5 of TBTAgreement. These provisions require that internal regulations and in particularlyrules for conformity assessment (article 5 TBT Agreement) are not applied toimported products under conditions less favourable then those granted tosuppliers of products of national origin. Conformity assessment should not beused in order to protect domestic production. The existence of two differentregulations for imported and domestic products renders difficult the overallappreciation of conditions for conformity assessment and may be used as adiscriminatory instrument. Even if differences in conformity assessment are notpresently considered as damageable by the EU operators, the system couldlegally be implemented in a stricter way to compensate elimination of quotas andimport licensing system. In any case, the justification of different rules forChinese and imported products cannot be accepted under the exceptions ofGATT and TBT Agreement and should be eliminated before accession.

§6. RESTRICTIONS AFFECTING EU JV

6.1. Measures

• Only a few EU Textiles and Apparel companies have realised significantinvestments in China. Two types of problems must be underlined. First EUcompanies often encounter difficulties linked to the provisions (or lack of explicitprovisions) in their JV contract protecting their rights. Second, specific


restrictions exist hampering the distribution on the local market.

Conditions of establishment are often not clearly defined in JV contracts

• It is understandable that information on the conditions of negotiation of JVcontracts is not easy to obtain from the EU companies. However, it turns out thatmost difficulties encountered by EU JV in China arose from the lack oftransparency of trade conditions agreed with Chinese Authorities and partnersduring the negotiations of the JV contract. Some commitments made by ChineseAuthorities are apparently not explicitly drafted in these contracts.

For example, in some cases, the commitments made by Chinese authorities todeliver export or import licenses were not written in the contracts. Afterwards, JVencountered difficulties to be provided with licences and had no legal recourseagainst the Authorities. For instance, notwithstanding the MOFTEC originalguarantee, it happened that Chinese Authorities stopped delivering exportlicences to a European partner given its refusal to accept trade conditions notagreed in the initial contract. In other cases, the EU Joint Venture have obtainedto distribute a fixed percentage of their production on the local market but werenever provided with the corresponding import licences (see infra).

Joint Ventures and EU companies are facing increasing restrictions:

• These companies were facing increasing trade barriers hampering theirpenetration into the local market. Their investment was mainly driven by theobjective to get a better access to the local market. However, these companiesare limited by at least three types of obstacles:

- Export performance requirements : JV and EU companies have to export aminimum part of their production. This percentage is agreed in their JVcontract with Chinese authorities. It can be from 50% to 95% (95% ineconomic zones). This constitutes a serious trade obstacle and cannot bechanged.

- Quotas : as above explained, the implementation of quotas strongly reducesthe possibility to distribute on local market the products processed in JV withimported inputs. It happened that these companies were granted with importlicences covering only 3 – 10% of their production, while they were expectingto distribute at least 30% of their production on the local market. Quotaimplementation damages therefore investments made by EU companies,provoking, in certain cases, production losses and temporary closings of themills.

- Local taxes and VAT : Joint Ventures companies are complaining about theincreasing burden of local taxes charged by local authorities (increasing everyyear). These are for instance educational tax, real estate tax, anti-flood tax,and food fund; help farmer fund, various stamps and fees, withholding andbusiness tax. The refundable VAT is calculated with a complicated formula,integrating parameters, such as export ratio and local sales. EU companies


allege they can only recuperate, while exporting their products, some 90-95%of VAT paid during the production process, when domestic competitors canrefund VAT by 100%. According to some companies interviewed, the overallpercentage of non-refundable VAT and local taxes can reach about 10% ofannual turnover of the company.

6.2. Legality

6.2.1. Export performance requirements

• Chinese authorities export performance requirements for Joint Ventures are incontradiction with the WTO Agreement on trade-related investment measures.According to the illustrative list of the Agreement, restrictions on the exportationsor sale for exports are inconsistent with article XI §1of GATT. The transitionalarrangements authorised by article 5 of the Agreement for the initial members ofGATT and countries acceding before the expiration of all transitional periods arealready not applicable. China will thus be obliged to abolish trade-relatedinvestment measures in contradiction with the provisions of the Agreement beforeaccession.

6.2.2. VAT refund and other taxes

• Discrimination concerning VAT refunds goes against the national treatmentprinciple established by article III of the GATT. This article specifically envisagesthe question of taxes.

§7. EXPORT RESTRICTIONS

EU industry against State agencies monopoly position for raw silk purchase

• EU operators complain about the violation of the «national treatment clause»contained in the bilateral Agreement between China and the EU and giving to theCommunity industry purchase conditions identical to these of the Chineseindustry. According to their arguments, the production and the purchase of rawmaterials are strictly regulated and can only be operated through State exportcorporations. Therefore, EU producers have no direct access to Chineseproducers (e.g. reeling mills) and must deal with an Import/Export corporation.

Recent modifications in the licensing system are not sufficient for EU industry

• Until January 2000, China National Silk Import and Export Corporation (CNSIEC)kept the exclusivity of Export Licenses. Since beginning 2000, MOFTEC wasgranted with the export licenses delivering. It recently entitled approximately 40


traders to get the right to make the exports. This means that the total amount ofquotas can be split among these 40 traders, selected by local Chambers ofcommerce.

• A significant part of the EU silk industry is distrustful regarding these new rules.The industry considers that they do not fulfil the expectation of elimination ofmonopoly position for raw silk purchase. EU operators will in fact continue todepend on licences, which are given to traders entitled by local authorities. Thecontrol on the export of silk materials will therefore not disappear. Export freedomobjective will consequently not been achieved.

• The Industry insisted on the fact that they need total export freedom in orderto be able to get their supplies directly from Chinese reeling mills, withoutany surcharge from Chinese Customs .

Double price system is still a key concern

• In addition, EU operators complain about the double price system applied toproducts sold to Chinese producers and to foreign producers (prices about 30%more expensive). In the case of silk products, Chinese farmers can sell a minorpart of their production directly to textile Chinese reeling mills. These cannot sellraw silk directly to EU operators (producers/traders), which have to buy thoughState agencies. This can raise considerably the price of exported productscompared to internal price for raw silk used by domestic producers. If for instancethe reeling mill sell raw silk 15 USD/kg to the domestic producer, the sameproduct will be charged with 2 USD internal taxes (17 USD). On this amount, theImport/export Corporation will charge 20%. Before export to Europe, the value ofthe product is then 21 USD, compared with 15 USD for the domestic market .

• Even if, for the moment, the double price system is less relevant, for conjuncturalreasons, it is feared that the export licence system may always give thepossibility to raise big differences in domestic and international prices for silk.

Improvement of raw silk quality is perceived as an essential issue

• The EU does not import cocoons from China but raw silk and raw thrown silkyarns. Silk reeling industry is a labour intensive industry. The interest of the EUindustry is therefore in practice more concentrated on the purchase of raw silk.About 3000 tons of raw silk are imported yearly in the EU, from which 2,500directly in Italy, 300 tons in France the remaining 200 tons in the other MemberStates. However, increasing number of EU operators left the raw silk Chinesemarket. There were mainly two reasons: (1) the structural quality problems - toomany defects appearing in the fabrics scarves processing in the EU - and (2)the conjunctural shortage of the highest raw silk grades (4 A, 5 A) required byhigh quality EU producers. This explains, for example, why over the recent yearsEU (e.g. French) silk operators have increased their purchases of silk to Braziluntil 50%. However, Brazilian silk is more expensive and some operators alsoencounter other difficulties with this market.


• EU silk operators would therefore welcome an improvement of the Chinese rawsilk processing, even through a cooperation framework with the EU. However, forthe EU industry, this cooperation should respect strict conditions. For someinterlocutors, the removal of the export restrictions and the State tradingmonopoly for silk is a pre-requisite. For others, which also agree with theimportance of removal of export restrictions, a Partnership would have to promotesilk as high quality commodity. According to them, this could be achieved forinstance through a system of withholding tax in China. A Partnership could alsoimprove the quality of the raw silk produced in China. However, this would needboth the support of the Industry representatives in the EU and a financialassistance regarding these projects.

• During the mission in China, Representatives of CNSIEC underlined their interestfor any project aiming at improving the quality control and the production processin reeling mills. Some co-operation project has already started with Japanesepartners for specific silk items (silk for kimonos).

7.1. Measures

Export licenses are needed for various raw materials items

• For some textile items, which are not subject to quotas under bilateral Agreementwith the EU (raw silk, silk fabrics), an export license is needed. The Chinese orEuropean JV producer must ask for the export licence, either directly toMOFTEC. (for JV) or via CNSIEC (for domestic producers). The Central Authority(State Planning Commission) establishes annually the maximum quantity to beexported. MOFTEC determines the quantities to be allocated for each applicant.

Raw materials subject to export taxes

• Silk products are subject to export taxes under Chinese Law. The number andthe levels of these export taxes have been reduced according to ChineseAuthorities (see implementation).

7.2. Implementation

Difficulties to obtain export licenses lay in the non-transparency of the system

• It was reported that EU/Chinese JV have encountered difficulties to get theirexport licenses for exporting silk materials and thrown yarns. It is difficult to dealwith the different Authorities in charge of issuing the export licenses in order toobtain the quantities needed. It is also problematical to know if the Chineseproducers have met difficulties to get the licenses.

Number and level of export taxes have been reduced


• There is a discrepancy of opinion between Chinese authorities which pretendthat there is no fee for export licenses, except minor and administrative fees, andEU operators which identified various surcharges hampering raw silk and silkyarns exports and increase significantly the value of the products.

• According to Chinese authorities (CNIESC), export license is free of charge.Export licenses cannot be sold from an exporter to another exporter (licensesnominative). However, there are two small and minor fees:

Administrative fee: this RMB 50 fee covers administrative fee for the exportlicense delivering (covering fill in of license and postal mail).Silk stabilisation fee: It is 8000 RMB/ton. It is aimed at feeding the silkdevelopment risk fund since 1st March 1997. It is levied only on the export ofraw silk.

• According to EU operators, export license "duty" varies between 1 – 5%.according to the market conditions. In addition, the quarantine inspection feecharged by CCIB (Chinese Commodity Inspection Bureau – about 2%) alsoaffects the price of the exported product. The MOFTEC surcharge of 4%, whichwas previously charged, is not currently applied (but apparently not abolished).

• VAT refund: is 5% only for cocoons, 13% for raw silk and 15% for silk thrown silkyarns and is total (17%) for silk apparel. For EU operators, which buy raw silk orsilk yarns, there is therefore a difference in price compared to Chinesecompetitors.

7.3. Legality

• According to article 12 of the Agreement between EC and China, concerningnon-MFA products, China must ensure that the supply to the Community industryof raw materials exists at conditions not less favourable than to Chinese domesticusers. The requirement of export licences, export duties and administrative feesis not in conformance with the Agreement. According to the Protocol about theimplementation of article 12 of the Agreement, if products of raw materials aresubject to specific practices (such as licences, fiscal, customs and others), theconditions for the Community users must not become less favourable than for theusers in China. This concerns among other things actual access and prices.China must also abstain from any such measures, practices and policies that mayresult in double pricing. The export licences introduced by China are automaticbut the administrative burden can be very important because of the non-transparency of the system. The export taxes, non refund of total amount of VATand administrative duties increase the price of the raw materials and the result isthat they are not supplied at the same conditions to EU producers than toChinese domestic users. Conditions for EU producers are obviously notably lessfavourable and the situation is a breach to EC-China Agreement. According toEU producers they suffer at present from a 50% price difference comparing toChinese producers. The situation is subject to regular review under the


Agreement and the problem may be solved if the EC requires abolishment ofexport licences and duties.

§ 8. OTHER RESTRICTIONS

8.1. Measures

New import rules for processing trade are a new subject of concern

• Both importers of EU products and EU exporters have expressed their strongconcern about the new rules implemented since October 1999 for inwardprocessing trade (IPT), also referred as “Export processing trade”. According toimporters, these rules are being implemented only in some entry points:

- Old rules : all importers had to request import licenses for processing trade(there were specific IPT quotas). There was no specific problem to obtain theimport license for some operators, while some EU JV were indeedexperiencing problems. The importer could therefore import the inputs (rawmaterials) aimed to be processed (e.g. raw wool or fabrics) without paying anyimport duty (exemption of customs duties and VAT) provided that the finishedproducts would be re-exported to third markets.

- New rules : rules have been officially changed in order to fight circumvention.Under the new regime, (which seems not be yet implemented by all Customsauthorities), importers have been divided into 4 categories:A importers : those who never had problems with Customs and do benefitfrom a favour regime. They do not need anymore import license. However,only AA grades importers do benefit from simplified procedures. Starting fromsingle A rating, companies must leave a deposit (amount varies with therating) at the time of import and recover it at the time of export.B and C importers : faced problems in the past with Customs. Are required todeliver, according to the case, a financial guarantee. This guarantee amounts,according to importers, to the total volume of customs duties and VAT or,which is more damaging, 100% of the imported goods. If this project is fullyimplemented, it will create a dramatic new trade barrier. There is no preciserule concerning the restitution of the guarantee to the importer.D importers : not allowed to import anymore.

Rating will be reviewed on a yearly basis and will take into account exportingvolumes, exported values, a ratio export/domestic market, etc …Even if thesystem is officially aimed at protecting “good” companies and fighting against“bad” ones, EU companies fear the discretionary power of Customs in theranking exercise. If the system is not correctly implemented, this could lead toadditional difficulties.


Restrictions on distribution of products constitute an important trade barrierfor EU apparel exports

• There is a consensus among importers that that the restrictions on distributioncreate a very important trade barrier. Under Chinese Law, foreign enterprisesmay not distribute themselves their own products and must use Chineseintermediaries or constitute Joint Ventures in the distribution sector. These JointVentures must be approved by the Central Government. In certain cases, theChinese partner is the main shareholder (more than 50%) .

These restrictions are reported to increasing the price of the products. Theyhamper the development of brand European names and affect the penetration ofEuropean products in the local market. All agents and importers interviewedestimated that this should be a priority issue to be addressed "as soon aspossible" with Chinese authorities in the framework of the WTO accessionnegotiations.

• The accession of China in the WTO will probably not resolve the problem ofprohibition of distribution activities by 100% own foreign companies. However, inthe light of its future accession to WTO, China has adopted in 1999 new morefavourable legislation for foreign investments. This legislation will extendprevious geographic limitations for distribution by Joint ventures. China has alsopromised future liberalization of geographic and sector limitation for Joint–ventures. The possibility for 100% companies to be involved in distributionactivities is still not envisaged.

Others

• Absence of protection for drawings and models remains a strong obstacle toexports. For some items, samples sent by EU operators are being systematicallycopied. However, other operators pretended their products couldn’t be copied asa result of quality or technology. Credit restrictions are apparently linked to thegreat difficulty of getting credit letters by Chinese clients

Impact

• According to EU operators, these trade restrictions give a significant advantageto domestic producers (above 20%).

8.2. Legality

8.2.1. New import rules for processing trade

• The new rules are seen as very damaging by European companies because theywill reduce their liquidity. They could be contested according to article VIII:3 ofthe GATT (proportionality in penalties for minor breaches of customs regulations)


and article 12:2 of the bilateral Agreement (avoidance of exacerbating tradedesequilibrium). Some of the main Chinese trade partners have created lobbies,which survey the classification of their companies and try to redress the situationif their company is classified in category under B.

Restriction on distribution of products

• The accession of China in the WTO will not resolve the problem of prohibition ofdistribution activities by 100% own foreign companies. However in the light of itsfuture accession to WTO, China has adopted in 1999 new more favorablelegislation for foreign investments. This legislation will extend previousgeographic limitations for distribution by Joint ventures. China has also promisedfuture liberalization of geographic and sector limitation for Joint–ventures. Thepossibility for 100% companies to be involved in distribution activities is still notenvisaged.

Protection for drawing and models

• China will not benefit of transition period for implementation of TRIPS Agreementafter accession in WTO. According to the provision of this Agreement membersshould adopt and effectively implement legislation on the protection of intellectualproperty.

Difficulties to get export licenses

• There is a general complaint about the delivering of export licenses under thebilateral Agreement with the EU. Licenses are difficult to obtain and expensive toget.


PART 3

RUSSIA


TABLE OF CONTENTS

§1. GENERAL CONDITIONS OF IMPORT OF EU TEXTILES AND CLOTHINGPRODUCTS

1.1. Trade flows

1.2. Legal framework

1.3. General problems affecting EU exports


§2. IMPORT DUTIES

2.1. Measures

2.2. Implementation

2.3. Legality


3.3. Measures

3.2. Implementation

3.3. Legality

§4. CERTIFICATION PROCEDURES

4.1. Measures

4.2. Implementation

4.3 Legality


§5. LABELLING

5.1. Measures

5.2. Implementation

5.3. Legality

§6. OTHER PROBLEMS IDENTIFIED

6.1. Measures

6.2. Implementation

6.3. Legality


§1. GENERAL CONDITIONS OF IMPORT OF EU TEXTILES ANDCLOTHING PRODUCTS

1.1. Trade flows

• Since the 1980’s, EU textile and clothing companies have constantly developedand increased their exports of textile and clothing products to Russia. In 1997,exports of EU textile and clothing products to this country reached 1085 MillionsEURO, while imports of Russian products were 248 Millions Euro. In 1998, evenafter the financial crisis EU exports reached 918 Millions Euro (349 Mio fortextiles and 569 Mio for clothing) and imports into the EU of Russian productswere 230 Millions Euro (97Mio for textiles and 133 Mio for clothing) 12. Russia isthe 13th export market of the EU.

• However, in 1999, the trade between the EU and Russia has decreasedsubstantially. The exports were 519 Millions Euro and the Imports - 189 MillionsEuro13.

• It is noticeable that export for outward processing has increased since 1997.They were 8 millions Euro in 1997 and they are 16 millions in 1999.

1.2. Legal framework

• From 1993 until 1998, exports of Russian textile and clothing products of theEuropean Union were regulated by a bilateral Agreement on textile productsbetween the Russian Federation and the Community14. This Agreement hasliberalised trade for some textile products and has fixed quantitative restrictionsfor a certain number of sensitive products for direct exports. It also establishedsome OPT restrictions concerning processing operations made in Russia out ofEU products (e.g. fabrics). These quantitative restrictions were managed under adouble licensing system.

• In 1999, a new bilateral textile Agreement has been concluded between the EUand the Russian Federation15. It has been agreed to liberalise the existingquantitative restrictions and to submit textile products to the general safeguardclause fixed16 in the Partnership and Co-operation Agreement between Russiaand the Community17. However, the double licensing system has beenmaintained for all textile and clothing exports from Russia to the EU. The aim of

12 EUROSTAT data for 199813 EUROSTAT estimations for 199914 JOCE - L123, 1994.15 JOCE – L169, 1998.16 Art.17 of PCA17 JOCE – L327, 1997.


the double licensing system is to facilitate the co-operation between parties andto prevent fraud.

• The Partnership and Co-operation Agreement and the bilateral Agreement ontextile products set up a legal framework for developing trade between the twoparties and to eliminate technical barriers on trade. The Partnership and co-operation Agreement18 requests the parties to adopt necessary legislativemeasures in order to reduce existing differences in their systems of standards,meteorology and certification. In application of this provision an "Understandingon certification" was annexed to 1998 EC-Russia textile Agreement. According tothe Understanding, Russia should provide information about the current systemand adopt new legislation about manufacturers’ declaration of conformity,excluding low-risk textile and clothing from mandatory pre-market certification.

• The future accession to WTO will oblige Russia to observe all the provisions ofthe WTO agreements. It can be useful to examine the current Russian legislationin the light of these agreements.

1.3. General problems affecting EU exports

• Despite the progression of EU exports to Russia, EU exporters complain abouttwo types of problems affecting their actual or potential exports to Russia.

• The main problem concern the uncertainty of current rules applied by Russianauthorities to imported products. EU producers are not only faced withcumbersome technical measures (certification, hygiene conclusion, labelling).They also face difficulties to get the exact rules they should respect. They mustdeal with different implementation procedures conducted by Russian authorities(for a similar product imported by a same company, a different certificate can berequired; a different minimum price is applied, an additional document will becontrolled during customs clearance etc …). This creates a total uncertaintyclimate in business. Importers of EU products face additional costs to resolvespecific problems with Customs.

• The second problem is the difficulty to pass through customs procedures withoutspecific introduction and good relationship with Customs Authorities. Accordingto all importers interviewed, Customs officers have a large interpretation powerregarding all measures applied to the importation of textile products. They havethe last word concerning the acceptance of the import declaration, the calculationmethod of duties, the product classification, the imposition of a minimum importprice.

• Most of the EU exporting companies is not directly present on the Russianmarket and their products are imported and distributed by Russian companies.This can be explained by two reasons. First, there is a difficulty to conduct thedistribution of EU products for a Foreign company under Russian Law. Most

18 Art.60 of PCA


companies have Russian representatives in the country. Others prefer to sell thegoods to Russian operators in Europe. These pick up the goods directly in theEU Company, pay the EU Company, and must consequently deal with the importformalities.

• This explains why a large number of the European companies do not haveinformation about the difficulties encountered on the Russian market or prefer notto talk about this subject, once a satisfactory solution has been found with theRussian authorities.


As explained above (see Part 1), the main trade obstacles for EU industry are:

- the high level of customs duties and the non transparency of thecalculation method by Customs.

- some aspect of clearance process, in particular the implementation of aminimum import price for certain textile products.

- the certification procedures.

These measures are treated below, together with other problems identified duringthe mission in Russia (24 January – 2 February 2000).

§ 2. IMPORT DUTIES

2.1. Measures

2.1.1. The customs duties

Applied duties constitute a significant obstacle for direct import

Russian Custom Tariffs fix the level of customs duty applied for each tariff code forproducts from chapters 50 to 63 of the Harmonised system. Two systems are appliedconcurrently:

- either the product is subject to a simple “ad valorem” duty, charged onCIF value

- or the product is subject to a ad valorem duty but can be subject to aminimum specific duty calculated on a weight basis (euro/kg) while thisamount exceeds the “ad valorem “value. (mentioned as minimum dutyrate).


Product (description) Ad valorem Specific duty (if any)Raw materialsSilkRaw woolNatural fibresCottonSynthetic

5% to 20%5%20%5-10%5%10%

FabricsSilkWoolCottonSynthetic

5% to 30%5%20%20%10% - 30%

Carpets 30% But not less than 0.75 EURO/m²Men's garments 25-30% But not less than 7-10 EURO/kgWomen's garments 25-30% But not less than 7-10 EURO/kgOther apparel (chapter 63) 30% But not less 1EURO/m²

• According to the Customs code19, the customs value of goods, defined inaccordance with the Law of Russian Federation on customs tariffs, shall be thebasis for the calculation of the customs duties.

2.1.2. The VAT

VAT is the only additional tax to the customs duty

• Under the Customs code20, the customs value of goods with the added customsduties is the basis for the calculation of VAT. According to Russian FederationLaw on VAT, the VAT rate is 20%. It is charged on duty paid value.

2.1.3. The clearance fees

In addition, clearance services charges of 0.15% are collected by Customs

• Under the Customs code21, clearance fees called customs duties for customsclearance are applied. Their amount is the following :

0,10% of the customs value of goods, paid in Russian currency.0, 05% of the customs value of goods, paid in foreign currency.For the goods imported on a non-profit basis, only the first fee is applicable.

• These fees are aimed at paying the services rendered by Customs authorities.They are at valorem duties.

19 Art.117§120 Art.117§221 Art.114


2.1.4. The payment of the Customs duties

Payment of customs duties is to be done in advance of clearance

• Under the Customs code22, customs payment shall be made before acceptanceor simultaneously with the acceptance of the customs declaration. The Customsshould have received the payment on their banking account in order to acceptthe customs declaration.

2.2. Implementation

2.2.1. The calculation system of import duties

Importers complain about non- transparency

• EU exporters complain about the non-transparency of the dual calculation systemof customs duties. They argue that Customs sometimes change their calculationand apply an ad valorem or a specific duty for the same product. According toCustoms Authorities, Customs officials decide on the calculation to be applied tothe imported product. They have the last word on the calculation method. Thisdecision is taken on the basis of the Import declaration.

• According to some importers, it is possible to convince Customs to take either thevalue or the weight as basis for the calculation of customs duties.

• Some importers reported different amounts charged by Customs for customsservices. For example an importing company is charged 1.5% on CIF value foreach shipment. Half of this amount is to be paid in hard currency, the other half inroubles.

2.2.2. The advance payment of import duties

Importers complain about advance payment

• Many importers complained about the obligation to pay the customs duties inadvance. The total amount must have reached the bank account of the Customsclearance post. This obliges them to send the money at least 10 days aheadbefore the shipment arrives (it goes first to the central bank account of thecustoms and then to the customs post bank account). The importer will need thereceipt from the bank that the Bank account of Customs has already beencredited.

22 Art.119


2.2.3. The collection of customs duties

Impact of total import duties is impossible to assess

• Several importers estimate the impact of import duties about 50 - 80% of the totalCIF value of the product. Importers and customs agents in Russia mentioned theexistence of additional surcharges. This hampers the development of purchasesof EU articles. In particular, since the 1998 crisis, the average and high class ofconsumers cannot afford the prices they were more willing to pay before thecrisis. People have less purchasing power, and they are more selective in theirpurchases.

2.3. Legality

2.3.1. The calculation method of customs duties

• According to article 13 of the Partnership and Co-operation Agreement withRussia articles VII (§ 1,2,3,4 a, b, d and § 5), VIII, IX and X of GATT areapplicable "mutatis mutandis" between the parties.

• According to article X-1 of the GATT "laws, regulations, judicial decisions andadministrative rulings of general application, made effective by any contractingparty related to the rates of duty shall be published in order to enablegovernments and traders to become acquainted of them".

• The double system of calculation of customs duties is not prohibited under GATT,but its application should be transparent for importers. Russian rates of customsduties are public, but their implementation according to the value or the weight ofthe goods is not published and depends very much of the appreciation of thecustoms officials. The administrative practice related to the calculation method isnot transparent for the EU importers and creates insecurity during import.

2.3.2. The clearance fees

• Article VIII 1a) requires that "all fees and charges of whatever character (otherthat import and export duties and taxes under article III) imposed by contractingparties or in connection with importation and exportation shall be limited inamount to the approximate cost of services rendered and shall not represent anindirect protection to domestic products or a taxation of imports and exports forfiscal proposes".

• The clearance fee of 0,15 of the value of imported goods imposed by article117§1 of the Russian customs code is an ad valorem duty not related to theapproximate cost of the services provided to the importers. This duty is prohibitedunder article VIII of GATT and article 13 of the PCA.


§ 3. CLEARANCE PROCEDURES

3.1. Measures

3.1.1. Import documents

Customs have a large power of interpretation

• The import documentation is not in practice a significant problem for Russianimporters. They did not mention a specific problem.

• However, theoretically, the customs officials have a large power in this field.According to the Russian Customs code23, documents and additional informationfor customs clearance are determined by the State Customs Committee. Thecompetent customs agency can impose terms for the submitting of thedocuments. The Russian State customs committee recognises that there is nowell-established list providing the identity and content of required importdocuments. The list can be different depending on the products. The importershould therefore consult the Customs before import.

• In fact, the following documents are required for clearance:

- Customs declaration (in Russian)- Commercial invoice- Contract and copy- TIR carnet- Currency Passport legalised copy- Packing list- Bill of lading- Proof of payment of customs duties- And in certain cases certificate of origin.

• However, sometimes the authorities are very slow to make a full check of thedocumentation. Therefore, this creates delays and losses for the producers.Often, documents are refused by Customs because they are “too old” (more than10 days). Sometimes Customs require the invoice to be presented in a specialform, which facilitates customs clearance. The document must then present theproducts tariff position (even if there are different shipments). For each singletariff position it is required to indicate the country of origin, the quantity, the grossweight, the net weight, the unit price, the total value, the freight charges and theinsurance costs.

23 Article 174


• According to the Decree of the Customs State committee n°49624, Customs areauthorised to check the certificate of conformity during customs clearance. Thisobligation only existed for children clothing until decree 49625 was amended. Thisnew legislation is in force since 1st of January 2000 and Customs aretheoretically obliged to check the declaration of conformity for all textile andclothing products subject to certification procedures.

• Actually, no import licences are needed for textile products.

3.1.2. Valuation issues

Customs not denied implementing a minimum import price system for textiles

• Several EU operators had mentioned that Customs apply a minimum importprice system for textiles. According to the Customs Authorities, minimum importprices are implemented only for fabrics (for garments it is very difficult todetermine the exact value). Minimum import prices are determined, using theaverage prices for these products in Europe. Customs authorities recognized thatCustoms officials are stricter for fabrics because import duties are lower than forgarments products and because domestic production has to be protected.

• The importer has theoretically an administrative recourse against the decision ofcustoms to implement a higher duty. Unfortunately, the Customs authorities havenot provided the list of documents required to prove the importer’s good faith.

Rules appear highly non transparent

• The explanations provided by Customs about the availability of a recourseillustrate the lack of transparency of these rules. According to Customs, officialscan conduct their own investigation on the estimated value of the importedgoods. They ask the authorities of the exporting country to provide informationabout the value of the goods. It is alleged that this information is often "refused",which leads to a high level of rejected recourses. Even if the importer delivers toCustoms a detailed file proving its good faith, Customs will not calculate customsduties on the declared value, but on an average value between the valuedeclared in the invoice and the value estimated by Customs. No legal text or listof requirements about this practice could be provided to the consultant.

Customs can redress the importer to the State Currency control

• The correction of the import price is source of problems for the importers. Thecorrection of customs declaration creates differences between the value of thetransaction stated in the currency passport and the amount of currency paid bythe importer. According to the Russian customs code26, the Customs authorities

24 Decree 496 from 14.08.199625 Decree 282 from 12.05.199926 Article 198


control the respect of the currency legislation. In case of divergence between thecurrency passport, which attests all the payments made for the contract and thesum effectively paid, the customs can send the importer to the Currency control.This institution decides if there is a breach to the currency legislation.

3.1.3. Clearance process

There are no systematic physical controls for imported textiles

• According to Customs Authorities, imported textile and clothing products are notsubject to compulsory physical controls. However, random controls are realisedby Customs Authorities. They are authorised to take samples for laboratoryanalysis in order to check the declared classification of the products. A number ofcompetent bodies are also authorised to carry out some verification duringcustoms clearance.

Clearance duration maximum time-limit is two weeks

• The legal time limit for the customs clearance is two weeks. According toCustoms Authorities, in practice, customs clearance lasts 10 days on average. Itcan be shorter if all the documents are provided immediately.

The customs code regulates the use of customs brokers and privatewarehouses

• A large number of importers of European products use the services ofspecialised brokers for the customs clearance of their products. This practice isauthorised by the Russian Customs Code27. Brokers should have speciallicences issued by the State Customs committee. They complete all the customsformalities on the behalf of the importer. The contract between the importer andthe broker should be notarised.

• The goods are stocked for customs clearance in a private warehouse. Thesewarehouses have to obtain special authorisation from Customs (license)28. Acustoms officer attached to the private warehouse conducts clearanceprocedures. Normally the importers have the right to choose their warehouse. IfCustoms choose a different warehouse, the importer can request transportationof the goods to another one under customs control. They will have to pay a duesum for the service. The relations between the warehouse and the importer areregulated on a contractual basis.

3.2. Implementation

27 Article 15728 Article 150 of the Russian Customs Code


3.2.1. Import documents

Customs power of interpretation increases difficulties with import documents

• Import documents constitute a substantial burden for the importers. They alwaysface uncertainty regarding the documents requested by customs authorities forclearance purposes. The Customs officers have a large power of interpretation ofthe Law and they can fix time limits for the presentation of some documents. Ifone document is not presented on time, the clearance procedure can last muchlonger (weeks and months).

• Importers of EU products have mentioned the following problems:

• Certificate of origin: some importers have reported that Customs require thecertificate of origin from the Member State of origin when the product is importedfrom the EU and refuse the EU certificate.

• Form of invoices: Importers are often obliged in practice to re-draft the invoicessent by European producers in order to comply with specific requirements fromCustoms (see supra). They will have to send back the new documents to the EUproducer or exporter for signature. If importers do not redraft invoices, Customswill spend more time to examine the presented invoice, which delays theclearance process by one or more weeks.

• Currency passport : its delivery causes serious problems for several importers.Russian currency legislation is very strict and the Banks have to justify allpayments in currency. The currency passport registers all the payments made forone contract. The importer is required to present the following documents inorder to be granted the currency passport: customs registration, statutorydocuments of the company, registration in State Chamber of Trade; Bankcertificate of solvability, letter from the tax inspection Body. This complicatedprocedure should be repeated for each contract.

3.2.2. Valuation issues (minimum import prices)

Importers scared to be sent to the currency control

• Several importers of EU products complained about the implementation byCustoms of minimum import prices. Customs do not take into account the factthat European companies sometimes import their stocks from previous year orhave different prices for different colours of fabrics, depending on the fashiontendency of the season. In various cases, Customs considered that the goodswere under-evaluated. They sent the importer to the State currency control. Thisadministration rejected on several occasions the elements of proof brought by theimporter. Importers have been threatened with penal prosecution for breaches ofthe currency legislation after two or three referrals by Customs to the Currencycontrol. In that case, importers were afraid to be put on a "black list", which wouldprevent them to continuing their imports of EU products.


• It is interesting to note that the Currency control is not an institution dependingfrom Customs, even if for the importers this control is a kind of continuation of thecustoms procedure. The importer can therefore support two different penalties :(1) a fine for a breach of the customs legislation because of the under-evaluationof the goods ; (2) a fine for the breach of the currency legislation because of thedifference between the sum indicated in the currency passport (inferior) and thesum effectively paid (superior).

In practice, the use of brokers is inevitable

• In practice, the companies have no other recourse than using the services ofbrokers for customs clearance, given their fear to be sent to the currency controlor to be victims of the Customs authorities’ discretionary power (identity of importdocuments, validity of documents, calculation of customs duties, etc ...).

• The advantage of using brokers services lays primarily in the close relationshipbetween brokers and Customs officers. Importers often do not know how thegoods have been cleared. The brokers make all necessary arrangements withcustoms officers. The customs clearance duration can vary depending on the factif the company is using a broker or not. The duration of the clearance canrepresent a substantial cost for the importer because he must afford considerablecosts of storage.

• The penetration of the Russian market for newcomers can be very difficult, giventheir lack of practice of Russian clearance procedures. According to Europeanoperators, Customs officers open all containers to check whether the goodsreally correspond to the customs declaration. They also send samples to thelaboratory to analyse their composition. This is done very often if the customsduties change considerably depending on the product composition.

3.3. Legality

3.3.1. The import documents

• The number and the complexity of the import documents required for customsclearance can be criticised under article VIII:1c) of GATT and article 13 of PCA.In accordance with this text, the contracting parties recognise the needs forminimising the import and exports formalities and documentation. Russianauthorities are obviously not implementing this provision. The number ofdocuments needed for import and export is constantly increasing and the newrequirements are not immediately published. Customs declaration is very longand detailed and can only be in Russian. Obligation to present invoice in aspecial form in order to facilitate work of customs authorities is burdensome forEU operators.


• The non-publication of some requirements can also represent a breach of articleX:1 of GATT. Russian customs authorities have large power of interpretation ofthe regulations. They can require additional documents and fix time-limit for theirpresentation. This practice is a source of insecurity and is not consistent with theGATT requirements.

3.3.2. The minimum import price system

• The Russian authorities do not deny they implement minimum import prices forcertain textile products, mainly fabrics. These minimum import prices are notpublished and the identity of products subject to these prices is not made publicby Customs. The situation can be analysed as a breach of article VII of GATTconcerning valuation for customs proposes and article X of GATT about thetransparency of trade regulations. The two articles are considered alsoapplicable under the frame of the PCA (article 13).

• According to Article VII:1, each party recognises the validity of general principlesof valuation. According to article VII:2, the value for customs purposes of theimported merchandise should be based on the actual value of the importedmerchandise on which duty or of a like merchandise and should not be based onthe value of the merchandise of national origin or on arbitrary or fictitious values.

• This article and the WTO Agreement on Customs valuation provide methods fordetermination of actual customs value. However, the main principle (according toarticle VII:5 and article X:1) is that bases, methods and administrative practicesfor determining the value of products subject to duties shall be stable and shouldbe given sufficient publicity. Russian minimum prices for fabrics are determinedconsidering average prices for these products in Europe and Russia, withouttaking in consideration the quantity and the colour of the products.

• The minimum prices are not published and EU exporters are not able todetermine with sufficient degree of certainty the value for customs proposes. Thesituation creates a real problem for them because the difference between invoiceand the price estimated by the customs authorities can be considered as abreach of customs legislation and currency control legislation and penalised bythe authorities.

3.3.3. The non-transparency of clearance procedures

The non-transparency of customs procedure is also not in accordance with article Xof GATT and article 13 PCA. The procedure can vary according to the customs pointand warehouse chosen by the importers. The absence of unified administrativepractice hampers the entry of EU newcomers in the Russian market.


§ 4. CERTIFICATION PROCEDURES

4.1. Measures

4.1.1. The current rules for certification - Certificate of conformity

• The compulsory certification GOST- R was introduced by the Law of June 10,1993 "On the certification of goods and services29 The resolution "On theapproval of on the list of goods and services subject to compulsory certification"identifies the products subject to mandatory certification. The majority of textileproducts are subject to mandatory certification. The Government determinesgroups of goods subject to certification. Afterwards, Gosstandart establishes amandatory list containing all the products subject to compulsory certification (on atariff line basis). This list is called Nomenclature"30.

• On the basis of the nomenclature, Customs Authorities establish a second list ofproducts for which a certificate of conformity is required for import. After the latestrevision of the Customs Order 49631, the two lists are identical. The compulsorycertification is necessary for compliance with the State standards, sanitaryregulations ensuring safety of life and health to the consumer.

EU producers must choose between production certificate and shipmentcertificate

• The certification of textile products in Russia is processed in conformity with theGosstandart Resolution "Certification rules for textile and light industryproducts32". It is compulsory for domestically produced goods and for importedgoods, indicated in the mandatory list. Certification normally has to be donebefore the goods are shipped to Russia. However, in some cases, importers areauthorised to request the certificate at the arrival of goods in Russia. Thecertificate should be issued by one of the certification bodies accredited byGosstandart. There are 102 accredited certification bodies in Russia. In Europe,there are apparently only two authorised organisations – SGS and Din Gos Tuv,which issue the Gost R certificates.

• The Gosstandart resolution sets up 10 basic certification schemes (art. 2). Inpractice, these schemes can be divided into two groups, depending on theidentity of the applicant (manufacturer or the importer). The EU producer canrequest a production certificate for a serial production (hereinafter "production

29 In the Editions of federal laws of December 27, 1995; March 2, 1998; July 31, 199830 Latest edition was introduced by Gosstandart resolution of February 23, 1998 and become effectiveon October 1, 1998.31 Order of 12 May 199932 Gosstandart Resolution of August 21, 1996 n. 13, registered on march 14, 1997 and in force sinceJuly 1, 1997


certificate") or a shipment certificate (requested for each shipment). The importercan request a certificate by shipment ("shipment certificate"). The scheme isproposed by the applicant and the certification body takes the definitive decision.

• The production certification is considered by some EU companies as theeasiest way of certification, in particular when they have regular business withRussia. This certification requires that experts from accredited GosstandartBodies evaluate "in situ" the production system of the EU company. Theevaluation must determine the capacity of the company to maintain the quality ofserially produced goods, its capacity to control the production of its branches andto maintain the same quality if the supplier changes. This procedure is not thesame as the one followed to get the ISO 9001 certificate. However, if the EUcompany has already its products with ISO certificate, the GOST-R proceduremay be simplified.

• Under the Russian rules, the Certification Body issues one certificate by"homogeneous group of products"33. The production certificate is normally issuedfor three years if delivered by Russian accredited experts. In any case, expertsshould check the system of production yearly in order to ensure that Russianstandards are respected. This could explain why the European accredited bodiesissue the production certificate for only one year and renew the certificates whileconducting the yearly checking.

• The original certificate is delivered to the EU producer. This latter gives a copywith the stamp of the company to his different customers in Russia.

• The shipment certificate must indicate the quantity, the type and references ofthe product, the number of the contract and the invoice number. The exporter orthe importer should request one certificate by tariff line. It is the less expensiveway of certification (in particular when a few different products are exported).However, it is less convenient for exporters having regular business with Russia.This certificate allows the products to be sold during one year. If after one year,there are any unsold stocks, new certificates have to be requested to theCertification Body. The first certificate is more expensive, but afterwards, if thecertification is required for the same type of products, the certificate is cheaper,because some basic tests are not to be performed anymore.

• If the certificate is requested by the producer, he has the advantage to request aproduction certificate, established for the group of homogenous products34. If theshipment certificate is requested, a different certificate has to be made for eachtariff line and it has to be done before each shipment.

The procedure and the costs are dependent on the contract negotiated

• The European producer or exporter has to contact one of the Russian orEuropean certification bodies accredited by Gosstandart. These will indicate the

33 Decision 1271/97, Art. 2.734 for example Man's collection for the season


required documents and the procedure to be followed during the certification.The applicant (importer or EU producer) submits the application form to theCertification Body. The form must be accompanied by copies of the documentsconfirming the origin, assortment quality and quantity (for some schemes), copiesof the documents used to manufacture the product and hygienic conclusion (if theproduct is subject to hygienic conclusion).

• The applicant must also present all documents confirming the established qualityindicators of the products - commodities materials, tests protocols issued by theexecutive bodies within their competence, previous certificates. Compliance withNational, International and European standards (CE, IEC, VC, GS and ISO) isnot sufficient to sell products in Russia (even if the producer or the importer canpresent these certificates to speed up the procedure).

• The certification is based on a contract concluded between the Certification Bodyand the applicant. The price for the certification services in Russia is determinedby the Recommendation of Gosstandart "Payment for works of certification ofgoods and services"35. The Foreign Accredited Bodies are not bound with thisrequirement. However, even in Russia, there are different prices applied by thevarious certification bodies. This is, according to the Russian Authorities,because the competent body can determine the certification scheme to be usedand the number of tests and analyses to be performed.

• The products are tested according to Russian standards elaborated byGosstandart. These standards are still not unified with the European andInternational ones, even if Gosstandart has started a process of modernisation36.

• Where shipment certificate is required, the producer or the importer shouldnormally demand one certificate by tariff line contained in the Gosstandartmandatory list. However, the certification body can authorise the applicant to docertification by group of homogenous products37.

The marking requirements and their compliance control are burdensome

• While the certificate of conformity is issued, the product has to be marked withthe GOST R certification logo on the package or on the label of the product. Themarking requirements are:

- the number of the certification body.- the minimum size of the mark is 8 mm.- The label and the size of the conformance logo should be verified

before commercialisation by the certification body.

35 Recommendation R 50.3 001-96, amended the 19 October 199936 For example for shirts they have to be tested about resistance to surface wear, resistance of napsurface to abrasive wear, durability of fixation of textures thread, conformity of percent compositionwith the data indicated on label, air proofness, resistance of dye to/ fading, washing, perspiration,ironing, organic solvents, rubbing; content of transient formaldehyde37 For example skirts and blouses for women with the same composition


• The certificate is compulsory for the retail of the products in Russia. Aninspection body from Gosstandart carries out the inspection of goods subject tomandatory certification. It verifies whether all the products subject to certificationare sold with a conformity certificate.

• In case of disputes or conflicts among the participants in the certification process,a party concerned may apply to a dispute settlement commission (COS). If theparty disagrees with the decision of the commission, it can appeal directly toGosstandart. The decision of Gosstandart may be appealed in the Court.

4.1.2. Hygienic conclusion

• Hygienic conclusion is issued in accordance with the Law «On Sanitary -Epidemiological Well-being of the population»

The Hygienic conclusion must be performed before certification procedures

• The hygienic conclusion is mandatory for some textile products and it should bedone before GOST-R certification procedure is engaged. The textile productsrequiring hygienic conclusion are synthetic products, children clothing, socks andin general all the products that are in the close contact with the skin. The identityof these products, which require hygienic conclusion, is not clear. The hygienicconclusion is also needed when a new product is retailed for the first time inRussia.

• It is required by the Department for Sanitary and Epidemiological State Control ofthe Ministry of Health (DSESC). This has to be well distinguished from thecertificate of conformity, established by Gosstandart. The aim of the certificate isto prove that the European product is in conformity with the standards for securityand health established by the Russian federation.

• The certificate is done by type of products and its validity is one year. The timelimit for delivery of the certificate is 4 weeks from the moment all the documentsand samples have been presented to the competent body. The competent bodyis not always the certification body but the majority of the accredited certificationbodies are also accredited by to carry out tests for the hygienic conclusion orhave contracts with accredited laboratories. The results of the tests aretransmitted to DSESC, which is the only body competent to deliver the hygienicconclusion. DSESC issues a registration number for the conclusion, which isnecessary to obtain GOST R certification and will be reproduced on thecertificate of conformity. With the request for hygienic conclusion, the companiesshould present 3 samples of the products. Those samples can not be used alsofor the conformity certification, some one or two additional samples are required.The tests conducted on the products are bacteriological, physicochemical andtoxicological. The contract with the laboratory determines the number and thecost of the tests.


Russian system for certification (currently in force)

The producer has the choice between :

Production certificate Shipment certificateValidity : 1-3 years, with compulsorychecking every year.

This certificate is done for every shipmentif the producer does not have productioncertificate.Validity : The certificate products can besold during one year, afterwards a newcertificate has to be done.

Procedure : Experts from Gosstandartauthorised body are coming to evaluate thesystem of the company in situ. They deliverone certificate by type of products. Theproducer also present samples of theproducts. Different tests are performed.

Procedure : 2 Samples of each producthave to be sent to the authorisedcertification body. Normal time limit: 2weeks. One certificate by tariff line isrequested. It is possible to regroup theproducts in the group of homogenousproducts.

Costs : The company has to pay all travelcosts and costs related as well thoserelated to the work and stay of the experts

Costs : The price depends of the numberand complexity of the tests performed andthe contract with the certification body.

Competent certification bodies : Certificatecan be done by Russian (102 certificationbodies in Russia) or foreign (apparently only2 certification bodies in Europe) authorisedcertification body.

Competent certification bodies:Certificate can be done by Russian (102certification bodies in Russia) or foreign(apparently only 2 certification bodies inEurope) authorised certification body.

Additional comments : ISO certification andother International certificates are notsufficient to sell textile products in Russia.However they can be taken in considerationduring the audit. The conformity isevaluated according to the Russianstandards. The goods have to be marked bythe conformance mark.

Additional comments: The textileproducts imported In Russia must haveGost R certification. The conformity isevaluated according to the Russianstandards. International and Europeancertificate of conformity are not sufficient,but can be taken in consideration. Thegoods have to be marked by theconformance mark.

The importer can only request a shipment certificate.


Hygienic conclusion:

A hygienic certificate is requested for some textile products (synthetic products,products in close contact with the skin), children clothes or products commercialisedin Russia for the first time.

Competent authority: Department for sanitary andEpidemiological State control

Has to be requested to: The certification body, if it authorised toissue this type of certificate or thecompetent accredited laboratory. Thecertification body can advise the EUoperator how to get the conclusion.

Procedure: 3 samples, time-limit: 2 weeks.


4.1.3. The declaration of conformity (new rules not yet implemented)

a) the Russian version of the declaration of conformity

• In July 1999, under the pressure of the future accession to WTO and theUnderstanding on certification annexed to the EC-Russia bilateral textileAgreement, the Government of Russian Federation has adopted a Decree on thedeclaration of conformity 38. According to the Russian Authorities, this is the firststep of the future Law on certification, which will modernise the Gost system.

Foreigners cannot make the Declaration

• However, the Russian version of the declaration of conformity presents somenotable particularities. It has to be differentiated from the producer declaration inthe European Union. The Gost declaration of conformity can be done not only bythe manufacturer, but also by the seller or performer. Foreigners can not makethe declaration. According to the Decree, the Russian producer or theorganisation registered as a juridical person in Russia and representing theinterests of relevant foreign manufacturers should adopt the declaration (art. 1).Therefore, the certification can not be realised by the European producer orexporter, if not registered under Russian Law. (art. 2) The strict interpretation ofthis regulation will mean that even a representative office of a foreign companycan not issue the conformity declaration because under Russian Law, it is not ajuridical person, registered under Russian Law. The EU operator has to set upcompany in Russia or to grant a Russian company with the rights to represent hisinterests.

Declaration concerns only a limited number of textile products

• The conformance declaration can only be done for the products listed in theDecision n°766. This applies to the following products : cotton and mixedblankets, pure wool and half woollen blankets, pure wool, woollen and half-woollen fabrics for clothing, fabrics of natural thrown silk for dresses, silk and halfsilk pile linen, Women's and Men's knitted outer articles, hosiery manufacturedon round-stoking machines, knitted gloves articles and scarves, artificial knittedfur for garments, Men and Women’s outer clothing of the over coat and suitassortment, women’s outer clothing of the dress and blouse assortment, Men’sshirts39.

Different documents can be used for the Declaration

• The following documents can be used as the basis for the declaration : theprotocols of acceptance, the acceptance delivery or other check tests of theproducts carried out by the manufacture or outside laboratories, the conformance

38"Decision of the Government of the Russian Federation n° 766 of July 7, 1999 on the approval ofthe list of products whose conformance may be confirmed by the conformance declaration and theprocedure for the adoption of the conformance declaration and its registration.39 For the three last categories of product the conformance declaration is possible with the exceptionof articles from cotton, flax and viscose.


certificates or protocols of the test for raw and other materials or accessories, thecertificates for the system of production quality, the documents stipulated for thegiven products by relevant federal Law and issued by bodies and organisationauthorised thereto, other documents confirming directly or indirectly theconformance of the products to the established requirements (art. 4).

There is no time-limit for the validity of the Declaration

• The declaration of conformity is established with respect to concrete products orgroup of products for a period established by the manufacturer. The text does notestablish any specific time-limit (art. 6). The declaration has to be establishedaccording to the form given in annex40.

An accredited Gosstandart Body must register the Declaration

• A particular feature of the Declaration is that it should be registered by acertification Body accredited by Gosstandart. This Body should be authorised byGosstandart to conduct certification for textile products. The certification bodymust check the correctness of the declaration and the related documents withinseven days. It decides to register (or not) the Declaration. The certification bodyhas to check whether the product is on the list of the products authorised for thedeclaration of conformity and if all the documents attesting the conformance ofthe product are available.

• The registered conformance declaration has the same legal effect as aconformance certificate. It is a ground for the manufacturer to mark the productwith the conformance mark.

• The price of the declaration was set up in the amendment of the Law "Paymentfor the work on certification of products and services" is two minimal monthsalaries in Russia.

• Federal organs do the controls on the products submitted to such a conformitydeclaration. If they reveal an unconformity of the products, the effect of thedeclaration is terminated.

b) the non implementation of the rules

Some modifications were adopted but are not published and implemented

40 The details that have to be given in the conformance declaration are the following: " name of theorganisation or surname first name and patronymic of the individual businessman that adopted thedeclaration; data about the registration of the organisation or individual businessman(name ofregistration body, date of registration, number); address, telephone, fax; post , surname, name andpatronymic of the head of the organisation on whose behalf the declaration is being adopted; nametype brand of the product covered by the declaration, Russian classification code, data about theserial output or lot ( lot , numbers of articles, requisite, elements of the agreement, contract, invoice,name of manufacturer and of a country and so on".


• According to the Russian authorities interviewed (Gosstandard and Customs),the new rules are already in force but they are still not implemented! The mainreason invoked is the need to adapt all the regulations about certification to thenew system. Authorities still have to introduce changes in the regulationsconcerning the schemes for certification, payment for the work on certification ofthe products and services and all others related regulations. Most of theamendments were adopted in the beginning of November. They are alleged byGosstandard to be in force since the 1st of January 2000.

• However, it has to be noted that Gosstandart did not answer clearly whether therules were really enforced (by the administration and by the Customs). The onlyinformation provided by Gosstandart Authorities is that modifications to Gostregulations are not yet published. They would have been sent to all accreditedbodies by electronic way. Importers were therefore not officially (and in practice)informed about the new rules.

Rules on hygienic conclusion must still be included in the new system

• A Gosstandart accredited body, interviewed by the consultant, stated that therules are not implemented because the hygienic conclusion was completelyforgotten in the new system. There is a legislative gap, which has to beredressed.

Customs have not adopted internal rules for the implementation

• Another reason for the non-implementation of the system is the non-adoption ofthe internal act of implementation for the Customs Authorities. Since 1st ofJanuary 2000, the customs are theoretically obliged to check the certificate ofconformity for textile products. They have to be informed for the existence of thecertificate of conformity in order to authorise the entry of goods accompanied bythis document. According to Customs, an internal document is still needed toauthorize them to implement the new rules. However, it is not known when thisdocument will be issued.


New system for certification

The Producer or importer has the choice between:

The Old system The New system – Declaration ofconformity

The producer can do:Production certification: experts fromthe authorised certification body come toevaluate in situ the production system ofthe company. One certificate by group ofhomogenous products. Validity: 3 yearswith regular checks every year. Theproducer can give a copy of thecertificate to the importer.Shipment certificate: One certificate bytariff line. The certificate has to be donefor every shipment. Products can be soldwith this certificate during one year.

The importer can only requestshipment certificate.

The declaration can be done by theproducer or by the importer.Product coverage: Only a limitednumber of products, enumerated in theDecree 766.Procedure: Only a Russian producer oran organisation registered as a judicialperson in Russia can make thedeclaration.The declaration has to be accomplishedwith all the documents, certifying theconformity of the products.Registration of the declaration: has tobe registered by an accreditedcertification body. Time limit forregistration: 7 days.Validity : no time limit for the validityCost: 2 months salaries in RussiaAdditional comments : Same legaleffects and procedure for disputesettlement as the old system. Theproduct has to be marked with theconformance mark.


4.2. Implementation

• The interviews with importers of EU products have shown that each operator hasits own way of conducting certification. Some EU exporters ask the productioncertification. Other EU companies follow the shipment certification. Others preferto sell products in Europe to Russian importers and they are not dealing withcertification procedures (etc ...).

4.2.1. The production certification

Production certification is very expensive for EU companies

• The certification is qualified by European companies, their agents, or their clientsas the most important obstacle to EU exports of textile products. Few exportershave chosen the production certificate. In fact, the production certificate is a veryexpensive option. EU companies have no interest to do it if their exports are notsignificant in terms of volume and product coverage. The companies have toinvite the accredited experts and to assume travel and living costs during audits.

• In addition, if the Russian certificate body does the certificate, it has to besubmitted to inspection monitoring every year (experts are coming again to verifythe quality of the production system). The certification body can cancel thecertificate if it does not proceed to inspection monitoring. If European certificationbody accredited by Gosstandart does the certificate, the certificate is anywayonly for one year and has to be renewed, if the company wants to continue toexport with the production certificate.

• The certification body can do in the same time tests for the hygienic conclusion, ifit is authorised to do this by the Ministry of Health. During the audit, expertsshould have access to all the information he needs in order to make an as fearevaluation as possible.

• The companies complain mostly about the very high price of the certificate it-selfand about the high additional cost connected to the visit of experts.

• The general policy pursued by Russian authorities and by the certification bodiesseems to establish operating offices of Russian certification bodies abroad whichcould offer all services to foreign companies abroad.

4.2.2. The shipment certification

The importers depend on certification bodies

• The shipment certification is also a very criticised issue. Its implementationdepends to a large extent on the certification body chosen by the importer and onthe contract signed with him. From shipment to shipment, the price can bedifferent, the number of certificates by product group and the time limit can also


be different.

• The certification body sometimes "succeeds" in regrouping the goods into a largegroup of homogenous products - for example in the category coats they regroupmantel, jackets and suits (normally, the certificate should be issued by productline in the mandatory list and by producer). In some cases, the certificationbodies deliver to importers only one certificate by "product type", independentlyof the identity of their supplier (s) (if they are importing a large number ofproducts from different producers and if these products are produced speciallyfor them).

• Importers consider that the certification procedure is a heavy loss of time andmoney (very long and complicate). In almost all cases, they have a person busywith the certification issues in their companies. The certification represents formost of them an important percentage of the CIF value of the product.

The system is completely non-transparent and over prescriptive

• Given the non-transparency of the system, some importers feel obliged to checkwith the Certification Body whether a certificate is needed (or not) for a givenproduct. They will therefore have to pay for the information and the writtenanswer from the certification body. They will use this answer to counteractoffensive attempts from the inspection bodies. This example shows how non-secure and non-transparent the system is perceived by EU exporters andRussian importers.

• It is alleged that a non-official aim of the maintaining of the certificationrequirements is to assure the survival of the research institutes. These financethemselves by doing the certification. The certificate is marketed aggressivelyand become competition factor for the companies trading with Russia. All thecompanies try to find the less expensive and less complicated way forcertification. A large number of importers recognise that they are making seriousevaluation before they request a certificate. The certification bodies try to makethe most attractive offer for certification. They often restrict where it is possiblethe number of the tests to be performed, in order to offer the best price.

Inspections are too strict and not conducted in open markets

• The inspection bodies conduct strict controls once every two weeks. Thisconstitutes an important problem for Russian distributors. Their objective is tofind any irregularity and charge penalties. As the Russian standards are very oldand not always adapted to the new products, the inspectors often conclude thatthe standards used for certification are not correct and fine the sellers. Importersof EU products also complain about the unfair competition they suffer from the"open markets" tolerated by Russian authorities. In these markets, smuggledgoods are often sold without any certificate at a very low price. Open markets arenot subject to inspection aimed at checking the compliance of certificates orlabels.


There is a possible discrimination between foreign and domestic companies

• The European operators consider that there is certain discrimination betweenforeign and domestic companies related to the certification prices. Even if theprices are set up by a regulation of Gosstandart, the certification bodies candecide which procedure will be used, and how much it will cost. According to EUoperators, prices offered to Russian producers are generally lower than thoseoffered to them. However, this issue is very difficult to prove.

4.2.3. Hygienic conclusion

Importers criticise the absence of scientific ground and the additional costs

• The legislation concerning the hygiene certificate is not clear (identity ofproducts). The scientific ground is not understood. The companies supportimportant additional costs. Sometimes importers prefer to do the conclusionbefore certification in order to avoid problems with the authorities. The EUoperators also complain about the considerable amount of samples (5-6)requested for the hygienic conclusion and the certification. The samples aredestroyed during the tests and it represents an important additional cost, whenhigh value added products are concerned. The duration of the procedure (2weeks) is also strongly criticised.

4.2.4. Declaration of conformity (not implemented)

EU operators expressed fear about the new certification rules

• Russian Authorities should have implemented new rules on conformityassessment from 1st October 1999. According to European companiesinterviewed this is not yet the case. The first part of the new Law on conformityassessment – the Decree on producer declaration - provides the possibility, for alimited number of products, to be imported without undergoing mandatorycertification by Gosstandart offices.

• EU companies have expressed serious doubts about the real progress made bythe new legislation:

- The conformance declaration has to be submitted for registration in one of theGosstandart accredited bodies. The EU Company will therefore be completelydependent upon Certification Authorities in Russia. Registration of thedeclaration will cost the amount of "two monthly minimal salaries" in Russia.Time limit for registration will be seven days. This looks like an improvementcompared to the old system, but the implementation of the new scheme forcertification will be difficult for the foreign companies.

- The companies have still to undergo mandatory third part certification for alarge number of products. The procedure is very restrictive and it gives EUoperators almost no choice between different certification schemes.


4.3. Legality

4.3.1. The Russian standards are over-prescriptive

• A large part of Russian standards for textile products are from the seventies andthey are not adapted to new methods of production. According to Article 55 of thePCA, "the two parties recognise the importance of the approximation of laws" andRussia took the commitment to adopt legislation compatible with EU legislation.The approximation of laws includes the field of standards and technicalregulation. Article 60 PCA recognises the importance of approximation of laws inthe field of standards and conformity assessment, use of international standardsand conclusion of mutual recognition agreements.

• In application of these provisions an Understanding on certification was annexedby Exchange of Letters to the 1998 EC-Russia textile Agreement. Under theUnderstanding, Russia should provide information about the current scheme ofcertification and adopt new Law in conformity with the international standards.

• In view of the future accession of Russia to the WTO, it should be mentioned thatRussian standards are not in conformity with the requirements of the TBTAgreement. The Agreement (article 2) requires that the members should useinternational standards already existing, except if those standards are ineffective.The standards should not create unnecessary obstacle to trade and be moretrade restrictive than necessary to fulfil legitimate objectives.

• Russia is not fully implementing the obligations indicated by the PCA, because ofthe subsistence of old standards and very few number of new provisions, but alsobecause the system does not follow the WTO rules. Russian standards can notbeen justified according to the article 2.2. of the Agreement. The legitimateobjective (protection of the consumers) seems not proportional to the importanceof the trade restrictions created by the Russian system.

4.3.2. Excessive requirements of certification procedures

• Russia has not provided sufficiently clear information about the current system ofconformity assessment with articles 55 and 60 PCA and the Understanding onCertification. The requirements of the Russian side remain unclear for the EUoperators. The certification procedure and the important number of products thatrequire mandatory certification create obviously an unnecessary obstacle to tradeas defined by article 5.1.1 TBT Agreement.

• The Russian authorities do not accept any certification to internationally adoptedstandards. The procedure of certification is not in conformance with theinternational guides and recommendations. Only a few number of Europeanlaboratories and certification bodies are accredited to provide Gosstandartcertification.


• Article 6 of TBT Agreement requires also that members assure whenever it ispossible the acceptance of the conformity assessment procedures proceeded inothers countries if it offers an assurance of conformity with the standardsconsidered as equivalent. The application of this provision is very problematicalconcerning Russia, because large part of textile products should undergomandatory third party certification according to the Russian legislation. InEurope, the situation is quite the opposite – the textile products are very oftensubject to producer declaration. In the case of Russia an automatic recognition ofcertification procedures will be very difficult without specific mutual recognitionagreement.

4.3.3. Non justification of hygiene conclusion for textile products

• The hygienic conclusion prior to mandatory certification can be analysed as atechnical regulation to trade and will be submitted to the provisions of TBTAgreement. According to article 2.2. of the Agreement, the technical regulationshould not be more trade restrictive than necessary to fulfil the legitimateobjective, taking in account the risk of non-fulfilment this would create. The mainobjective of the hygienic conclusion is the protection of human health. Whateverthe justification of the procedure for textile products which are also subject tomandatory certification, the cost and the duration of the procedure can hardly bejustified by the protection of the human health. It is important to stress thathygienic conclusion and the certification of conformance are two separatedocuments to be obtained in two different administrations pursuing the objectiveof the protection of consumers. Normally the certification procedure is sufficientto prove that the product is not dangerous for consumer use. Additionalprocedure is over-prescriptive and is not in conformance with the TBTAgreement.

4.3.4. Non conformity of the new declaration of conformityto the international guides

• The Decree on the declaration of conformity was adopted on the light of thefuture accession of Russia in the WTO and in application of the Understanding ofcertification attached to the EC-Russia textile Agreement. As explained, thedeclaration can be adopted only by a person or organisation registered underRussian Law. It must be submitted for registration to the standardisation bodyaccredited by Gosstandart. The new decree is not in compliance with article5.1.1. of TBT Agreement and article 60 PCA. First, the Decree can be consideredas creating discrimination between national and other producers. Producers andimporters from third countries are obliged to create company in Russia or to dealwith Russian partners. Second, under internationally adopted practice, thedeclaration of conformity is not registered, but the producer should keep aspecial technical file in case of inspection. The obligation of registration requiredby Russian legislation can be considered as an unnecessary barrier to trade.


§ 5. LABELLING

5.1. Measures

5.1.1. Labelling requirements for textile

• The Russian legislation implementing labelling rules is officially aiming at offeringa high level of protection of the consumer. The labelling requirements are set upin the Law for the protection of the consumer and for the textile products and lightindustry they are explained in the Regulation of Gosstandart n°51121-97.

• In general, all the information on the products must be in Russian, except thename of the producer or the importer with the condition to mention in Russianthat it is the importer or the producer. The elements to be affixed in the label areas follows:

- the name of the product ( for ex. skirt, dress, etc),- the model of the product (артикул n°)- name and address of the producer or of the distributor- country of origin- composition (the ingredients are presented by order of importance and

with the percentage)- the size according to the Russian size system- indications for washing, ironing and use of the product- mark of conformity (the logo of conformity approved by the certification

body with the number of this certification body)- code- recommended age (for children clothing).

• This information is to be affixed on the label of the product. However, theinformation for imported products can be provided on stickers on the originallabel, or on the package of the product.

5.1.2. Control of labels by Customs authorities

• The consultant has not found any law regulating the controls of label by theCustoms authorities. However, according to some certification bodies, Customsshould check the label during clearance. According to the Customs, Customsofficials do not check the labels during the clearance process. Given theconfusion on this point, various European apparel companies prepare their labelbefore exporting to Russia. Even if the label is not controlled by the Customs, amodel of the label must normally be presented to the certification body beforecommercialisation.

5.1.3. Control of labels by Russian Authorities


• Under the Russian Law, inspectors from the Ministry of Trade have to conductrandom controls in the shops. They control both domestic and imported products.

5.2. Implementation

5.2.1. Additional costs supported by European exporters

• According to EU exporters, the labelling legislation is over-prescriptive. Theadditional cost of labelling for the Russian market is estimated by EU companiesbetween 1% and 5% of CIF value.

• The confusion about the information to be put on the label is complete, becausenot all the requirements for light industry apply to textile products. However, it isproblematical to know which are exactly the compulsory mentions for textileproducts. The EU producers or the importers sometimes prefer to put moreinformation (than possibly required) in order to avoid problems with theinspection. Some of them consider that is compulsory to put the colour, the dateof production or the telephone/fax number of the producer.

5.2.2. Control by Customs authorities

• There is a confusion among EU producers on the question to know if the customsauthorities are (or not) conducting any control on labels of imported productsduring clearance. Obviously, those who do think that Customs conduct suchcontrol will then attach in the country of origin the required label and will supportan additional cost. Those who know that no customs inspection will be carried outon their products will not affix these labels and let them to be prepared andaffixed by the importer or the final customer.

5.2.3. Control of label by Russian Authorities

• It is almost a "goal" for the inspectors to find some irregularities on the label.Because of the non-transparency of the rules, it is very difficult for the operatorsto know the rules applicable to their products. In any case, they will pay the finesin order to avoid problems. The situation gets sometimes so difficult (eachinspection leading to fines) that some importers prefer do not pretend to fullycomply with the requirements. Therefore, they pay the penalties and correct thelabels after the inspection. This is sometimes a less expensive solution.

5.3. Legality

• Excessive requirements for label may represent an important trade barrier.According to the definition adopted by international organisations and used in theTBT Agreement, marking and labelling requirements represent technicalregulation under the scope of this Agreement. Article 2 of TBT Agreement insistson the point that technical regulations should not be more restrictive than


necessary to fulfil the legitimate objective. In the case of labelling, the objective isthe protection of the consumer. However a large part of the required information(name of the product, model of the product) is not absolutely necessary. Thenon-transparency of the Russian labelling legislation can also be criticised underthe provisions of the TBT Agreement.

• Art. 55 PCA requires the approximation of the Russian legislation concerningtechnical barriers and the protection of the consumers to the European Law inthis field. It seems that Russia has not accomplished any effort to implement thisprovision.

§ 6. OTHER PROBLEMS IDENTIFIED

6.1. Measures

6.1.1. Protection of intellectual property

• Russia has made considerable progress on the adoption of the legislation forprotection of the intellectual property. Since 1993, Russia has adopted generallyacceptable laws on trademarks and appellations of origin, patents andcopyrights. Russia is party to the Paris, Berne and Geneva conventions. Russiaalso created a special body, (Rospatent) in order to protect copyrights andneighbouring rights.

6.1.2. Restrictions on distribution for Foreigners

• Foreign companies are not authorised to exercise a commercial activity on theterritory of the Russian federation. For example, Foreign companies can not openshops or set up distribution system on the territory of the Russian Federation. Aforeign company needs to register a company in Russia, which may be a 100%-owned or a JV, in order to engage directly in any kind of commercial activity.

• The legal framework is set by the Law on Foreign Investment of 1999, a series oflaws on taxation and a number of government regulations governing specificlegal issues involved.

6.1.3. Investment rules

• Investment rules in Russia are very restrictive. Even if a new Law for Foreigninvestment was adopted in 1999, it is very conservative and does not encourageforeign direct investment. According to Russian experts from the Ministry ofEconomy the Law will be revised because the new majority in the Duma is morefavourable to foreign investment.


• The rules of investment in Russia are different depending of the regions andsectors of activity. The regions have competence to adopt laws on the investmentin order to promote economic activities. Regions as Nijni Novgorod have sometax exemptions for investment. The Ministry of Economy in the field of textile andlight industry is developing programs for promoting the development of somesectors. The first program of this type concerns the wool sector. This programprovides a number of advantages for investment in this sector. The sameprogramme will be elaborated for the cotton sector. The foreign investors willingto invest in Russia should request information in the Ministry of Economy and theregional authorities for the laws and regulations applicable on investment.

• Another serious barrier for investors is the non-transparent tax and accountinglegislation in the Russian Federation. Russian accounting system is differentfrom the international accepted one and the complexity of the tax legislationmakes difficult to comply with all rules and regulations.

6.2. Implementation

6.2.1. The protection of the intellectual property

• The European operators complain about the lack of implementation of thelegislation on the intellectual property. They face a number of illegal copies oftheir products imported from China and Turkey. The protection of exclusivedistribution rights is also not implemented. The exclusive distributors of Europeanproducts face the competition of goods imported in a smuggled way. Theoperators are often obliged to resolve their problems by themselves because theauthorities are very slow to react.

6.2.2. Restriction for distribution for foreigners

• The European operators are obliged to register a company or a joint ventureunder Russian Law. The registration of a company is not a very difficultprocedure, but according to EU companies it is an additional administrativeburden. The problems are mostly a posteriori because the company is submittedto Russian Tax and Accountancy Law and sometimes the companies havedifficulties to deal with this.

• A large number of European operators prefer opening a Representation Office inRussia and avoid these problems. In this case, all contracts are concluded by theEuropean company. The Representation only receives the customers and takestheir demands. For the opening of the official representation in Russia, a certainnumber of formalities have to be conducted. The Russian legislation requires anumbers of documents : the statute of the company, the statute of therepresentation, a document about the financial solvability from the bank, theregistration in the trade register and 1000 dollars per year. The officialrepresentation is not submitted to Russian Tax Law and it does not pay VAT and4% additional tax on the rent of the offices.



• European companies prefer not to make direct investments in Russia. They areusing the OPT scheme. This is much more profitable than to invest in Russia.They are importing fabrics without paying the customs duties (Russian CustomsLaw provides exemptions for the OPT scheme) and after they re-export thefinished products to the European Union. If they want to re-import these goods toRussia, they must pay the import taxes. According to the estimations of theEuropean operators, it is cheaper to pay import taxes than to invest in Russia.The investor must pay all the charges – fiscal, social, electricity and all otherspayments for the state.

• A company willing to invest should negotiate with the regional authorities for amore favourable treatment. It must choose the region where the investment mightbe more profitable.

6.3. Legality

6.3.1. Intellectual Property

• The enforcement of the intellectual property rights is an important problem for theEuropean companies and their distributors operating on the Russian market. TheRussian authorities have not adopted the appropriated provisions forenforcement of these rights or their efforts in some sectors are not sufficient. Inaccordance with article 54 PCA and annex XX of this Agreement, the two partiesshould guarantee adequate and effective protection of the intellectual propertyrights. In case of difficulties with the implementation of the provision of thisarticle, parties should organise consultations in order to find mutually acceptedsolutions. An important part of the TACIS fund is reported to be used for theimplementation of the intellectual property rights and EU should seek a solutionof the problem.

• The enforcement of the intellectual property rights might be an important problemafter Russian accession in the WTO. The part III of the TRIPS Agreementrequires from the parties an enforcement of intellectual property rights. Afteraccession Russia will not benefit from a transitional period and it would beimportant to assure the enforcement of intellectual property legislation beforeaccession.

6.3.2. Restriction of distribution for foreigners

• Restriction of distribution for foreigners is set up in the new Law of ForeignInvestment. According to this Law, dependent companies of a commercialorganisation with foreign investment do not enjoy the legal protection, guaranteesand privileges established by the present Federal Law as they pursue theirentrepreneurial activities on the territory of the Russian Federation.


Comparatively, a foreign investor or a commercial organisation with foreigninvestment set up on the territory of the Russian Federation (if a foreign investorowns at least 10 per cent of the authorised capital) enjoys the legal protection,guarantees and privileges established by the present Federal Law as theyreinvest.

• Under this legislation, EU operators are obliged to create branch or companyunder Russian legislation in order to exercise commercial activity. This provisionis very criticised by the EU companies. The new Law on investment is not really abreach of article 29 PCA about the right of establishment. This article requiresthat Russian branches of EU companies are not discriminated under RussianLaw. Under the Investment Law, the Russian Law does not protect the foreigncorporations exercising commercial activities. This provision can be incontradiction with article 11 § 2 PCA. According to this article, the products fromthe EU benefit of treatment not less favourable then this provided to nationalproducts according to laws and regulations concerning sale and distribution. Infact, under Russian Law, imported products do not benefit of the same treatmentbecause a company has to be set up for their sale and distribution. The situationcan create discrimination in favour of the national production.


• Russian Law of Investment is very conservative and does not create favourableconditions for foreign investments. Article 58 PCA requires that parties create afavourable environment for national and foreign investment. The parties shouldalso provide information about laws and regulations concerning foreigninvestment. Fulfilment of this obligation is very problematical from the Russianside given the large number of regional and local regulations on investment. Thebest way to deal with the restriction on investment would be the signaturebetween the EU Member States and Russia of an Agreement on promotion andprotection of investment, as provided in article 58 § 2.

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