Export guide to EU light industry ENG

Practical guide

EXPORT to the EU:

Apparel and footwear

This Practical guide was prepared within the framework of the project supported by the Embassy of the Kingdom of the Netherlands to Ukraine, and is complemented by the Roadmap for Ukrainian exporters of apparel and footwear to the EU.

All rights reserved. No part of this Practical guide and the roadmap may be reproduced, transmitted or copied in any form or by any means without reference to the originals.

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What should you know about exporting to the EU?

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2

Take the first step – determine if your company is ready for export

9

Check the range of products and manufacturing processes required for export

9

3

Identify the necessary resources

10

Analyse current development plan

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Identify trends and sales structure

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Analyse your previous marketing experience

12

Find out if the marketing infrastructure of the company is ready for export

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Identify the strengths and weaknesses of your company

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The next step: selection of the most promising markets

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How to conduct market research on your own: a step-by-step guide

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Information resources for independent analysis of prospective markets

17

For exporters’ reference: current state and perspectives of the European apparel and footwear market

4

What are the rules?

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24

Import duty rates – do they still matter?

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The origin of goods: the most important issue

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Documents confirming that the product is made in Ukraine

28

The Pan-Euro-Mediterranean cumulation: why it is important for apparel and

5

footwear exporters?

30

Standards and certification: how to find the way to the European consumer?

32

Sources of information on tariff/non-tariff regulation of export to the EU

34

Search for partner in a foreign market and product promotion

36

How to find a partner in a foreign market using the variety of sources?

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How to prepare for an international exhibition?

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How to present your products efficiently (advertising and PR)?

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How to take advantage of the e-mail and Internet marketing?

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The next step: determine the optimal business model

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Selection of the optimal business model to enter the EU market: distribution,

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franchise or agency agreement

44

E-commerce – how does it work?

48

Participation in the EU public procurement: a step-by-step guide

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Dealing with transport and logistics?

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What should you know to mitigate risks?

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Foreign economic agreements: basic issues

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Currency control rules with regard to foreign economic agreements

60

Special sanctions: what the Ukrainian business should remember

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For exporters’ reference: current programs to support export activities of SMEs

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They did it! Success stories of apparel and footwear exports to the EU

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What should you know about export to the EU? At the beginning of 2016, the trade relations between the EU and Ukraine entered upon a new phase: the EU–Ukraine Association Agreement, establishing the Deep and Comprehensive Free Trade Area (DCFTA), took effect. Besides tariff reduction, the Association Agreement provides for a roadmap on the vitally needed reform process in Ukraine. A clear timeline is also determined in order to streamline the approximation of the Ukrainian legislation to the relevant EU internal market rules.

The Association Agreement opens for Ukrainian goods and services one of the largest markets in the world, comprising 28 countries and 500 million potential consumers. This market is particularly important and promising for Ukrainian apparel and footwear industry, which has made a real fashion revolution during the last three years and shows even higher potential for the future.

Export of Ukrainian goods to the EU market: the preferential trade regimes Ukrainian goods benefit from the preferential market access under two trade regimes: the DCFTA, envisaged by the Association Agreement, and the Generalized System of Preferences (GSP)1. At the moment, Ukrainian footwear and apparel may be exported to the EU within the scope of either trade regime. Thus, the importer may use either the DCFTA or the GSP depending on the lower tariff rate.

Export of Ukrainian goods to the EU market

Deep and Comprehensive Free Trade Area between the EU and Ukraine (DCFTA) (Certificate EUR.1)

Tariff quotas for certain agricultural goods

Elimination/reduction of import duties regarding the majority of agricultural and industrial goods (including footwear and apparel)

Generalized System of Preferences (GSP) (Certificate of Form Đ?)

Elimination/reduction of import duties for certain agricultural and industrial goods (including footwear and apparel)

EU Generalized Scheme of Preferences (GSP) was introduced on January 1, 2014 based on the EU Regulation 978/2012 and provides unilateral reduction of import duties on the part of the EU for certain categories of products originating in Ukraine and other countries.

1

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With respect to the DCFTA, the Ukrainian apparel entering the EU market already faces zero tariffs. Moreover, the import duties applied to the majority of footwear products will be removed gradually: within the period of three–five years.

The GSP regime reduces (but not eliminates) the import duties for the Ukrainian products of apparel and footwear industry. In this vein, the tariffs on Ukrainian apparel exported to the EU under the GSP regime are higher in comparison with those applicable under the DCFTA. However, the GSP may be especially beneficial for footwear industry, since some EU import duties for footwear products are lower under the GSP than those within the DCFTA. The GSP will be applicable to Ukraine until the end of 2017.

Prerequisites for the use of a preferential trade regime In order to benefit from the tariff preferences under the GSP and the DCFTA, the exporter needs to: (a) ship the goods directly to the country of import (i.e. the products have to be transported directly between Ukraine and the EU) and (b) prove that the product originates from Ukraine (i.e. is manufactured or assembled in Ukraine). These rules are to ensure that only the parties to the preferential trade regimes benefit from the tariff preferences.

The origin of goods is determined through the set of rules and shall be certified by the special document. In this vein, the exporter using the DCFTA regime needs either: (1) a EUR.1 movement certificate, issued by the customs service of Ukraine; or (2) an invoice declaration drafted by the exporter (for consignments valued 6,000 Euro or less).

The exporter benefiting from the tariff preferences installed via the GSP regime shall either: (1) obtain a Certificate of Origin of Form A, issued by the Ukrainian Chamber of Commerce and Industry; or (2) prepare an invoice declaration (for consignments valued 6,000 Euro or less).

Other rules applicable to the product entering the EU market are the same irrespective of the preferential trade regime: the GSP or the DCFTA (e.g. the list of other documents accompanying the product is the same within the scope of both regimes). These issues will be further explained in the sections below with the focus on the apparel and footwear industry.

Thus, the Ukrainian exporters may choose the preferential trade regime depending on the tariff rate or the procedure applicable to the issue of the certificate of origin accompanying the product.

Access to the EU market: general comments The EU internal market is based on the free movement of goods. Once an item of goods

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has entered an EU country, it can freely move through the whole EU market. Accordingly, the product requirements in all EU countries are harmonized and ensure that the consumers and business environment throughout the EU territory enjoy equal level of protection. The harmonized product requirements are proportionate to the risks associated with the product. However, the basic prerequisite the importer has to meet on the way to the EU market is safety and quality of the product.

A manufacturer/importer is obliged to demonstrate that the product meets the specific requirements. To that end, it has to: (1) define the applicable harmonized EU legislation, i.e. the mandatory requirements for the specific product; (2) identify additional private standards (on a voluntary basis); (3) prove that the product meets the mandatory and/or voluntary standards (through the conformity assessment procedure, which can be provided by the manufacturer or by an independent body).

Entering the EU market does not require the importer to go through “nine circles of hell� while undergoing a range of bureaucratic procedures and layers of control. The importers/manufacturers are solely responsible for the safety and quality of the product they place on the market. However, the EU market surveillance system imposes strict sanctions in case of any detected violations to product safety/quality.

Finally, the importer has to take into account the interplay of the legal, commercial and other relevant aspects. For example, the EU consumer attaches particular attention to the production methods and sustainable business practices of the manufacturer: environmental and social responsibility, respectable work conditions, anti-corruption and business ethics. In the sections below these issues will be highlighted in more detail, with the focus on the apparel and footwear industry.

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Take theВи first step – determine Що повинні знати про if your company is ready for export експорт до ЄС?

The first question most small businesses ask is why we should export. It is a valid question given the costs, time and commitment required to be internationally successful. Foreign markets offer you the opportunities for growth, increased sales and diversified consumer segments. But it takes time and effort. If you are focused and committed, you must first assess your readiness to enter the global marketplace.

A business ready for export is the one that has the capacity, resources and management to deliver a marketable product on the global scale at a competitive price. You can assess your company with an export capacity audit, to help define the company’s objectives as well as strengths and weaknesses in exporting with regard to the following areas: product readiness, company’s resources, current development plan, trends and sales structure, marketing experience and marketing infrastructure.

Check the range of products and manufacturing processes required for export You need to assess if your products and production process meet the requirements of the market you plan to sell your goods to – the European market in this case. First, choose from the range of your products those that will be competitive abroad.

List the strengths and weaknesses of products that you believe have export potential

Select the most exportable products to be offered

Evaluate the product to be offered

In order to define the marketing potential of your products you should analyse product features in detail: • specifications (compared to key competitors); • compliance with existing market regulations, standards and certification requirements; • cost/price/margin, awards (if they are acceptable to your company).

It will help the company to find the distinctive features of your product, which will enable you to compete for the clients abroad.

All product weaknesses (poor quality, limited product range) you identify during the assessment will help eliminate them during the implementation of the export strategy.

In the course of the audit, you might find out that particular product features that are appreciated on the Ukrainian market may be not so appealing to foreign customers and may therefore have to be modified respectively. In case of non-compliance of your product with the technical specifications, market requirements and consumer preferences of the European market, 9

you should analyze the ability to adapt production to the market requirements, the necessary costs and time.

Production capacities are also an important area that influences directly a company’s ability to export. You have to determine whether your company has enough production capacity available to meet the export demand. Spikes in export or domestic demand could lead to delays in supply.

Therefore, you need to assess the company’s basic parameters of current production and capacities of all products: volume of current production, current capacity, fixed and variable costs of production.

Identify the necessary resources Resources are the most important part of your export readiness audit. You have to ensure your business has access to sufficient resources (both financial and human) to support the export initiative. Launching an exporting business will place additional demands on the capital resource pool of the firm. This capital will be required to finance increased inventories and receivables for your international business. Therefore, your company needs to have sufficient funds available to start an export business.

It is important to get a clear and accurate picture of your company. Distortions of your company’s resources will result in a wrong decision in assessing an export market. Often cultural prejudices and researcher incompetence are the reasons for distorted information and misrepresentation of production capacity, R&D level, financial position, and most importantly, the company’s competitiveness. If you doubt the accuracy, sufficiency, or interpretation of the facts assembled, you should seek external assistance from those who have the training and experience to guide the audit. Consensus of opinion should be reached wherever possible.

During the evaluation of available financial resources, it is important to determine exactly how much money is available for export marketing because it directly influences the scope and content of exports.

New costs can include: • overcoming barriers such as compliance with standards and regulations; • legal fees; • international market research; • travel abroad; • transportation, insurance, and tariffs; • product adaptation; • warranty and after-sales service provisions; • participation in trade fairs and exhibitions.

It is also necessary to assess current and future costs for marketing and sales on the basis of marketing activities, preparation of market research and other marketing materials.

In the analysis of manpower resources, you have to estimate the time needed by marketing personnel for the export marketing and their other duties and responsibilities.

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The members of your team involved in exporting have to be to a certain extent familiar with the importing country and foreign customers. International experience, cultural background and language proficiency can be sources of competitive advantage. International success also requires experience and expertise in building trust-based relationships with foreign partnering companies and their managers. Successful management of all these activities requires specialized managerial talent within your organization.

If you have no personnel with export experience, there are two options. First, you could choose to train and develop suitable employees. Regardless of their level of responsibility, they need to be familiar with the company, its products, organizational structure, and management attitudes. The second choice is to hire an export manager who is already trained and experienced in exporting. This may incur higher costs but will allow you to launch the export program quickly.

As you look over your company’s resources, ask yourself the following questions.

Human resources – do you have: • the capacity to handle the extra demand associated with exporting; • senior management committed to exporting; • efficient ways of responding quickly to customer inquiries; • qualified marketing personnel; • and ways of dealing with language barriers?

Financial and legal resources – can you: • obtain enough capital or credit lines to produce the product; • find ways to reduce the financial risks of international trade; • find people to advise you on the legal and tax issues of exporting; • deal effectively with different currencies; • and ensure protection of your intellectual property?

Analyse current development plan In order to develop a realistic export strategy, you should analyze the existing strategies and plans, in particular marketing and sales strategy. Specifically, you should answer the following questions: 1. Is there any contradiction between your current strategies and the new direction of activity – export? What should be changed in your current plans to harmonize them with the export development?

2. How successful is the implementation of your existing strategies/plans? Have you succeeded in reaching the targets?

3. What is the cause of failure? Is there any risk of failure of the export plan due to these reasons?

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4. Which divisions of your company did not fulfill previous plans or did not act in accordance with the company strategy? Who is personally responsible for this?

5. What mistakes in strategic planning should be taken into account in the development of the export strategy?

Identify trends and structure of sales To identify the shortcomings of current export sales you should analyze their trends and structure. It will help remove existing “bottlenecks� and develop a marketing strategy. Thus, you have to analyze: 1. Product range in exports. Prevalence of one product group in export could lead to sudden sales losses in case of a shift in consumer preferences. Analyze sales and gross profit margin structure by product groups.

2. Geographic structure of exports. Check the geographic structure of your export. If you are dependent on the supplies to one or two countries it also could be a threat in case of changes in demand, introduction of additional requirements and restrictions in these markets.

3. The client structure of exports. Very often Ukrainian apparel exporters concentrate only on one sales channel (for example, only on distributors, ignoring the large wholesalers), or on one large customer. Consequently, if you are in a similar situation, you are dependent on customers and in case of non-cooperation (or a significant change in terms of purchases), finding an alternatives quickly could be a problem for you.

4. The general export trends by goods, countries, channels, consumers. This analysis will help you reveal the negative developments, their causes and correct your sales policy.

Analyse your previous marketing experience A practical way to start your internal evaluation is to assess past exporting or international experience. If your company has no or very limited experience in exporting, it is possible to analyse previous sales inquiries or requests for product information from abroad.

Such information is a valuable link to international markets. Simple as it sounds, it often makes sense to first study your own company’s records. Companies that have neither export experience nor inquiries from abroad can learn about export opportunities from external sources.

Every marketing effort that you make can teach you something about the effectiveness of marketing your company and your products; even failures can teach you something.

Since marketing for each and every company is unique, these lessons are important. Yes, general marketing principles are always applied, but they are not as important as the specific lessons we learn from our own experience. Those specific lessons can help you formulate your plans for the next marketing activities that you are preparing for the company.

Remember, you are looking for both things that worked and things that failed. You are interested in the things that worked, so that you can repeat that success. At the same time, you are interested in the things that failed, so that you do not repeat those failures

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In order to analyse your current and past marketing and sales activities you have to assess the following marketing activity: (domestic sales and export have to be analysed independently): • personal selling; • public relations; • direct advertising; • e-commerce; • networking; • commercial representation; • buyer advertising.

Based on the information collected, analyse the strengths and weaknesses of the company’s previous export marketing.

Find out if the marketing infrastructure of the company is ready for export You need to assess if marketing infrastructure of your company is ready and your team is committed and geared to plan and implement the export initiative.

Your company’s ability to respond quickly to potential customers’ requests is one of the important prerequisites for successful export activities. Contacts with international partners which result in good export business can come in a variety of ways. You may receive enquiries via your website, through your own networks or by participation in trade fairs abroad.

Whether you can convert an enquiry into real business often depends on how you handle it.

Remember that the same enquiry may also have been sent to your competitors in Ukraine and other countries. The information you send and the responses from your competitors will help the importer decide whether to buy from you or from some other source.

The buying process can be lengthy and complicated. A decision often has to be made by several people and can take a long time, especially if large sums of money are involved and if the product is expensive.

If you do not hear back from the enquirer immediately, this does not mean that they are not interested or not to be trusted. Repeated efforts are often needed to win an order, so do not ignore an enquirer simply because he or she does not buy right away – it could be a long-term business opportunity. Keep in mind that export relationships usually take longer to build than domestic relationships.

You may have developed the best export strategy but it will not work if the potential customer had a bad impression from the first phone call or marketing request to your company.

Therefore, assessment of strengths and weaknesses of the your company’s marketing infrastructure (processing phone calls and requests) is important not only because of the need to keep existing clients but also to search for the new ones. Assess the existing marketing infrastructure: telephone answering, processing of marketing enquiries (that can be sent by mail/ fax/e-mail, using the webpage forms) and handling existing clients’ queries and sales orders) and analyse if there is any check or monitoring and follow-up of these procedures.

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Based on the assessment you should develop formal procedures (described in detail in the job descriptions) to deal with: • answering telephone calls (making telephone conversations, using standard messages, recording telephone calls and processing messages); • processing marketing enquiries (recording queries, following up on queries, indicating the responsible persons, and setting deadlines for answers); • and improving the sales process (techniques for dealing with existing clients including sorting and tracking orders, effective communication with the client).

Get your marketing infrastructure in place and you will be amazed at how much easier it is to bring in new clients.

Identify the strengths and weaknesses of your company From the previous stages of export capacity audit, you should indicate the most important strengths and weaknesses that your company has to take into account in order to carry out the process of export expansion.

In order to make the most out of your company’s strengths and improve your weaknesses, the export expansion begins with an analysis of the competitive capacities of the company in relation to foreign markets in order to achieve maximum profit.

Here are some strengths enabling international success: • sufficient production capacity or surplus in order to satisfy an increase of demand in foreign commercial activities; • a suitable level of technology and quality which allows you to take on the new sales market successfully; • sufficient flexibility to adapt the product to the needs of certain foreign markets.

The most common weaknesses of exporting companies are: • lack of resources to finance the current capital of the international operations; • lack of knowledge and information about foreign market and the way to create an international commercial network; • incapability to get appropriate human resources for the export tasks – in terms of experience, knowledge of foreign trade and languages.

Once a company has been assessed, strengths could be used as an anchor for the strategy (marketing based on the company’s strengths) while with regard to weaknesses it is important to develop an action plan to address them so that implementation of the strategy is more efficient.

In some cases, the weaknesses will be so fundamental that no further export marketing should take place until they have been addressed (the company does not have any more capacity for export). Other weaknesses can be addressed over time to improve the marketing performance.

How an enterprise deals with a certain issue depends on the available resources. For example, the absence of dedicated export marketing personnel could be addressed immediately simply by recruiting a qualified person or training the existing personnel.

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To learn more: • A Step-by-Step Guide to Exporting (http://tradecommissioner. gc.ca/exporters-exportateurs/assets/pdfs/guide-exporting.pdf) • Exporting Basics: The Why’s, How-To’s and To-Do’s for New Exporters (http://www.tradecomplianceinstitute.org/x_plfls/ Exporting%20Basics%20Final%20With%20Pegination%20 for%20Wafer%20Drive.pdf) • Export Marketing Strategy: Tactics and Skills That Work (https:// books.google.com.ua/books/about/Export_Marketing_Strategy. html?id=7eGbmAEACAAJ&redir_esc=y)

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The next step: selection of the most promising markets How to conduct market research on your own: step-by-step guide For the purpose of a systematic assessment of the market potential of your product, you should carry out a detailed study of the target export market.

The results of this study will inform your company about: • the size of target markets abroad; • the fastest growing markets; • market trends and prospects; • the entry conditions and current practices on the market; • the competitiveness of the company and its products.

You may start to export without conducting any export market research if it receives unsolicited orders from abroad. Although this type of selling is valuable, your company may discover even more promising markets by conducting a systematic search.

You may study a market by using either primary or secondary data resources.

In conducting primary market research, a company gathers data directly from the foreign marketplace through a direct contact with the participants of a given market. The most commonly used methods are individual conversations, telephone conversations, questionnaires, etc. It is a time-consuming and costly method. However, it provides an in-depth and very individual research and analysis. From the perspective of small companies, this form may be too expensive.

When conducting secondary market research, a company collects data from compiled sources, such as trade statistics for a country or a product and other generally available materials – magazines, research results, etc. Currently, this analysis is based mainly on the Internet sources.

Secondary research is a valuable and relatively easy first step for a company to take. It may be the only step needed if the company decides to export indirectly through an intermediary, since the other company may have advanced research capabilities.

Details of some secondary sources of information are identified in next subtitle. However, it should be stressed that there are many other sources of secondary information available and those listed in subtitle are only a representative selection provided as direction indicators to the EU potential exporters.

You may find it useful for your company to take the following step-by-step approach to market research.

1. Screen the potential markets Step 1. Collect export and import statistics that show product export to different countries.

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It will provide reliable indicators of where Ukrainian exported goods are shipped and the trade volume on the target market. You can find statistical information on the Internet resources of the State Statistics Service of Ukraine (http://www.ukrstat.gov.ua) and Eurostat (http://ec.europa.eu/ eurostat).

Step 2. Identify potential markets. Detect 5 to 10 large and fast-growing markets for your product. Look at them over the past three to five years. Has the market growth been stable year over year? Did import growth occur even during periods of economic recession? If not, did the growth restart with economic recovery?

Step 3. Select some smaller emerging markets that may not have as many competitors as an established market. If the market is just beginning to open up, there may be fewer competitors than in established markets. Growth rates should be substantially higher in these countries to qualify as perspective markets, given the lower starting point.

Step 4. Target three to five of the most statistically promising markets for further study.

Consult with business associations, freight forwarders, and others to help refine targeted markets.

2. Assess targeted markets Step 1. Study trends for company products as well as related products that could influence demand. Examine product consumption and production (overall consumption of the product and the amount accounted for by imports), as well as overall demographic and economic trends in the target country.

Step 2. Get to know the competition. Sources of competition include domestic industry production and the major foreign countries your company could compete with in each targeted market.

Step 3. Evaluate factors affecting marketing and use of the product in each market, such as end user sectors, channels of distribution, specific cultural features, and business practices.

Step 4. Identify any foreign barriers (tariff or non-tariff) for the product imported into the country.

Step 5. Determine whether your product is price competitive after you have figured the packaging, shipping, marketing, sales commissions, taxes and tariffs, and other related costs.

3. Draw conclusions After examining the data, you may conclude that your marketing resources would be applied more efficiently to a couple of countries. In general, one or two countries are usually enough to start with. Exporting to a manageable number of countries allows you to focus your resources without jeopardizing your domestic sales efforts. The audit of your company’s internal resources, conducted earlier, should determine what choice you make. With these conclusions in hand, you can begin to develop your marketing strategy.

Information resources for independent analysis of prospective markets There are many domestic and international sources of information about the international markets. They range from simple trade statistics to the deep market research and expert interviews.

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In the European Union, the main source of such information is the European Statistical Office (Eurostat), which publishes information on www.epp.eurostat.ec.europa.eu, including all published reports and statistical analyses of foreign trade, production and apparent consumption.

The Centre for the Promotion of Imports from developing countries (CBI, Netherlands, www. cbi.eu) provides exporters with relevant market surveys of the EU countries, marketing research and information on European non-tariff trade barriers such as product safety requirements, consumer health, social standards, business ethics standards and environmental protection. It is a valuable analytical source to prepare for export activities.

The information about international markets is available on the website of the World Trade Organization (www.wto.org) and United Nations Statistical Division (http://unstats.un.org/unsd/ default.htm).

For exporters’ reference: current state and perspectives of the European apparel and footwear market The following analysis was specifically carried out by the authors of this guide to provide the maximum information for the benefit of the readers.

The European apparel and footwear market is the world’s largest regional market and is characterized by the stable growth of import demand. In particular, the EU apparel market apparent consumption grew by 10% during the last 5 years to 90.4 billion EUR in 2015 (up by 2.0% annually on average). The EU footwear market apparent consumption increased by 29% to 30.2 billion EUR in 2015 (up by 5.2% on average).

Apparel and footwear production is declining in many of core manufacturing countries in Europe. This fact against the background of consumption growth promotes the increase of import demand –Europe continues to be an attractive destination market for the products of exporters from the developing countries. As a result, over the last 5 years the EU countries have been constantly recording import share growth, totalling 92% in apparel market in 2015 and 66% in footwear market.

Apparent consumption, bln EUR

bln. EUR

100

81%

86%

87%

89%

91%

92%

80

40

60%

81,9 83,8 80,4 78,0 83,2 90,4

40% 20%

20 0

100% 80%

60

2010 2011 2012 2013 2014 2015

Apparent consumption, bln EUR

bln. EUR

Import share, %

0%

Figure 3.1 – EU apparel market apparent consumption in 2010–2015, bln. EUR

Import share, %

40 63%

30

61%

65%

65%

63%

66%

20 10 0

27,3 30,2 23,4 25,0 23,8 23,8

2010 2011 2012 2013 2014 2015

80%

60% 40%

20% 0%

Figure 3.2 – EU footwear market apparent consumption in 2010–2015, bln. EUR

In 2015, the EU apparel demand comprised outerwear (33.0 billion EUR in 2015), underwear (25.7 billion EUR) and other knitted and crocheted apparel (11.8 billion EUR), amounting to about 80% of apparent consumption. Articles of fur constitute the most strongly growing product 18

category, with CAGR amounting to 16.3% for the period 2010-2015. Leather clothes (-1.2% per year) showed the most negative development of all product groups.

All footwear market segments are undergoing strong growth, while sports footwear is characterised by the highest growth rate (+15.0% per year).

Table 3.1

Group

EU apparel and footwear apparent consumption of in 2010–2015 by product groups, mln. EUR Subgroup

Articles of fur

Consumption CAGR in mln. EUR 2010–2015 411 16,3% 1 341 -1,2% 25 661 1,9% 35 039 2,5%

Production

Export

Import

619 956 6 369 11 818

424 528 4 657 9 756

216 913 23 949 32 977

2 963

444

2 013

4 532

1,9%

3 342

2 015

10 423

11 750

0,9%

Leather clothes Underwear Outerwear Knitted and crocheted hosiery Apparel Other knitted and crocheted apparel Other wearing apparel and accessories Workwear Total Footwear other than sports and protective footwear and orthopaedic shoes Protective and other Footwear footwear Sports footwear Parts of footwear of leather Total

4 180

6 432

11 479

9 228

1,5%

1 483 31 731

237 24 493

1 332 83 302

2 578 90 540

3,8% 2,0%

13 759

7 013

15 299

22 046

4,0%

1 084

333

692

1 443

1,5%

627

398

2 692

2 921

15,0%

2 996

427

1 202

3 771

9,1%

18 466

8 170

19 885

30 181

5,2%

TOTAL

50 197

32 663

103 187

120 721

2,8%

Source: Eurostat

Over the last 5 years the EU apparel and footwear external import has been undergoing strong growth (up annually by 4.7% and 6.2% respectively). Import volumes of apparel in 2015 amounted to 83.3 billion EUR and of footwear to 19.9 billion EUR. The Ukraine’s share in the EU external import was quite small: 0.3% in apparel segment and 0.4% in footwear segment in 2015. Thus, the growth area for Ukrainian exports is real and potentially very significant.

The main product groups of the EU apparel external import are outerwear and underwear (totally 56.9 bln. EUR or 68% import value in 2015). In the footwear segment the main importing subgroup is footwear other than sports, protective footwear and orthopaedic shoes – 15.3 bln.

EUR or 77% (see table 3.2).

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Table 3.2 EU apparel and footwear import by main product groups in 2010–2015 EU external import Group

Subgroup

Leather clothes Workwear Outerwear Underwear Knitted and crocheted hosiery Apparel Other knitted and crocheted apparel Articles of fur Other wearing apparel and accessories Total Footwear other than sports and protective footwear and orthopaedic shoes Protective and other Footwear footwear Sports footwear Parts of footwear of leather Total

TOTAL

EU import from Ukraine

UA share in external import

mln. EUR

CAGR in 2010–2015

mln.

EUR

CAGR in 2010–2015

912,7 1 332,5 32 977,3 23 949,3

-0,7% 5,4% 5,8% 4,1%

12,7 27,0 178,9 40,2

1,0% -2,4% -0,8% -0,9%

1,4% 2,0% 0,5% 0,2%

2 012,9

4,2%

0,8

25,0%

0,0%

10 423,1

3,4%

4,3

-11,8%

0,0%

215,7

0,7%

0,1

8,3%

0,1%

11 478,9

4,7%

19,9

3,5%

0,2%

83 302,3

4,7%

284,0

-0,8%

0,3%

15 299,2

5,2%

20,0

-1,6%

0,1%

691,7

2,8%

0,6

17,8%

0,1%

2 691,6

16,0%

0,0

-42,5%

0,0%

1 202,4

5,2%

53,1

13,0%

4,4%

19 884,8

6,2%

73,7

7,6%

0,4%

103 187,2

5,0%

357,7

0,6%

0,3%

Source: Eurostat

The major importers of apparel from outside the EU are Germany (21.9% in 2015), the United Kingdom (17.6%), France (12.2%) and Spain (11.7%) which in 2015 accounted for 63% of import values. Germany is also the leading footwear importer with an import share of 20.3% in terms of value, followed by the UK (15.8%), Italy (13.7%) and Belgium (11.6%).

The important centres of imports of apparel and footwear are Belgium and the Netherlands.

These countries are in general trading hubs for goods coming to Europe (especially through the ports of Rotterdam and Antwerp).

20

Spain 9 720 11,7%

Netherlands 8 751 10,5% Italy 7 877 9,5% Belgium 3 858 4,6% Denmark 2 443 2,9% Sweden 2 189 2,6% Other 5 415 6,5%

France 10 134 12,2%

United Kingdom 14 658 17,6%

France 2 287 11,5% Germany 18 211 21,9%

Figure 3.5 - EU apparel external import by main importing countries in 2015, mln. EUR

Belgium 2 300 11,6%

Netherlands 1 578 7,9%

Italy 2 719 13,7%

Spain 1 441 7,2% Poland 333 1,7% Sweden 277 1,4% Other 1 770 8,9%

United Kingdom 3 147 15,8%

Germany 4 032 20,3%

Figure 3.6 – EU footwear external import by main importing countries in 2015, mln. EUR

Demand for external import of apparel in the majority of Eastern European countries has grown significantly in recent 5 years, among them the largest CAGR were observed in Luxembourg (up by 20.0% on average in 2010–2015), Poland (+15.4%), Latvia (+13.7%), Slovakia (+12.7%) and Lithuania (+12.3%). The biggest declines were experienced in the Southern Europe, most notably in Croatia (-15.7%), Cyprus (-9.0%) and Greece (-6.5%).

Developments in volumes of external import of footwear into the EU during the period 2010–2015 can also be divided into two extremes: strongly growing imports and decreasing imports. The first group is formed by the countries with strongly growing imports (8% and more) which was noticeable in many Eastern EU countries (Poland, Slovenia, the Baltic states and Hungary), Belgium and Portugal. Several developments in distribution (from informal to retail store chains), consumption (popularity of international brand names and of sports footwear) led to a growth in the footwear market of East European countries. The second group of EU countries with decreasing imports is formed mainly by Southern EU countries, where the imports figures are below average and even decreased in the case of Greece, Cyprus and Croatia.

21

-0,9% -2,7% -6,5% -9,0% -15,7%

20,0% 15,4% 13,7% 12,7% 12,3% 9,2% 8,9% 8,2% 7,3% 6,1% 6,1% 5,8% 5,7% 5,6% 5,3% 5,2% 4,8% 3,6% 3,4% 2,6% 2,3% 1,1% 0,0%

Luxembourg Poland Latvia Slovakia Lithuania Spain Bulgaria Netherlands Malta Slovenia Sweden Romania Hungary Czech Republic United Kingdom Denmark Austria Germany France Belgium Estonia Italy Ireland Portugal Finland Greece Cyprus Croatia

Figure 3.7 – EU apparel external import CAGR in 2010–2015, %

-19,7% -21,3%

-0,4% -2,7% -2,9%

18,0% 14,1% 13,7% 11,5% 10,0% 9,1% 8,9% 8,8% 8,8% 8,1% 8,0% 7,4% 5,8% 5,1% 4,6% 4,6% 3,1% 2,7% 2,2% 1,2% 1,0% 0,7% 0,2%

Poland Slovenia Belgium Hungary Portugal Bulgaria Slovakia Germany Lithuania Estonia France Finland Romania United Kingdom Sweden Netherlands Spain Italy Czech Republic Austria Malta Ireland Latvia Greece Cyprus Denmark Croatia Luxembourg

Figure 3.8 – EU footwear external import CAGR in 2010–2015, %

Price and European import tariffs will remain key drivers in procurement and relocation strategies on the EU apparel and footwear market. Although the sourcing of such items and collections continues to take place in Asia, retail and brand buyers are widening their outlook with regard to alternative sourcing destinations. As a result, it creates opportunities for the Ukrainian producers, which could provide short delivery periods and a qualified labour force.

Potential exporters from Ukraine are recommended to: • enter the market and target niche areas with fewer competitors and considerable potential for growth; • set a strategic approach towards buyers. For suppliers who are able to deliver highquality apparel, opportunities can be found in the middle and upper-middle segments, in which independent retailers and luxury department stores seek to purchase high-quality garments for attractive prices. The major advantage of these buyers is that sizes of their orders are small to medium, with less pressure on delivery times; • work together with your buyers with regard to their expectations, encourage long-term relationships and strive for continuous improvement. A proactive approach by suppliers from Ukraine with regard to respecting labour standards and addressing sustainability issues could become a decisive factor in the choice of partners.

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To learn more: • Export Marketing Planner (http://www.cei.org.ni/images/ exportmarketingplan.pdf) • Market intelligence: A key to boost export competitiveness: Action Guide for Exporters (http://www.latitudeglobal.com/ documents/MKtIntl_Paper_general_190508.pdf) • European Statistical Office (EUROSTAT) which places information on www.epp.eurostat.ec.europa.eu • Centre for the Promotion of Import from developing countries (CBI), an agency of the Netherlands (www.cbi.eu) • World Trade Organization (www.wto.org) • United Nations Statistical Division (http://unstats.un.org/unsd/ default.htm )

23

What are the rules?

Import duties – do they still matter?

The Association Agreement provides for the elimination of import duties on nearly all products exported from Ukraine to the EU. The majority of duties were removed as of 1 January 2016, when the DCFTA entered into the phase of provisional application. The exceptions mainly relate to the products for which there is a transition period2.

Footwear With respect to footwear, the import duties will be removed gradually: within the period of three-five years. The only exception is the footwear falling under the customs code 6406, which faces zero tariff on import to the EU already at this stage. The current level of import duties applicable to the Ukrainian footwear imported to the EU, except for that classified under the customs code 6406, is calculated according to the following formula: “basic tariff rate – (basic tariff rate/ (transitional period + 1))”.

The table below indicates the examples of the tariff rates applicable to the Ukrainian footwear before the DCFTA came into force (basic tariff rates) and the transition period for removal/ reduction of import duties. For example, Ukrainian slippers imported to the EU (product code 64041910) were liable to import duty of 16,9% before the DCFTA came into force. This tariff shall be eliminated over a transitional period of five years on a gradual basis. According to the formula, mentioned above, the current level of import duty imposed on slippers is “16,9 – (16,9/ (5+1))” which equals 14%. The same rule applies to other footwear products exported from Ukraine to the EU .

Tariff line code 64032000 64041100 64041910 6406

2

Description of goods Footwear with outer soles of leather, and uppers which consist of leather straps across the instep and around the big toe Sports footwear; tennis shoes, basketball shoes, gym shoes, training shoes and the like Slippers and other indoor footwear Footwear; parts of footwear; removable in-soles, heel cushions and similar articles; gaiters, leggings and similar articles, and parts thereof

Basic Transition tariff rate period (years) 8%

3

16,9%

5

16,9%

5

3%

0

Also there are other exceptions, for example, some agricultural products falling under the scope of tariff quotas.

24

Apparel At the moment, Ukrainian apparel already faces zero tariffs on import to the EU. The table below shows the import duties applicable to Ukrainian clothing before the DCFTA came into force (basic tariff rates) and the current rates of import duties.

Tariff line code

Description of goods

61

Apparel and clothing accessories; knitted or crocheted

62

Apparel and clothing accessories; not knitted or crocheted

Basic tariff rate

Tariff rate in the scopes of the DCFTA

12%

0%

6,3–12%

0%

The origin of goods: the most important issue The preferential tariff rates under the DCFTA apply only to the goods originating from territories of the EU and Ukraine.3 Thus, when exporting goods under the trade preferences regime, the most important issue is to establish where the goods originate. This location is determined through the rules of origin, which are usually designed for every particular preferential trade agreement.

Therefore, the determination of the origin of goods may differ from agreement to agreement.

The rules of origin for Ukrainian goods are defined in the Protocol 1 to the EU – Ukraine Association Agreement concerning the Definition of the Concept “Originating Products” and Methods of Administrative Cooperation (the “Origin Protocol”). These rules contain a set of procedures to determine the place of manufacture for the purpose of defining the origin. Each particular customs code has its own set of requirements to be complied with to obtain the product specific origin.

Footwear The manufacture of footwear in Ukraine shall undergo the special working or processing operations envisaged with respect to this product. The processing rules, conferring originating status to the footwear are outlined in the table below.4

According to Article 26 (1) of the Association Agreement, the provisions of the Association Agreement shall apply to trade in goods originating in territories of the EU and Ukraine. For this purposes “originating” means qualifying under the rules of origin set out in the Origin Protocol. Under Article 2 of the Origin Protocol, the following products shall be considered as originating in the EU or Ukraine: (1) products wholly obtained in the EU or Ukraine; (2) products obtained in the EU or Ukraine incorporating materials which have not been wholly obtained there, provided that such materials have undergone sufficient working or processing in the EU or in Ukraine.

4 These rules are listed in Annex II to the Origin Protocol.

3

25

HS heading (product code)

Working or processing, carried out on non-originating materials, which confers originating status

Description of product

manufacture from materials of any heading, except from assemblies of uppers affixed to inner soles or to other sole components of heading 6406

ex Chapter Footwear, gaiters and the like; parts of such 64 articles; except for:

6406

Parts of footwear (including uppers whether or not attached to soles other than outer soles); removable in-soles, heel cushions and similar articles; gaiters, leggings and similar articles, and parts thereof.

manufacture from materials of any heading, except that of the product

Basically, there is no reference to the origin of raw materials used for manufacture of footwear in Ukraine. Thus, according to the processing rules listed above, the materials of any origin may be used for the manufacture of footwear in Ukraine.

Apparel: manufacture from yarn Manufacture from yarn (double transformation) The basic rule of origin, pertaining

Non-UA

UA

UA

to apparel, is “manufacture from yarn” (double transformation). According to this rule, yarn may be imported from any country, however, the manufacture of fabric and apparel has to take place in Ukraine. Thus, for example, a dress will

have a Ukrainian origin only in case it is made in Ukraine from fabrics, produced in Ukraine.

Three exceptions apply, however: bilateral cumulation, the so called “8 percent rule” and “10 percent rule”.

Exception 1: bilateral cumulation

EU

UA

Bilateral cumulation The Association Agreement allows bilateral cumulation, according to which the products shall be considered as originating in Ukraine if such products are obtained there, incorporating materials originating in the European Union.5 This means that fabrics made in the EU can be used freely for

the production of apparel in Ukraine, and this apparel will qualify for preferential access to the EU. 5

26

Article 4 of .

Exception 2: “the 8 percent rule” According to Note 6.1 of the Origin Protocol, textile materials (with the exception of linings and interlinings) from the third countries (which do not have Ukrainian or the EU origin) may be used, provided that their value does not exceed 8% of the ex-works price of the product.6 According to Note 6.2 of the Origin Protocol, materials, which are not classified within Chapters 50 to 63 (textile materials), may be used freely in the manufacture of textile products, whether or not they contain textiles. For example, such products as buttons, press-fasteners and snapfasteners are classified within Chapter 93.

However, where a percentage-rule applies, the value of buttons, press-fasteners, snap-fasteners and other materials, not classified within Chapters 50 to 63 must be taken into account when calculating the value of the non-originating materials.7 Thus, according to this exception, when the rule “manufacture from yarn” is applied: (1) the value of materials from the third countries shall not exceed 8%; (2) the use of linings and interlinings from the third countries is not allowed; (3) buttons, press-fasteners, snap-fasteners may be used freely in the manufacture of apparel, whether or not they contain textiles; however, the value thereof must be taken into account when calculating the value of the non-originating materials.

Exception 3: “the 10 percent rule” According to Note 5.1 of the Origin Protocol, the rule “manufacture from yarn” shall not be applied to any basic textile materials used in the production thereof, which, taken together, represent 10% or less of the total weight of all basic textile materials used in the product.8 It has to be noted that the tolerance mentioned in Note 5.1 may be applied only to mixed products, which have been made from two or more basic textile materials.

According to Note 6.1 of the Origin Protocol, where, in the list, reference is made to this Note, textile materials (with the exception of linings and interlinings), which do not satisfy the rule set out in the list in column 3 for the made-up product concerned, may be used, provided that they are classified in a heading other than that of the product and that their value does not exceed 8 % of the ex-works price of the product.

7 Note 6.3 of the Origin Protocol.

8 According to Note 5.1 of the Origin Protocol, where, for a given product in the list, reference is made to this Note, the conditions set out in column 3 shall not be applied to any basic textile materials used in the manufacture of this product and which, taken together, represent 10 % or less of the total weight of all the basic textile materials used.

6

27

The basic textile materials are such products as: silk, wool, coarse animal hair, fine animal hair, horsehair, cotton, papermaking materials and paper, flax, true hemp etc.9 Thus, according to this exception, the rule “manufacture from yarn” shall not apply: (1) to the products containing two or more “basic textile materials”; (2) when the weight of the basic textile materials from the third countries represents 10% or less of the total weight of all the basic textile materials used in the product at hand.10 For example, a dress made from silk and cotton is the product containing two or more “basic textile materials”. Therefore, the weight of fabrics, which do not satisfy the origin-rules, may be used, provided that the total weight thereof does not exceed 10% of the weight of this dress.

Documents confirming that the product is made in Ukraine Products originating in Ukraine pursuant to the Origin Protocol shall benefit from preferential trade upon direct shipment to the country of import and submission of either:11 • Movement certificate EUR.1 (“Certificate EUR. 1”)12, or

The list of the “basic textile materials”, provided in note 5.2 of the Origin Protocol includes the following: silk, wool, coarse animal hair, fine animal hair, horsehair, cotton, paper-making materials and paper, flax, true hemp, jute and other textile bast fibres, sisal and other textile fibres of the genus Agave, coconut, abaca, ramie and other vegetable textile fibres, synthetic man-made filaments, artificial man-made filaments, current-conducting filaments, synthetic man-made staple fibres of polypropylene, synthetic man-made staple fibres of polyester, synthetic manmade staple fibres of polyamide, synthetic man-made staple fibres of polyacrylonitrile, synthetic man-made staple fibres of polyimide, synthetic man-made staple fibres of polytetrafluoroethylene, synthetic man-made staple fibres of poly(phenylene sulphide), synthetic man-made staple fibres of poly(vinyl chloride), other synthetic man-made staple fibres, artificial man-made staple fibres of viscose, other artificial man-made staple fibres, yarn made of polyurethane segmented with flexible segments of polyether, whether or not gimped, yarn made of polyurethane segmented with flexible segments of polyester, whether or not gimped, products of heading 5605 (metallised yarn) incorporating strip consisting of a core of aluminium foil or of a core of plastic film whether or not coated with aluminium powder, of a width not exceeding 5 mm, sandwiched by means of a transparent or coloured adhesive between two layers of plastic film, other products of heading 5605.

10 Needless to say that (1) in the case of products incorporating “yarn made of polyurethane segmented with flexible segments of polyether, whether or not gimped”, this tolerance is 20 % in respect of this yarn (Note 5.3 of the Origin Protocol); (2) in the case of products incorporating “strip consisting of a core of aluminium foil or of a core of plastic film whether or not coated with aluminium powder, of a width not exceeding 5 mm, sandwiched by means of a transparent or coloured adhesive between two layers of plastic film”, this tolerance is 30 % in respect of this strip (Note 5.4 of the Origin Protocol)..

11 Article 16 of the Origin Protocol 12 Certificate EUR. 1 shall be issued according to the Order of the Ministry of Finance of Ukraine “The Rules of Filling and Issuing by Customs Authorities of the Certificate for Transporting of Goods EUR.1 according to the Association Agreement between the European Union and the European Atomic Energy Community and their member states, of the one part, and Ukraine, of the other part” No. 1142 dated 18 November 2014.

9

28

• Invoice declaration13.

Both are the documents confirming that the products were produced in accordance with the preferential rules of origin. They are a kind of passport affirming the link between the product and the country of origin thereof. In both scenarios, the goods shall be manufactured in accordance with the rules of origin designed for a particular product at hand.

Certificate EUR.1 is issued by customs authorities for each instalment of products. In order to receive it, an exporter shall submit the following documents to the customs authorities: • application form; • filled out form of the certificate; • documents confirming that the products originate in Ukraine (on the basis of the Origin Protocol); Certificate EUR.1 is issued for one instalment and is valid for four months. The decision on issuance of the certificate or refusal thereof shall be taken within three working days. As a general rule, the documents confirming originating status are required for the receipt of Certificate EUR.1 only if the products are imported to the EU for the first time.

Certificate EUR.1 can be also issued after the exportation of the products under the following conditions: • the certificate was not issued at the time of exportation because of errors or involuntary omissions or special circumstances, or • the certificate was previously issued but was not accepted at importation for technical reasons.

Invoice declaration may be issued by: • an approved exporter,14 or • an exporter of the products the total value of which does not exceed EUR 6,000.

An invoice declaration can be made out by an exporter if all the requirements for preferential origin are met (e.g. “manufacture from yarn” for apparel). At the same time, the exporter making out an invoice declaration shall be prepared to submit at any time, at the request of the customs authorities of the exporting country, all appropriate documents confirming Ukrainian origin of the products. The form of invoice declaration is provided in Annex IV to the Origin Protocol.

Invoice declaration shall be issued according to the Origin Protocol; the Origin Protocol also includes the form of invoice declaration.

14 The status of approved exported shall be granted as prescribed by the Order of the Ministry of Finance of Ukraine “On Adoption of the Order on Granting and Termination by the Customs Authorities of the Status of Authorized (Approved) Exporter” No. 1013 dated 7 October 2014 (the “Order No. 1013”).

13

29

Approved exporter can issue an invoice declaration irrespective of the value of exporting product. Hence, in this case there is no need to receive the Certificate EUR. 1. The status of approved exporter is conferred by the customs authorities upon meeting the following conditions: • exportation of the products of preferential origin within one year; • absence of violations pertaining to the preferential rules of origin; • the exporting products satisfy the preferential rules of origin; • exporter ensures the monitoring process of the products manufacture as well as the supporting documents confirming the Ukrainian preferential origin thereof.

To receive this status, an exporter shall submit to the customs authorities at the place of its registration the following documents: • application form; • copy of the agreement based on which products shall be exported; • copies of documents confirming the preferential origin of the products.

As a general rule, the customs authorities shall grant the status of approved exporter within thirty calendar days. The approved exporter shall be provided with (1) a customs authorization number which shall appear on the invoice declaration; (2) the information booklet with a list of the products exported under this authorization number. The validity of the status of approved exporter is not restricted in time.15

Pan-Euro-Mediterranean Cumulation: why is it important for exporters of apparel and footwear?

In September 2016, Ukraine applied for accession to the Regional Convention on Pan-EuroMediterranean Preferential Rules of Origin (the “Pan-Euro-Med”). This Convention allows in-depth trade between the EU and the countries with which the EU concluded the preferential trade agreements (the “PTAs”): i.e. the free trade agreements (the “FTAs”) or customs unions.

Currently, the Convention includes forty-two Member-States, among which are: • the EU Member-States; • the EFTA Member-States; 15

30

The customs authorities may withdraw the authorization in case of: • submission by an approved exporter of an application for withdrawal of its status; • termination of a legal person, which is an approved exporter; • violations pertaining to the preferential rules of origin; • declaration of the products not listed in the information booklet; • non-performance of the obligations set in the Order No. 1013 (e.g., obligation to keep a copy of declaration for at least three years from the moment of issuance thereof, as well as the documents confirming the Ukrainian origin of the products).

• the Member-States of the Barcelona Process; • the Members of the EU Stabilisation and Association Process, and • the Republic of Moldova.

If Ukraine accedes the Pan-Euro-Med, the trade between the EU and Ukraine will be based on the preferential rules of origin contained in the Convention (as stated above, this issue is currently regulated by the Origin Protocol). The Convention sets for the uniform rules of origin for trade in products, manufactured in the countries with which the EU has FTAs (and customs unions).

Needless to say, that the Pan-Euro-Med is especially important for the Ukrainian producers of apparel since these products are subject to particularly strict rules of origin.

As noted above, the products originating in Ukraine are eligible for preferential export to the EU if they are accompanied by the Certificate EUR.1/ invoice declaration. In order to receive the Certificate EUR.1, the products shall comply with the relevant rules of origin. In other words, the Ukrainian apparel facing zero tariffs on import to the EU shall be made from fabric, which is produced in Ukraine. The major exception relates to the bilateral cumulation: when the EU originating fabric may be used for manufacture of the apparel in Ukraine.

The Pan-Euro-Med goes further and sets for the diagonal cumulation, i.e. allows using not only the domestic raw material of the parties to the particular FTA but also the raw material of other Pan-Euro-Med Members. In particular, diagonal cumulation allows for the use of raw material from the third countries, which are not members to the FTA concerned (under which the trade is carried out). It means that the apparel sewn in Ukraine from the fabric produced in Turkey, can be imported to the EU with “zero” import duties. At current stage, the Association Agreement does not allow for this.

However, needless to say that diagonal cumulation in the Pan-Euro-Mediterranean region is applicable only if two preconditions are met: the country should (1) join the Pan-Euro-Med, and (2) negotiate the FTAs with those Member-States to the Convention, with which it intends to apply the diagonal cumulation. Therefore, in order to enable the preferential import to the EU of Ukrainian apparel made from Turkish fabric, Ukraine needs to: (1) become a Pan-Euro-Med Member; and (2) conclude the FTA not only with the EU, but also with Turkey.

As for now, Ukraine has concluded the respective agreements with the EU, the EFTA (Switzerland, Norway, Iceland, and Liechtenstein), Montenegro, Macedonia and Moldova under the CIS FTA. Apart from this, negotiations on conclusion of the free trade agreements with Turkey and Israel are in progress. In addition, Ukraine concluded the FTA with Georgia which is also currently in the process of accession to the Pan-Euro-Med.

31

Standards and certification: how to find the way to the EU consumer Requirements for footwear and apparel The EU legislation envisages mandatory as well as voluntary requirements for the products placed within the EU market. The full list of mandatory regulations can be defined only on the basis of the product code. However, the section below delineates the common requirements pertaining to the footwear and apparel products: in particular, safety, labelling and other specific requirements.

Safety requirements The EU legislation envisages the following safety requirements common for apparel and footwear: • requirements regarding the general product safety;16 • restriction on the use of certain chemical substances in textile and leather products.17 Як встановлено в Директиві 2001/95/ЕС від 3 грудня 2001 року, тільки безпечна продукція може розмAccording to the Directive 2001/95/EC dated 3 December 2001, only safe products may be placed on the EU market; “safe product” shall mean any product, which does not present any risk or only the minimum risks compatible with the product’s use, is consistent with a high level of protection for the safety and health of persons, taking into account the following points in particular: • the characteristics of the product, including its composition, packaging, instructions for assembly and, where applicable, for installation and maintenance; • the effect on other products, where it is reasonably foreseeable that it will be used with other products; • the presentation of the product, the labelling, any warnings and instructions for its use and disposal and any other indication or information regarding the product; • the categories of consumers at risk when using the product, in particular children and the elderly.

17 The textile and leather products placed on the EU market shall not contain certain chemical substances listed in Annex XVII to Regulation No.1907/2006 (REACH Regulation) dated 18 December 2006. According to the Regulation No. 1907/2006 (REACH Regulation), the main chemical substances, not allowed in textile and leather articles are: • Tris (2,3 dibromopropyl) phosphate in textile articles intended to come into contact with the skin.

• Tris (aziridinyl) phosphinoxide in textile articles intended to come into contact with the skin.

• Polybrominated biphenyls (PBB) in textile articles intended to come into contact with the skin.

• Mercury compounds in the impregnation of heavy-duty industrial textiles and yarn intended for their manufacture.

• Dioctyltin (DOT) compounds in textile articles, footwear or part of footwear intended to come into contact with the skin.

• Nickel in articles intended to come into direct and prolonged contact with the skin, such as rivets buttons, tighteners, rivets, zippers and metal marks, when these are used in garments.

• Azodyes which may release one or more of the aromatic amines listed in Appendix 8, in textile and leather articles which may come into direct and prolonged contact with the skin or oral cavity.

• Nonylphenol and nonylphenol ethoxylates in textile and leather processing.

• Chromium VI compounds in leather articles intended to come into contact with the skin.

• Polycyclic aromatic hydrocarbons compounds in clothing, footwear, gloves and sporstwear if any of their rubber or plastic components come into direct as well as prolonged or short-term repetitive contact with the skin or the oral cavity.

The REACH Regulation is available at: http://eur-lex.europa.eu/legal-content/EN/TXT/ PDF/?uri=CELEX:02006R1907-20140410&from=EN. 16

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Labelling requirements The particular attention is paid to providing the EU consumer with proper and inclusive information on the product. Therefore, compliance with the mandatory labelling requirements is of critical importance. Besides, the EU regulation provides for voluntary eco-labelling scheme.

Requirements

Footwear

Apparel

Mandatory labelling

Footwear and main parts thereof shall be in conformity with the general EU labelling requirements.18 In particular, a label shall convey information relating to the three parts of the footwear: the upper; the lining and sock; and the outersole. Also, it shall contain the pictograms germane to the type of materials used: “leather”, “coated leather”, “textile” or “other materials”.19

Textile products placed on the EU market shall be also labelled in accordance with the EU requirements.20 In particular, the label of apparel has to indicate the fibre composition of the product.21 The information has to be accurate, provided in easily legible, visible and accessible manner. Abbreviations are not allowed (with the exception of a mechanized processing code, or where the abbreviations are defined in international standards).

Particular importance is attached to language: the labeling shall be provided in the official language or languages of the EU Member State on the territory of which the textile products are offered to the consumer, unless the relevant Member State provides otherwise.

Eco-labelling (voluntary)

The footwear meeting the ecological criteria may be labelled with the EU Ecolabel – a “Flower logo”, which is not mandatory or necessary prerequisite for a product to enter the EU market. The aim of this eco-labeling scheme is to promote sustainable development and help consumers to identify the products with the lowest negative impact on environment.22

As in case with footwear, the apparel produced in accordance with the ecological criteria for textile products may be marked with EU Ecolabel “Flower logo”, indicating contribution of the product to environmental improvements. This eco-labeling is provided on voluntary basis.23

The general EU labelling requirements applicable to footwear are enshrined in the Directive 94/11/EC dated 23 March 1994, available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:31994L0011&f rom=EN. 19 The types of pictograms are laid down in Annex I to the Directive 94/11/EC. 20 The general EU labelling requirements applicable to apparel are defined in the Regulation No. 1007/2011 dated 27 September 2011, available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:3201 1R1007&from=EN. 21 The fibre composition of the product shall be indicated in accordance with the List of textile fibre names, provided in Annex I to the Regulation No.1007/2011.

22 The eco-labeling of footwear is regulated by (1) Regulation No. 66/2010 on the EU Ecolabel dated 25 November 2009, available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32010R0066& from=EN; (2) Commission Decision 2016/1349/EU on establishing the ecological criteria for the award of the Community eco-label for footwear dated 5 August 2016, available at: http://eur-lex.europa.eu/legal-content/EN/ TXT/PDF/?uri=CELEX:32016D1349&from=EN. 23 The eco-labeling of apparel is regulated by (1) Regulation No. 66/2010 on the EU Ecolabel dated 25 November 2009, available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32010R006 6&from=EN; (2) Commission Decision 2014/350/EU establishing the ecological criteria for the award of the Community eco-label to textile products dated 5 June 2014, available at: http://eur-lex.europa.eu/legal-content/ EN/TXT/PDF/?uri=CELEX:32014D0350&from=EN; (3) Commission Decision 2009/567/EC establishing the ecological criteria for the award of the Community Ecolabel for textile products dated 9 July 2009, available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32009D0567&from=EN. 18

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Other requirements Depending on the product characteristics, footwear and apparel may fall within the ambit of other requirements.24

Certification of apparel and footwear Certification of apparel and footwear imported to the EU market is provided on voluntary basis. Nevertheless, the EU consumers pay more and more attention to the product production methods and sustainable business practices of a manufacturer: environmental impact and social responsibility, decent labour requirements, anti-bribery practices and business ethics.

For example, the EU Ecolabel scheme mentioned above is intended to reduce the environmental impact of the entire life cycle of a product: “from raw material to its production, use and disposal�.25 Footwear and apparel have to comply with criteria developed for each particular product group. The producers/importers wishing to mark their products with the EU Ecolabel have to undergo the assessment and verification procedures on compliance with the relevant criteria. The assessment is provided by the competent body in one of the EU countries, where the product is placed on the market.26 The procedure includes the examination of documents and on-site visit, when necessary.

The EU Ecolabel scheme outlined above is just one example of certification procedures applicable within the EU market. There is a range of private standards and certification procedures, developed by the private actors: associations of manufacturers, wholesalers, retailers etc. The list of standards applicable to the particular product at the relevant market can be found at the free on-line resource Standards Map (http://www.standardsmap.org).

However, before launching the certification procedures, it is advisable to consult with the business partner in the EU regarding consumers’ tastes and preferences, requirements of wholesalers and retailers pertaining to the product within the particular market.

Sources of information on tariff/non-tariff regulation of export to the EU Export Helpdesk (http://exporthelp.europa.eu) is a free on-line service of the European Commission providing information for the exporters entering the EU market. In order to obtain the information germane to export of Ukrainian products to the EU the following data has to be entered: (1) the product code, i.e. the classification of the product under the Ukrainian Commodity Classification for Foreign Economic Activity (UKTZED); (2) the country of origin (Ukraine); and (3) the destination country.

For example, seal products or products containing fluorinated greenhouse gases are generally prohibited within the EU. 25 The EU Ecolabel scheme: http://ec.europa.eu/environment/ecolabel/index_en.htm.

26 The contact list of the competent bodies is available at: http://ec.europa.eu/environment/ecolabel/competentbodies.html#uk.

24

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Export Helpdesk includes all relevant information pertaining to export of Ukrainian footwear and apparel to the EU: in particular, import

tariffs,

requirements

to

internal the

taxes, products

(packaging, labelling requirements and technical standards, regulations), rules of origin, statistical data.

To learn more: • • • •

Export Helpdesk (http://exporthelp.europa.eu); Standards Map (http://www.standardsmap.org); Terms of exports to the EU. EU Export Helpdesk (in Russian): http://exporthelp.europa.eu/thdapp/AR_RU_pdf/DGTrade_ EH_main_document_RU.pdf; • Business Portal «Exportdesk: Export to the EU»: http:// exportdesk.org.ua; • «Stronger Together» information campaign: http://www. strongertogether.org.ua; • MEDT telephone line on access to the EU market: (044) 596-67-05; Export Promotion Council at MEDT: exportcouncil@me.gov.ua.

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Search for partner in the foreign market and product promotion How to find a partner in the foreign market using the variety of sources?

There is a number of tools available for Ukrainian clothes manufacturers that allow to search for partners (importers, distributors, specialized retail chains), not only in the EU but also in the whole world. These tools can be divided into Web resources and institutions with the function to facilitate trade and investment.

Kompass (http://ua.kompass.com). This is a global online data base, which contains more than 5 million companies with proven contact details (check occurs every year), the profile of activity, sites, addresses and contact persons. Existing functionality of the sampling on many criteria makes it easy to select buyers of clothes anywhere in the world. Access to this database is available on a fee-for-service basis and is about 5 000 UAH per a month. At the same time it is possible to order single samples, which cost about 2000 UAH for contact details for 1000 companies.

Europages (http://www.europages.com.ru). Online b2b catalogue that contains data on 2.6 million companies from most countries of the world. A significant advantage of this resource is its free use subject to prior registration. Currently, on-demand «clothing» catalog provides information on nearly 50 thousand companies, including 10 thousand in Italy, 7 thousand in France, 6 thousand in the UK and 3 thousand in Germany. Besides, company data can be structured according to their status (for example, agent/representative of retail sales, distributor, wholesale, and manufacturer). Profile of every company includes information about the details of its specialization, address and contact phone numbers, e-mailing form, web site, as well as photo and video of the products. In addition to the active search for clients, it is appropriate to create a profile of your company on Europages, which will provide an additional channel of possible queries in the address of your company.

Social Networks (LinkedIn). The world’s largest professional social network that allows you to communicate with the representatives of retail chains, importers, distributors, specializing in garments sales. Moreover, the addition of private users to your contact list gives you access to person’s contact information, which very often contains even personal mobile phone numbers.

In addition, there are professional groups created in the network, whose members are potential buyers of Ukrainian clothes, for example, the group «Textile, Apparel, Footwear & Fashion» and «Fashion Retailers», whose members include 190 thousand and 70 thousand participants respectively. It may be also efficient to use LinkedIn in the context of finding company representatives that you are interested in as potential buyers. Thus knowing the name of the company you can filter the list of persons who are its current employees, and then establish business relations.

TradeFairDates (http://www.tradefairdates.com). Participation in exhibitions is one of the main ways to promote Ukrainian garment manufacturers in foreign markets (for more

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details see the chapter about participation in exhibitions). At the same time, careful selection of the exhibition is important when using this tool. For this purpose, you should use the global aggregator of exhibitions TradeFairDates, containing up to date information on exhibitions and trade fairs in Europe and all over the world. This resource allows you to search by country and city where the exhibition is held, as well as the planned date.

In addition, the list of international exhibitions held in countries that are major trading partners of Ukraine, as well as other useful information on participation in international exhibitions and fairs can be found on the website of the Ministry of Economic Development and Trade of Ukraine in the “Export Development” section (http://www.me.gov.ua).

Business directories. There is a number of business directories, which are an effective tool for searching companies and importers of garments to the EU. The principle of their functioning is collecting and posting information about the company, sorting enterprises by branch or product affiliation and allowing users to generate the lists of relevant companies on key criteria. These core business directories include European Navigator, European Business Register, and Search Europe. There are also specialized business directories that provide information exclusively on the production and sale of clothing, such as Apparel Importers-Exporters, GBA (Garment Buying Agency), Retail-Index.

The Ministry of Foreign Affairs of Ukraine. The Ministry of Foreign Affairs together with economic departments of embassies is quite an effective source of information about potential partners. In particular, the mechanism for obtaining data provides for a letter of request in any form to be sent to the e-mail address of the Department of Economic Cooperation of the MFA of Ukraine (http://mfa.gov.ua; uens@mfa.gov.ua). If you need more information, you can also contact diplomatic missions of countries that are of most interest for you (http://mfa.gov.ua/ua/ about-mfa/abroad/embassies).

Organizations for Trade Support and Development. One of the importer’s search channels are exports support and development agencies, among them: • EPO (Ukraine, http://www.epo.org.ua) – Export Promotion Office of the Ministry of Economic Development and Trade of Ukraine supports Ukrainian exporters and promotes Ukrainian goods and services abroad. EPO is as well involved in the development of export competences of the Ukrainian business and increase of their international competitiveness in the market.

• CBI (The Netherlands, https://www.cbi.eu) – Centre for the Promotion of Imports from developing countries. The center provides comprehensive support to exporters, whose ultimate goal is to find partners and sign trade agreements.

• ITFC (Ukraine, http://tradecenter.org.ua). One of the basic functions of the organization 37

is to assist companies in entering foreign markets, organize business meetings abroad and search for potential partners.

• Chambers of Commerce and other institutions.

How to prepare for international exhibitions Exhibition is one of the most efficient tools in fashion business: within the short term of 2–3 days you can demonstrate your brand products, communicate with potential customers and learn more about your competitors’ offers on a particular market.

They take place almost in every country. There are both local and international exhibitions.

The latter are more popular, as they are visited by buyers from the neighboring countries and can immediately embrace the whole region. For example, London exhibition PURE gathers customers not only from the UK but from all the Northern Europe; SPD exhibition in Dusseldorf specializes in fashion of Germany and Eastern Europe, Who is Next based in Paris is interesting for buyers from many countries. However, trends are changing from time to time and some exhibitions lose their popularity, with others gaining it.

Therefore, when choosing an exhibition many factors should be taken into account for effective use of the company’s marketing budget. You should clearly understand for which market your brand will be unique and competitive. There are countries where people are keen on fashion and everything related to it, and those where creative expensive goods are valuable.

At the same time there are also markets where consumer goods are evaluated only by their convenience and price. Before choosing the country where your company is going to export products, check import liabilities, calculate logistics cost and the whole final cost, comparing it to similar local products. Moreover, when planning to participate in an exhibition, you need to do it in advance – stands at popular international exhibitions sometimes have to be booked six months or even a year before the event.

Preparing any collection, you should feel who will appreciate and order it, especially when it comes to foreign orders. Each country has a particular historical mentality in clothes. For example, Germany appreciates practicality, France – elegance, in Italy a good selection of accessories comes to the fore.

Here are the steps of preparation for an international exhibition: 1. Form the idea of your collection – emphasizing the uniqueness and defining the essence of your brand associated with the requirements of modern consumers. Create values that will attract the attention of your target audience.

2. Prepare a matrix of the collection – basic and supplementary elements that can be

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combined using different textures of fabrics and colors, considering the season and the country for which you are preparing it.

3. Make photo sessions to create collection tools.

4. Develop financial background for the price lists of products with well calculated wholesale prices on EXW conditions.

Exhibition tools: Look book – a series of fashion photos of product samples that allow feeing the style, mood of the brand and its target audience. It is the tool that “sells” a product. The best shots from the look book become image photos that are used as posters or materials to decorate an exhibition stand or in stores.

Catalogue – a more detailed photo shooting of each article in the entire range of the collection that allows to look at the style, cut, fit and details of products. Catalogues are sent to all customers and potential clients.

Sales book – collected information about each article, possible range of sizes, quantity in package, fabric, price with the photo. It can be made according to the clothes type: outwear, dresses, shoulder products (blouses, jackets), belt products (skirts, trousers) if the collection is large.

Passport – a small card attached to each element of exposition with the following information on it: photos of the model (front and back view), possible range of sizes, quantity in package, fabric, and price. The passport helps customers quickly decide if to make an order.

Form of order – a lined notepad with copied sheets containing information about product number, size, amount, color, price, customer requirements, for example, a small change in the model (if accepted by the producer), information about the customer and the manufacturer. If an order is small, the form of order signed by the supplier and the customer replaces the contract.

Draft contract – template agreement with standard terms of the company.

Handout materials – flyers, leaflets, business cards, catalogues with contacts of the company.

Participation in the exhibition is one of the tools of complex overall marketing and PR-work, but not a “remedy” against low sales or lack of customers. Simply coming to the exhibition and putting products on the stand or spreading leaflets about the products, spending a few days at the exhibition, you are unlikely to achieve the desired goals and results. Participation in an exhibition should be prepared and planned in advance. For example, for this purpose you can use an “operational plan” where all tasks and specifying details of the preparation are included, from contact of organizers and contractors responsible for building the stand, to persons, responsible for contacts collected at the exhibition.

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A creatively decorated exhibition stand helps to stand out from the large number of exhibitors.

Employees at the stand dressed in style, professionally stored production and convenient location on the stand will be the key points in gaining a large number of visitors. During the exhibition of ready-made clothes, it is a good idea to have a model to demonstrate the clothes chosen by the client – these are not the expenses to cut down on.

It is a good idea to write after the exhibition to the visitors who have shown interest in the stand to establish further communication.

And one last tip. It is better to conquer the markets gradually and persistently. There is an unspoken rule: regular visitors appreciate permanent exhibitors, and only after 2–3 seasons they start working with the brand they like, relying on its consistency. It is believed that customers get used to the style of a brand and do not risk changing the proposals. This is typical for European buyers. If after the first exhibition in a particular country you feel confident with your product, you can make a deeper expansion strategy in this market.

How to present your products efficiently (advertising and PR)?

Fashion is the most variable and unpredictable category of consumer goods. At the same time fashion and clothing are rather different concepts. Clothing is a tangible physical product, while fashion is a cultural and symbolic product. In order to make consumers buy clothing items that have become to be considered “fashionable” again and again, you should continuously maintain your ideology. New global media is an excellent way of communication for the quickly changing fashion created by designers, creative directors, stylists. Reports and analyses of fashion journalists and tastemakers help define and spread the fashion trends. Fashion media praise certain styles, trends and brands. In this way, they become sales hits for 4–6 weeks until a new favorite appears. There is also a category that remains in trend year after year varying only in shades and nuances of models, such as jeans.

So how can a company stand out among others with the increasing similarity of products? In order to provide sales promotion and spread information about the product advertising campaigns are set up. They bring the brand’s individual message and are mostly associated with a particular product of the season. Very often, in order to emphasize the spirit of the brand and to strengthen this process, the companies invite famous models and photographers. Speaking about the export strategy in advertising, one should keep in mind that things that work in one country may not work in another one. This may be relevant to the choice of models for photo sessions as well.

Media plan is a significant element. It is the system of advertisement placement in the efficient media specifically for your target audience. Budget is a fixed amount of money to cover all expenses related to promotional activities, which include photo session, creation of promotional

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materials and their placement as well as PR service costs. It is important to define the brand advertising strategy for your target audience, and to evaluate its efficiency, i.e. the number of people who will see your ad in relation to the sum of money paid for it. If you have enough advertising budget, it can be a good idea to make advertising at the international exhibition where your company participates (before arrival to the exhibition your advertising could be placed in the areas with high concentration of visitors). This is an effective focus of attention on your brand and your products, active for 3–4 days of the exhibition, which will be visited by the majority of international buyers and customers of the region. An advertising image in the exhibition catalogue can be also quite efficient. Sometimes when buyers do not have enough time to go around all the participants, they work with the catalogue. Therefore, the representatives of your target audience will remember your company as a reliable and respectable one.

In the export advertising strategy, it is particularly important to have a good website, which clearly demonstrates the collections, is visually appealing and makes customers want to purchase your products. It should completely dominate on the first pages of search engines. It is also important to have high quality and constantly updated content on Facebook and Instagram accounts.

PR is one of the most important promotion tools; it is both tactical and strategic marketing instrument. In most cases it is run by an independent company, a department, an external PR-agency or a freelancer. Their main task is to highlight company’s product during a certain season in media related to fashion. Therefore, a PR-manager is usually hired to establish, develop and support the company’s interaction with the media, to strengthen the brand image without active investment in prints (as in the case of advertisements). For example, a magazine publishes a photo of the dress of your brand in its column with a fashion review. The brand does not have to pay for such advertising, while it helps to sell many of these dresses. The advantage of PR compared to advertising is in minimal investment compared to the benefits.

How to take advantage of the e-mail and Internet marketing?

Internet marketing is a practice of using of all aspects of traditional marketing in the Internet, in order to get a maximum effect of the potential audience of the site. Today, the most effective types of internet-marketing are: 1. SMM (social media marketing) or marketing in social networks – a set of tools to use social media as a channel to promote companies and solve other business tasks. Today SMM is one of the most powerful tools of promoting the product. Facebook, YouTube, Instagram and Twitter are the most effective networks for entering the European market. A few tips for the most efficient use of social networks:

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• Start from the content! The number of followers will depend on the information on your page, it should be useful and interesting.

• Do you already have a page and want to invest in its promotion? Then it is necessary to use targeting (mechanism to allocate a portion of the target audience and to advertise only for it): in any social network it is possible to configure geotargeting (regions for showing your ads) and social targeting (depending on age and sex of the audience). The company can also use special services for more profound analysis of an audience, which allow to save the budget and to increase the effectiveness of advertising.

Nowadays a growing number of innovative SMM tools is used in practice, for example: • Live-video – is performing of live broadcast, one of the ways to arise interest of the audience and strengthen the confidence of consumers through authentic content.

• Chat Bots – is a computer program that imitates meaningful conversation without human intervention. Chat bots offer flexibility by automating tasks and help in gathering information. They are an important element in improving the user experience and increasing the efficiency of customer service.

• Disappearing social content – the information is automatically deleted after a certain time of publication. Users know that they have little time to learn the content before.

2. Context and media advertising.

Contextual advertising – is the type of online advertising where an ad is displayed according to the context of the page being viewed. To determine whether the advertising material correlates to the page, the principle of keywords is usually being used. For contextual advertising, it is important to choose the right keywords. To achieve high effectiveness of advertising you should use low-frequency queries like “Women’s red wool coat with pearl buttons”.

Display advertising in the Internet – a text, sound and image that is displayed regardless of the context of the page being viewed. The most popular type of display advertising are banners.

The use of context and media advertising requires significant and permanent investment.

However, this tactic is justified, for example, if you need to urgently sell a large number of seasonal goods.

To make advertising more and more effective, innovative solutions are used, for example, Mobile and Programmatic. Mobile – is advertising on the screens of mobile phones, i.e. mobile versions of sites, games and applications. Programmatic – this software based on preset goals of the campaign automatically selects tools and advertising space. It has two major advantages: constant optimization based on the effectiveness of advertising on a site and the possibility of direct communication at a narrow target audience.

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3. SEM (search engine marketing) is search marketing; a set of tools aimed at increasing site traffic by its target audience with search engines use. To ensure constant traffic to your site, you must deal with his promotion in search engines. As with pages in social networks, the main element of the site is unique content. So try to look at your website from point of view of the visitor and think about making texts the most interesting.

4. E-mail marketing

means sending e-mail letters to interested audience. Among

the companies that provide support services of such mailings stand out: UniSender, EasyEmailNewsletter (for a small number of letters), Emarsys, SmartFocus, SalesForce (professional programs for a large number of letters).

E-mail marketing is the most accessible and at the same time an effective tool to attract and return customers. Analyzing purchase history and customer behavior, you can create a system of sending e-mail messages in those time periods when the customers are prone to purchase the product.

5. Non-standard and innovative solutions. You cannot engage in online marketing by standard procedures. Experts recommend business owners to allocate 10% of the marketing budget in innovative actions and test innovative ways of promotion that can bring profits.

To learn more: • • • • • •

Kompass http://ua.kompass.com Europages http://www.europages.com.ru TradeFairDates http://www.tradefairdates.com Export Promotion Office http://www.epo.org.ua Economic Cooperation Office of MFA http://mfa.gov.ua Embassies of foreign countries http://mfa.gov.ua/ua/about-mfa/ abroad/embassies • CBI https://www.cbi.eu • ITFC http://tradecenter.org.ua • The Ministry of Economic Development and Trade http://www. me.gov.ua

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The next step: determine the optimal business model Selection of the optimal business model to enter the EU market: distribution, franchise or agency agreement Entry into the market of the European Union requires expanding the scheme of supplies, negotiated and agreed between the Ukrainian supplier and the European client. The scheme of supplies should be chosen with regard to the specificity of the product, business relations with the customer and the supplier’s goals. Basically, there are three main supply schemes, which are the most common in structuring international trade relations in the field of footwear and apparel: distribution, agency and franchising.

Distribution Distribution is the most straightforward scheme of supplies. Its difference from other schemes of supply is based on the presumption that the distributor acts as an independent entrepreneur which buys and further resells products in its own name and for its own account. The distributor is usually the owner of the distributed products and gains profit from their resale. As a rule, distributors are defined as legal entities, having concluded general distribution contracts with products’ suppliers, which entitle them to establish a dealer chain in order to resell the respective products to end consumers directly or through dealers.

In practice a supplier and a distributor usually exercise a long-term distribution agreement which is the framework for their further relations. Such a distribution agreement may be later supplemented with sale and purchase contracts, or may initially contain sale and purchase provisions included therein. The main difference between a distribution agreement and a simple sale and purchase contract is that the distribution agreement usually contains provisions on: • the territory of distribution and the rules of sale to customers beyond its borders; • the rules of sale to different categories of customers or through the Internet; • the rules of use of a trademark of the producer or supplier; • obligations of the distributor and costs in the sphere of sales promotion and market research; • sales targets and minimum turnover; • prohibition for the distributor to engage in trade with the competing products (exclusivity clause); • price policy, etc.

Agency An agency scheme27 of supplies envisages intermediation between the manufacturer and the NB! Agency relations are specifically addressed by Ukrainian law i.e. by Chapter 35 of the Commercial Code of Ukraine 27

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final consumer on behalf, for the benefit, under control and at the account of the represented entity. In this supply scheme, the agent works to find end consumers for the products of the producer (supplier of the products) and/or to ensure conclusion of contracts (e.g. sale and purchase contracts) on behalf of the represented entity (supplier). Though such contracts are concluded by the agent, the parties to them are the supplier and the consumer.

The competence and authority of the commercial agent (a citizen or a legal entity) to act on behalf of the supplier is based on the agency agreement. The agency agreement should define the sphere of responsibility of the agent, its authority, nature and rules of intermediation services, the amount of agency fees, the territory of the agency agreement, the term of the agreement, penalties for its breach, etc. The parties to the agency agreement may also include a range of other provisions: the rules on use of the trademark, minimum turnover, marketing and sales promotion policy, etc.

Franchising A franchising agreement is a contract, according to which one party (the franchisor) authorises the other party (the franchisee) to use a set of rights belonging to the franchisor for the purposes of manufacturing and/or selling certain types of products or providing services. The conditions of use of these rights, the fees and other provisions should be defined by the franchising agreement.

Based on the franchising agreement the franchisor confers a right to the franchisee to use the franchisor’s intellectual property (trademark, design, know-how, commercial secret, etc.), commercial experience and reputation. In the franchising agreement, the parties define in detail the rules on using the intellectual property. In so doing the franchisor may include strict requirements regarding the activities of the franchisee, for instance if the franchisee intends to open a footwear shop, the franchisor may include requirements regarding the location of the shop, the premises and design, etc. in the agreement.

The franchisee is obliged to use the trademark of the franchisor in the way, envisaged in the franchising agreement, to comply with the quality standards of the franchisor, to comply with the instructions of the franchisor regarding the use of the trademark and to keep commercial secrets of the franchisor. In turn, the franchisor as a rule is obliged to transfer to the franchisee technical and commercial documentation, provide other information regarding the activities with the franchisor’s intellectual property, provide constant technical and consulting assistance, control the quality of the goods (works or services). The franchisor’s assistance often includes instructions and manuals on doing business in a particular sphere, training of personnel, and assistance with other commercial issues.

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Foreign regulation of supply schemes and contracts Though the concept of distribution, agency and franchising agreements is quite similar in all countries, foreign legislation provides for its own regulation and rules regarding such agreements.

The rights and obligations of the parties may significantly differ from country to country, and the same goes for the mandatory legislative provisions applied to their activities.

Depending on the material law applicable to the relevant contract (whether this is the law of Ukraine or the law of any other country), it is highly advisable to get acquainted with the main legislative provisions regarding the particular contract type.

The experts of the International Distribution Institute28 have prepared a rather detailed country-by-country overview29 of the main legislative provisions regarding distribution, agency and franchising agreements, alongside with the texts of the model contracts. Such information might be useful to conduct a preliminary verification and analysis of the rules, applicable to the particular contract.

Distribution, franchise or agency agreement – a practitioner’s opinion The export of retail brands into foreign markets is not a new phenomenon. Still, as practice shows, it is quite a complicated problem for fashion brands to work in conventional formats abroad, because it is much more difficult to lead a retail brand abroad than to raise the manufacturing process. The reasons for this are the following: • International fashion markets may differ significantly regarding the ratio of consumer demand, the nature of competition and market infrastructure; • Brand positioning may not meet the features of the new market, and the parameters of competitive advantage achieved in the export country/country of origin+ may be unacceptable to the conditions of another country; • Additional costs of doing business abroad may interfere with established business models; • Often profits can become a reality only in the long term.

That is why it is important to take the right strategy to enter foreign markets, based on the size of your company, its stage of development and characteristics of the business model.

These may be the following systems: • Agency; • Distribution; • Franchising.

28 29

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http://www.idiproject.com/ Reports of the International Distribution Institute are provided on a paid basis.

Collaboration through an agency would be suitable for small brands. On the fixed territory under the contract an agent receives a fixed rate fee (for the use of the area of the showroom and service promotions) and a percentage on sold customer goods. The agent is provided with seasonal collection, catalogs, look book, sales book, handouts, promotional videos, and so on. one of the duties of the agent is organization of events or exhibitions for the search of new orders. At the end of the season the collection is returned to the client or is sold at wholesale prices, the client receives reports and final payment. After the first season, it is clear whether it is possible to renew the contract.

Advantages: • The agent performs the work, which the company itself will not be able to carry out without opening a branch in another country; • There is a growing awareness of the brand in the selected country; • This system allows not to freeze funds in mass production, and to manufacture products for specific orders collected by the agent from the end customers.

Advice: • Carefully select the agent, preferably upon recommendation; • Clearly state all conditions in the agency contract; • However tempting it may be to carry out such agreements informally, never do that!

Otherwise, you could go without collections, money, and a good reputation in a chosen market.

Distribution is the delivery of the products to the final consumer. As practice shows, it is not enough to attract the final consumers and dealers once, you should be able to keep them. There is hardly a manufacturer who does not want a reliable distribution system, which would help him to become the market leader in the region and would provide a significant advantage over competitors.

In business the distribution refers to a conscious manufacturer’s choice of specific tools and techniques that would help him to get to the buyer. If you produce something you have 2 ways to sell: • directly • through distributors.

Of course, the first option also takes place, especially in high-tech and high-yield sectors.

But for most of our market segments the second option is more appropriate.

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Advantages: • Great potential sale of the goods – thanks to the long experience of trading companies in establishing effective and strong relationships with the end user, distribution network has a really huge sales potential. After all, if a manufacturer decides to build his own sales network, he will for sure face stiff competition of other market participants. And it will not lead to anything except huge financial losses.

• Service. Distributors can offer a consumer much more qualified and diverse service, having adapted it to his wants and needs. A manufacturer, in turn, doesn’t have such resources a distributor has, and though the manufacturer may try to keep in line with the high-level standards, this may be rather inconvenient for the consumer.

• Logistics. Network distributors can organize logistic solutions considerably quicker and better for their customers than manufactures. This means that the products will be delivered to the final customer at the required time and in required quantities. Thus it is possible to create an operational stock of goods in warehouses.

Franchising. Franchising is the most effective form of fashion retailer internationalization.

But of course, it is effective only for large companies that have a solid reputation in their market, a balanced product portfolio and merchandising policy and large production capacity to serve the entire mechanism of the orders of their franchisees. Of course it is easier to invest in an elaborated and time-protected consumer business model than to “invent the wheel”. It is very important to maintain the corporate rules of franchising networks. Those who buy a franchise have the responsibility to carry world standards and quality of service of the franchise owner. Those who sell the franchise, have a big responsibility not to let their partners down in developing trend collections and making timely deliveries. Otherwise it will lead to large losses and impairment of reputation.

Electronic commerce – how it works?

Basic terms and concepts: Ecommerce – an organization and technology of the electronic sale of goods and services using electronic communication networks and financial and economic instruments.

Marketplace – вa website where a large number of B2C sellers are able to sell their products, and the sales transaction is performed directly on the Internet platform.

Fulfilment – a set of storage services that provides order processing, namely acceptance of goods to the warehouse, completing orders, execution of accompanying documentation, packaging, labelling orders, and transfer orders for delivery.

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Internet Acquiring – acceptance of payments by payment cards over the Internet using a specially designed and secure WEB-protected interface that allows payments at any time in any place in the presence of a computer connected to the Internet.

E-commerce export models: Business model #1. The organization of the independent sale of goods by a vendor, who is a resident of Ukraine to non-resident buyers using the service “International Internet acquiring”.

The bank will automatically convert 100% of payments in hryvnia STEP 1

STEP 2

Customer – nonresident:

Client - resident: 1) receives payment in local currency for each transaction on his bank account;

1) places an order on the site; 2) pays with a bank card or other payment instrument in his home currency.

Goods are sent to the client

2) draws the delivery of goods to the customer (postal and express parcel).

The seller (resident of Ukraine) localizes the site in a certain country (or group of countries) and offers non-resident buyers to make orders for the goods at the territory of Ukraine.

The following things shall be considered: • the option to select a convenient language; • the option to specify the delivery address abroad in the personal account or in the order form; • the option of payment for the goods with bank card in the currency of the buyer using the service “International Internet acquiring” for payment processing.

Advantages of international acquiring service: (1) 200 currencies authorised, local currency used for payment; (2) instant conversion to UAH for the seller’s account; (3) transfer of funds to the seller’s account within 24 hours; How to connect international acquiring service?

1. It is necessary to have an account in one of Ukrainian banks; 49

2. Sign an additional contract for service activation; 3. Install the application “Platon” at your computer; 4. Agree on the amount of commission (up to 3%).

Business model #2. Selling goods by the seller, who is a resident of Ukraine, to the buyers, who are non-residents of Ukraine by posting information about products on international marketplaces.

STEP 2

STEP 1

Marketplace:

Buyer-non-resident:

1) informs the seller about the prevailing order;

1) makes an online order at the marketplace;

2) fixes the payment from the buyer;

2) pays with a bank card or other payment instrument in a national currency.

STEP 3

3) sends a consolidated amount to the seller in defined terms and periods.

Seller - resident: Provides delivery to the client’s address (postal and express parcel).

Payment: in most cases marketplaces consolidate payments from customers for a period (determined by the conditions of each site) and this consolidated payment is forwarded to the seller at the registered bank account or a specified payment system account, excluding commission fees charged by marketplaces as a payment for product placement services.

Relations with marketplaces are regulated through: • Approval by the seller of the marketplace’s public offer regarding selling his goods on the marketplace (for example, https://services.amazon.com/content/sell-on-amazon.htm/ ref=footer_soa?ld=AZFSSOA-dT1).

• Signing the contract between an individual person (seller) and marketplace’s legal entity (this option is extremely rare).

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Business model #3. Selling goods by the seller, who is a resident of Ukraine, to the buyers, who are -non-residents of Ukraine by posting information about products on marketplaces and services using transit warehouses for the temporary storage of goods followed by their selling to end users.

STEP 2

STEP 1

Marketplace:

Buyer-non-resident:

1) informs the seller about the prevailing order;

1) makes online order on the marketplace;

2) fixes the payment from the buyer;

2) pays with a bank card or other payment instrument in national currency.

3) sends a consolidated amount to the seller defined terms of cooperation intervals.

STEP 3 Fulfilment Centre: 1) forms order from its storage; 2) provides delivery to the client’s address (postal and express parcel).

Seller-resident: controls communication with the client and manages processes fulfilment center remotely.

The advantages of e-commerce exports for Ukrainian producers and commercial projects: • “Easy entrance” to new global markets.

Ukrainian entrepreneurs can try to start international trade without making substantial investments (of finances and time) in the organization and marketing, and placing their goods on the shopping areas.

Marketplace

Placement condition

Number of visits

ASOS

20% of the order + GBP 20 fee per month

53 mln.

AMAZON

8–25 % of the order

2 200 mln.

eBay

5–40 % of the order

1 150 mln.

ETSY

0–30 % of the order

170 mln.

• The possibility of delivering goods to the destination country within the simplified customs regime without additional customs certificates and permits.

• The possibility of delivering goods to the end consumer without paying of duties and taxes within the tax-free limits

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Country

Limit

UK

Up to 135 GBP

EU countries

Up to 22 EUR

Participation in the EU public procurement: a step-by-step guide The Ukrainian light industry companies have an effective tool at their disposal for the sales of their products through the participation in the EU public procurement. Promotion of the products by means of the European tender mechanisms has the following advantages: • absence of significant marketing and distribution costs; • high speed of the sales processes; • absence of traders discrimination; • transparent and clear terms of the winners determining.

The access to all announcements of tenders in the EU is available at the moment through the electronic portal TED (Tenders Electronic Daily), http:// ted.europa.eu. Under EU legislation, the EU Central and Sub-Central government entities are obliged to publish their tender invitations for all contracts exceeding: а) the

threshold

and

services

for

supplies

(except

for

works): Central government authorities – over 204 thousand euros, Sub-Central authorities – over 315 thousand euros, other authorities – over 629 thousand euro; б) the threshold for works: Central government authorities – more than 7684 thousand euros, Sub-Central authorities – more than 7864 thousand euros, other authorities – more than 7864 thousand euros.

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A step-by-step guide for participation in the tender for the purchase of garment in the EU is as follows.

1. Selection of the tender on the portal: а) registration at the TED website, which is free and takes about 10 minutes; б) browsing by business sector “Clothing, footwear, luggage articles and accessories”; в) selection of the section “Contract notice”, which allows access to the announcement of the opened tenders; г) selection of the appropriate commodity nomenclature, produced by your company. For example, “special clothes”, “clothing accessories”, “outerwear”, “shoes”, and others. As a result, you will have access to the list of open tenders for this heading.

2. Submission of an application for participation in the tender: а) Study the requirements for participation in the tender. The profile of each tender, contains at least the following information: the subject of the tender announcements; contact details of the body’s responsible person that announced the tender; information regarding the goods which are purchased; tender costs; terms of contract performance; requirements for the participants; the winner selection criteria, document templates, which one should complete and submit to participate in the tender; the method of application (mail, e-mail). б) Preparation of the tender offer. The tender offer is prepared and provided in accordance with the requirements specified in the tender profile. As a rule, the tender documentation is published in the language of the country, which has announced a tender. The tender offer should be prepared as well in the language of the country where a tender is announced.

In case of absence lack of complete information, contact persons from the side which has announced the tender should provide all documentation and answer questions upon request.

3. The results of the tender. After the completion of the tender the results are published at the TED portal in the general section of “Contract Award Notice”, which contains information about the winner. Upon the participant’s request, there may be provided additional information about the reasons for non-election of the company to fulfill the contract.

4. Implementation of the tender contract. In case of winning the tender, the sale of goods is carried out by the same rules as regular export outside the framework of tender procurement.

The tariff and non-tariff regulation of export is identical to usual regulation conditions.

Dealing with transport and logistics To perform an export contract the company should select a shipping (logistic) firm and make 53

customs clearance. Typically, these operations are performed in paralle.

Selection of the shipping company The Supplier agrees with his foreign customer the size of the consignment, the means and the time of delivery. Depending on the terms of delivery (according to Incoterms) specified in the contract the type of transport and the carrier is defined. When sending small consignment, requiring the carrier to consolidate the cargo, you need to contact a logistics company. When it comes to delivery of medium and large batches of goods, it is more advantageous to entrust them to a forwarding company. In this case, the client can decide on the type of transport, the carrier and the forwarder that will take the load. Like other goods, apparels and footwear can be delivered by road, air, sea or rail.

The following are indicative steps for choosing a carrier, if it has not been specified by the client: 1. Explore how products similar to yours are delivered from abroad to Ukraine. Who are carriers, forwarders? Are there similar sales from Ukraine abroad? Who are the carriers?

Create a short-list of suitable shipping companies.

2. Select a delivery method depending on the cargo (auto, air, other).

3. Make the final selection of the transport or forwarding company.

4. Discuss the terms of cooperation, the possible risks and their insurance and the customs clearance procedure in the country of destination.

5. Develop the best optimum route.

6. Calculate the approximate shipping costs and include them in the price of goods.

7. Agree on a trial dispatch.

8. Make custom clearance (get the permission to export the goods at the customs office 1–2 days prior to export).

9. Send a trial consignment.

10. Ensure the delivery deadlines.

11. Get feedback from the client (timeliness, packaging integrity, condition of the goods, etc.).

12. In absence of claims proceed to signing a contract with the carrier on a permanent basis.

Novice exporters are usually looking for the shipping company in the Internet, business directories, upon recommendations of colleagues or friends. Deliveries in Europe are carried 54

out mainly by road. To check whether the trucking company has permits for international shipment we recommend contacting the Association of International Road Carriers of Ukraine (www.asmap.org.ua).

Customs clearance The procedure of customs clearance of the goods is rather complicated, especially for firsttime exporters. Any mistake here can cost you a lot.

Basically, customs clearance of exports consists of two main steps: 1. Provide the customs authority with the documents proving grounds and conditions for the export of goods from the customs territory of Ukraine.

2. Comply with the legislation requirements.

The customs clearance can take place in any customs authority throughout the territory of Ukraine. First, you need to submit an oral statement on the need for such procedures. Second, accreditation at the customs post is required. This is a must action for all Ukrainian residents engaged in foreign trade, both for legal entities and for individual entrepreneurs.

After accreditation at the customs post, the exporter must prepare all documents for the export of goods. For those who have previously dealt with imports, the business will be familiar, as a package of customs clearance documents for exports is similar to the package of documents for the import of goods to Ukraine.

The following is a preliminary list of documents for export (to obtain an export declaration): • An accreditation at the customs post; • a contract with a foreign partner with all annexes; • an annex (specification) for a particular supply; • commodity-transport documents (CMR, railway, aviation, postal invoices – depending on the type of transport); • driver identification information (if vehicle is used) – a copy of the passport and the technical passport of the car and trailer; • a contract with the carrier; • invoice indicating the country of origin of goods, delivery terms, contract, etc.; • a packing list; • proof of purchase (if the sender is not the manufacturer) – a contract for the purchase of goods on the territory of Ukraine, the tax bill;

55

• invoice, payment orders. From the manufacturer of the goods – production cost calculation.

All documents are in copies, certified by the seal of the enterprise; • a certificate of origin (EUR–1 – for deliveries to Europe, if the goods are produced in Ukraine); • CARNET TIR (if any) • a certificate for the freight transportation under customs supervision (if available).

Besides, you should undergo radiological control, sanitary-epidemiological control (for shoes and underwear), and phytosanitary control (if wooden pallets are used). It is possible to specify exactly which documents are needed after determination of the code classification of goods under the CN FEA and communicating with potential partner overseas, as some certificates are mandatory (required by country), and some - voluntary (available upon request of the importer).

If the exporter does not have time and desire to run all this paperwork, he can entrust it to a specialized company providing customs brokerage services (customs broker or international shipping company). We strongly recommend the use of intermediary services for the first deliveries abroad. For the novice exporter the customs broker will develop basic forms to start foreign economic activity and prepare all necessary documents to export goods. If required, it will also advise the best path of goods delivery taking into account transportation costs and the trade restrictions in force in different countries.

To learn more: • https://services.amazon.com/content/sell-on-amazon.htm/ ref=footer_soa?ld=AZFSSOA-dT1 • Tenders Electronic Daily: http://ted.europa.eu • Incoterms: Official Rules for the Interpretation of Trade Terms of the International Chamber of Commerce (http://zakon2.rada. gov.ua/laws/show/988_007) • Customs Code of Ukraine (http://zakon3.rada.gov.ua/laws/ show/4495-17) • The Association of International Road Carriers of Ukraine www. asmap.org.ua

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What should you know to mitigate risks?

Foreign economic contracts: basic issues Though legislative approaches to regulation of the contracts between the residents of Ukraine and foreign economic contracts have much in common, there are specific differences, which may be useful for negotiating and drafting a foreign economic contract.

General regulation The basic principle, both for domestic and foreign economic business activities, is the freedom of contract. According to this principle30 companies are authorized to enter into any foreign economic contracts, except those, for which the conclusion is prohibited by the legislation of Ukraine. The contract is deemed to be concluded if the parties have reached agreement in due form on all essential terms of the contract.

Essential terms of the contract As a rule, regardless of the jurisdiction, the essential terms of the contract are considered to be the subject, price and duration of the contract. The terms of the contract on its subject shall define the name (list, range) of products (works, services) and quality requirements. In addition, the agreement should comply with specific legislation applicable to the contract (if any), and both parties should approve of the conditions under which the agreement is concluded.

In case of a lack of any of the essential terms in the contract, it should be considered as nonexisting.

Form of the contract According to the Law of Ukraine “On International Private Law”, a foreign economic contract, where one of the parties is a Ukrainian entity or citizen, shall be made in written form.

Desirable terms and conditions of the contract According to the principle of the freedom of contract, the parties of the contract are free to decide on the content and conditions of the contract. However, Ukrainian legislation31 provides the recommended form and content of the supply contract, one of the most frequently used types of the contract. The parties are free to deviate from the requirements listed below if they duly agree on the essential terms of the contract. However, from a practical point of view, it is recommended to directly define the below issues in the contract.

A foreign economic supply contract shall contain the following provisions and clauses: • The name and number of the contract (e.g. Supply Agreement), its place and date of conclusion; • A preamble containing the full official registered names of the parties, their short Article 382 of the Commercial Code of Ukraine Order of the Ministry of Economy and for the Issues of European Integration of Ukraine No. 201 “On Adoption of the Regulation on the Form of Foreign Economic Contracts” dated 06.09.2001.

30 31

57

authorized to execute the contract and the document on which basis this person is acting (e.g. Articles of Association);

• The subject of the contract (e.g. name of goods to be supplied), quality and quantity of goods, works or services; • Basic delivery conditions according to Incoterms. Notably, the contract shall directly indicate which edition shall apply in relations with the parties; • The price of the contract, total value of the goods, works or services supplied under the contract and foreign currency in which all payments will be made; • The payment terms and conditions (e.g. how invoices will be issued, terms within which they should be paid etc.); • The conditions of the transfer and acceptance of the goods, works or services; • Labelling and packaging; • Force-majeure; • Penalties for violations of the contract, conditions on the recovery of damages. Notably, from a practical point of view it is crucial to precisely indicate penalties in the contract e.g. interests for delayed payments; • A dispute settlement clause (please see for details below); • The office address (residence address), mail address, bank details (account No., name of the bank, etc.).

The foreign economic contract may, upon agreement of the parties, define additional conditions on insurance, warranty, delegation of obligations and subcontracting, agency, transportation, loading, transfer of technical documentation, security of trademarks, payment of taxes and customs duties, safeguard clauses, the date the contract enters into force, the number of copies of the contract, the procedure of making amendments, etc.

NB! From the practical point of view, it is desirable to describe in the contract all issues which are important for the parties, even if they relate to some procedures etc. If all such provisions make the contract quite big, some of them may be agreed upon not in the contract directly, but in the annexes to the contract (e.g. assortment of goods to be supplied, a standard template of the act of services acceptance etc.) to be executed by both parties.

A foreign economic contract is a very important document, as it sets the future “rules of the game” between you and your partner and defines the boundaries of mutual responsibility, so it is advisable to entrust its preparation to a professional lawyer.

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Applicable law The parties to the foreign economic contract are authorized to choose the legislation (whether Ukrainian or of a foreign state) applicable to their contract.

In absence of such choice, applicable legislation will be defined according to the Law of Ukraine “On International Private Law�. Under the general rule, the law, applied to the international contract, is the law of the country where the party which makes the essential performance in the contract (e.g. seller in the contract of sale and purchase) is registered or resides.

It should be noted that imperative provisions of the Ukrainian legislation shall in any case be applicable to the contract, without regard to its form and the applicable law. Though Ukrainian legislation does not explain the concept of such imperative norms, the most essential rules regarding the freedom of the contract, equality of the parties, responsibility for damages, consumer protection, etc. will be applicable. Furthermore, foreign law provisions may not apply if they violate the public order of Ukraine.

NB! If foreign law is chosen as the applicable law, prior to execution of the contract it is crucial to analyze the relevant provisions of the foreign law because it may stipulate huge penalties or specific restrictions or very short or long time limits for claims etc.

Dispute settlement The parties to a foreign economic contract may agree on the dispute settlement clause. Thus, the parties may agree to submit all their disputes arising out of the contract to jurisdiction of the Ukrainian or foreign court (litigation clause) or to jurisdiction of the arbitration tribunal (arbitration clause). The latter option is preferable in terms of further enforcement of the relevant court or arbitration decisions. In practice, usually it is easier to enforce arbitration awards, while it may be hardly possible to enforce judgements of foreign courts of countries with which Ukraine does not have the relevant bilateral agreements on legal assistance.

Detailed information on arbitration proceedings can be found on the web-site of the International Council for Commercial Arbitration (ICCA)32, which is a worldwide nongovernmental organization devoted to promoting the use and improving the processes of arbitration, conciliation and other forms of resolving international commercial disputes. NB! The said web-site contains references to the direct web-sites of the different arbitration institutions around the world where it is possible to find model arbitration clauses in different languages.

The International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry has its own model arbitration clause.33 32 33

http://www.arbitration-icca.org/related-links.html http://arb.ucci.org.ua/icac/en/clause.html

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Currency control rules in foreign economic agreements General background and regulation Ukrainian legislation prohibits foreign currency payments between the residents of Ukraine.

Therefore, foreign currency control is applicable only to relations between a resident of Ukraine and a foreign entity. According to Ukrainian legislation34 in case of export of goods or services on the basis of post-payment, foreign currency income of the residents of Ukraine shall be credited to their bank accounts not later than 180 days from: • the date of customs clearance (date of export customs declaration); or • the date of the act of completion of works (provision of services) which provision should be confirmed by acts of acceptance to be executed by both counterparties.

The same rule with minor changes applies to import of goods or services by Ukrainian entity on the basis of prepayment: customs clearance of such products (or execution of the act of completion of works or provisions of services) shall take place within 180 days from the date of advance payment.

The aforementioned terms of 180 days may be prolonged by resolution of the Ministry of Economic Development and Trade of Ukraine only in certain limited cases35 which in practice is an extremely rare case. On the contrary, the aforementioned 180 days terms may be reduced by the order of the National Bank of Ukraine (“NBU”) upon its own discretion for the period up to 6 months.

The practice of reduction of 180 days terms by NBU started in 2012. Since then NBU by its resolutions continuously reduces the maximum terms of foreign currency payments. The new terms of payments are usually introduced by NBU for a three month period and in the previous several years varied, depending on economic situation, from 90 to 120 days.36 From a practical point of view, it is advisable to check which maximum terms of foreign currency payments are indicated in the effective NBU resolution and fix the respective payment terms in the contract between the resident of Ukraine and foreign counterparty respecting the above terms.

It should be additionally noted, that export and import payments made in the national currency of Ukraine shall be made according to the rules applied to foreign currency payments.

Other restrictions Based on the above general regulation, a number of other restrictions follow. First of all, the State Fiscal Service of Ukraine, which is responsible for control of compliance with foreign The Law of Ukraine “On Foreign Currency Settlements” I.e. under the contracts of cooperation, consignment, complex construction, tender supply, warranty, supply of complex devices).

36 As of the date of this report such term of foreign currency payment is 120 days.

34 35

60

currency payments, considers that the agreements on change of creditor or debtor in international contracts are outlawed because in this case payment will be made by another entity or to the account of another entity, than is indicated in the contract.

Secondly, the NBU establishes in its resolutions37 the obligation of the residents to sell a certain share of their foreign currency income on the interbank exchange market by its exchange to national currency – hryvna. The share of income to be sold equals to 65% as of the date of this review and the sale is made automatically by banks after such income is credited to the resident’s account.

Thirdly, by virtue of NBU resolutions termination of debts in foreign currency by set-off is prohibited.

Additionally, NBU resolutions envisage a number of other specific limitations in the sphere of foreign currency payments applicable in different spheres (investments, dividends, etc.).

Foreign currency control Control over compliance with the terms of foreign currency payments (foreign currency control)38 is exercised by banks. The following operations are subject to control: • export operations where settlements have not been finished in full before customs clearance; • export operations where settlements have not been finished in full before customs clearance).

Exchange control regulations do not apply if the export operation is performed on the basis of full payment, or if the import operation is carried out on the terms of payment of the goods after their import to Ukraine.

If supplies and payments are made in several stages, foreign currency control is exercised for each fact of supply (in case of export) or payment (in case of import). Foreign currency control is terminated after the bank receives the relevant notification from the customs authority on customs clearance or a copy of the customs declaration. The banks are obliged to inform tax authorities on each fact of violation of the terms of payment.

Breach consequences In case of a violation of the terms of foreign currency settlements in the process of export or import, the residents of Ukraine are subject to a fine in the amount of 0,3% of the price of As mentioned above, NBU in the course of the last 3 years follows the practice of adoption of regulations on a quarterly basis regulating foreign currency payments, including the time-limits of foreign currency payments, measures on the foreign exchange market, etc.

38 The rules of foreign currency control are set out in the Regulation of the Board of NBU No. 136 “On adoption of the instruction on the rules of control over export, import operation” dated 24 March 1999.

37

61

debt or non-received goods for each day of violation of the term. This fine is levied by the State Fiscal Service of Ukraine and is applied to the resident automatically, even if the term of foreign currency payment is breached by its foreign counterparty. The final amount of the fine shall not exceed the amount of debt.

The fine is not charged if the resident files an action to the court for the recovery of debt from the non-resident, or initiates arbitration procedure in the International Commercial Arbitration Court or Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry.

If the resident wins such dispute, the fine is not applied from the date of submission of the statement of claim. On the contrary, if the court rejects the resident’s claim the fine is applied for all days of the trial.

It should be noted, that in certain cases upon its consideration the State Fiscal Service of Ukraine may prepare and submit the request to the Ministry of Economic Development and Trade of Ukraine for imposition of special sanctions against the resident and non-resident for violation of foreign currency payment terms39. In practice, such special sanctions are imposed if the total amount of foreign currency debt exceeds USD 10,000.00.

Special sanctions: what the Ukrainian business should remember Ukrainian legislation envisages application of special sanctions to violators of requirements in the field of foreign economic activity.

Types of special sanctions Generally, Ukrainian legislation provides for three types of special sanctions which may be applied: • A penalty; • An individual licensing regime; • A temporary suspension of the foreign economic activities.

In practice the individual licensing regime is the most common type of special sanction.

Temporary suspension of the foreign economic activities goes second, while a penalty has never been applied.

State agencies responsible for application of special sanctions Special sanctions are applied by the Ministry of Economic Development and Trade of Ukraine (the “Ministry”) upon request of the State Fiscal Service or the Security Service of Ukraine40.

For the details of application of special sanctions, please see the respective section of the Manual.

A number of other Ukrainian official bodies are also empowered to send such requests to the Ministry, however in practice such right is used only by two aforementioned bodies.

39 40

62

Individual licensing regime The Application of the individual license regime provides that any products (services, works, and intellectual property rights) of foreign companies or Ukrainian counterparties are allowed for import into Ukraine/export from Ukraine only upon receipt of individual license for each separate transaction by the Ukrainian importer/exporter. NB! Separate transaction is understood by each one-time completed transfer of goods (works, services) and completed payments for them. Except for export-import operations, a separate individual licence may be required for international payments, cooperation, establishment of a common enterprise, lease operations etc. Without individual licenses neither customs clearance nor any settlements are allowed.

Obtaining an individual license is quite a difficult and long procedure in Ukraine which requires submission of a bundle of documents, may take up to 15 working days and costs 0,2% of the operation price.

Temporary suspension of the foreign economic activity Suspension of the foreign economic activities may be applied in case such activities threaten the national economic security of Ukraine. However, there are no official interpretations which actions may be considered as a threat of national interests. In practice the Ministry applies this type of sanction for basically the same violations as the individual licensing regime.

In case of temporary suspension of the foreign economic activities, legal entities under sanctions have no right to perform any foreign economic operations in Ukraine at all.41 The maximum term of application of this type of sanction is 3 months. Extension of this period may be granted only by court upon request of a state authority – the initiator of special sanctions application. However, upon expiration of above 3-month period the special sanction does not cease to apply, it transforms into the individual licensing regime, which has no timelimits for its application.

Ministry’s official warning In case of a minor violation or if the situation with the violation is not clear, the Ministry may use an official warning to inform the company that in case of further violations sanctions will be applied. In practice such warnings are applied quite rarely. Notably, there are no official interpretations in which situations the official warning may be applied, instead of individual licensing regime or temporary suspension of foreign economic activity.

Entities subject to special sanctions Special sanctions may apply to both Ukrainian business entities engaged in foreign economic activity and foreign business entities. Generally, in case of a violation of economic legislation The only exception is made for accomplishment of payments or supplies by another party in operations where the initial payments or supply was made by one of the parties prior to application of sanctions.

41

63

special sanctions are applied to both the entity, who has committed the respective violation, and to its counterparty irrespective of the country of incorporation.

Violations that may result in special sanctions application Ukrainian legislation does not explicitly provide for a precise list of violations which may be a ground for imposition of special sanctions. Under the general rule special sanctions shall apply for violations of the Foreign Activity Law and its associated laws. In practice special sanctions may be applied for any violation of Ukrainian legislation connected with foreign business activity. The most common ground for the application of special sanctions is a violation of foreign currency control requirements42. In certain cases, however, special sanctions may apply for a violation of labelling requirements, transportation requirements, customs legislation, etc.

How to learn about application of special sanctions Ukrainian state authorities are not obliged to inform legal entities on the application of special sanctions. The only way to find out in advance, whether sanctions have been applied is to constantly monitor the Ministry’s official website (see section “Special sanctions” http://www. me.gov.ua/SpecialSanctions/List?lang=uk-UA), where the relevant lists are published.

Suspension and removal of special sanctions Companies, which are subject to special sanctions, are empowered to address the Ministry (Department of foreign trade regulation http://www.me.gov.ua/Documents/Detail?title=Dep artamentZovnishnoekonomichnoiDiialnosti) with a motion for the termination or suspension of special sanctions after they have eliminated the violations or taken measures to ensure compliance with Ukrainian legislation. In case the proofs of the company are well-grounded, the Ministry removes the special sanction. However, if there is no sufficient evidence that the company brought its activity in line with Ukrainian legislation, the Ministry may only suspend special sanctions or even refuse to take any actions.

42

Please see the respective section of the manual

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To learn more: •

International Distribution Institute

http://www.idiproject.com/

•

International Council for Commercial Arbitration (ICCA) – links to sites of arbitration institutions http://www.arbitration-icca.org/related-links.html

•

International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry – a model arbitration clause http://arb.ucci.org.ua/icac/en/clause.html

•

Civil Code of Ukraine http://zakon5.rada.gov.ua/laws/show/435-15

•

Commercial Code of Ukraine

•

Law of Ukraine «On Foreign Economic Activity» show/959-12

•

Law of Ukraine «On Foreign Currency Settlements» laws/show/185/94-%D0%B2%D1%80

•

Law of Ukraine «On International Private Law» show/2709-15

•

Decree of the Cabinet of Ministers of Ukraine No.15-93 «On System of Foreign Currency Regulation and Currency Control» dated 19.02.2003 http://zakon2.rada.gov.ua/ laws/show/15-93

•

Regulation of the Board of NBU No. 49 «On Adoption of the Regulation on Currency Control» dated 08.02.2000 http://zakon2.rada.gov.ua/laws/show/z0209-00

•

Regulation of the Board of NBU No. 136 «On Adoption of the Instruction on the Rules of Control over Export, Import Operations» dated 24.03.1999 http://zakon2.rada.gov. ua/laws/show/z0338-99

•

Regulation of the Board of NBU No. 410 «On Settling of the Situation on the MonetaryCredit and Currency Markets of Ukraine» dated 14.12.2016 https://bank.gov.ua/ document/download?docId=40919892

•

Order of the Ministry of Economy and for the Issues of European Integration of Ukraine No. 201 «On adoption of the Regulation on the Form of Foreign Economic Contracts» dated 06.09.2001 http://zakon2.rada.gov.ua/laws/show/z0833-01

•

Order of the Ministry of Economy of Ukraine No. 52 «On Adoption of the Regulation on the Rules of Application of Special Sanctions envisaged by Article 37 of the Law of Ukraine «On Foreign Economic Activity» to Ukrainian Foreign Economic Actors and Foreign Business Entities» dated 17.04.2000 http://zakon2.rada.gov.ua/laws/show/ z0260-00

•

Regulation of Foreign Economic Activity Department (MEDT) http://www.me.gov.ua/ Documents/Detail?title=DepartamentZovnishnoekonomichnoiDiialnosti

http://zakon5.rada.gov.ua/laws/show/436-15 http://zakon2.rada.gov.ua/laws/ http://zakon2.rada.gov.ua/ http://zakon2.rada.gov.ua/laws/

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For exporters’ programs to Що Виreference: повинні current знати про support експорт export activities до ЄС?of SMEs Today many donor organizations, projects and programs focus on supporting small and medium enterprises, both in their current activities and export development issues.

The main ones are listed below. You can find detailed information directly on their sites.

• EU4Business program. https://www.facebook.com/ebrdbasukraine/?fref=ts https://euukrainecoop.com/2015/05/09/eusure • Leadership in Economic Governance (LEG/LEV). http://www.eef.org.ua/ua/lev.html • Canada-Ukraine Trade and Investment Support Program (CUTIS) https://www.facebook.com/CUTISproject/ • Partnership for Local Economic Development and Democratic Governance http://pleddg.org.ua/ua/pro-promis/fokus-promis • Eastern Partnership SME Finance Facility http://www.euneighbours.eu/maineast.php?id=578&id_type=10&lang_id=471 • Western NIS Enterprise Fund (WNISEF) Programs http://www.wnisef.org/ua/

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They did it! Success stories of apparel and footwear exports to the EU The company “Bembi” was founded in 1998. Over the years the company has become one of the leading manufacturers of children’s clothing in Ukraine. “Bambi” has achieved this thanks to its unique quality, the production of exclusive seasonal collections and a wide product range.

The company continuously strives to stay on top of fashion, to strictly follow a clear, pure, trustworthy partnership, which is very important for a successful mutual work. The key to the company’s success is the permanent updating of the model range, and most importantly – the company’s constant development. The company goes ahead all the time, continues and expands evolving, listens to comments, is not afraid to take risks and to experiment.

Today “Bambi” has its own network of mono-brand stores and a distribution network (in nearly every region of Ukraine).

In 2005, the company entered the international market; first to the Republic of Belarus.

In 2014, “Bambi” was looking to enter the European market. The company’s specialists conducted their own market research, carried out an “investigation”, found staff and opened a representative office in Warsaw. Today, the Polish representation trades not only throughout Poland, but also sends the goods to France, Germany, Latvia, Lithuania and Estonia.

Foreign economic activities, according to the company’s management opinion, are more complicated and risky than in Ukraine, and an enterprise which is going to enter the foreign market should be morally, organizationally, financially and physically ready for all kinds of challenges.

Having passed a difficult but successful path, the company kindly shares practical advice and lessons it has learned: 1. The access to foreign markets makes sense then, when: • You have both feet on the ground in Ukraine, and you have the possibility of making long-term (2–3 years) investment by operating the domestic market. Besides one should not only bet on the foreign market; • If you have additional capacity that you can quickly use to provide a new market.

2. Be sure to conduct a very thorough research and understand what, to whom, and how you intend to sell. It is important to honestly answer the question: why exactly should foreign customers buy your product? You have to offer a unique “trick”.

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3. It is desirable to find local staff, who knows the specificities of local business and the consumer mentality.

4. It is important to have legal support in the chosen country, the laws are very different.

5. Standard approaches to trade, which have been effective in Ukraine, do not work abroad.

You need to create new techniques and use the right tools and distribution channels. One needs to be very assertive, flexible and adaptive.

6. Before entering the new market, consider the following issues very carefully: a promotion strategy, adaptation of the production, packaging (according to their requirements), marking (according to the EU requirements), certification, logistics (including customs) and pricing, advertising and marketing support. www.bembi.ua

Ukrainian brand RITO, known for its modern design and unique designer knitwear, was founded over 25 years ago.

Its entire production cycle, from the ideas to the shelves of the stores, six unique collections a year, its own stores in Ukraine and its regular participation in the prêt-à-porter Ukrainian Fashion Week – have all lead to a huge popularity. After foreign independent fashion experts started speaking about RITO on the pages of competent publications like FASHION-REVIEW, CLOSE-UP and COLLEZIONI, the popularity of knitting art of RITO spread beyond Ukraine. From that moment there was a passionate need to sell knitwear abroad.

Finding reliable partners was a priority to start foreign trade. And a basic requirement for them, just as important as honesty and integrity, was selfless love to knitwear from RITO! Thus, in 2014 the partners sprung up in the Czech Republic, and in 2015 a showroom was opened in Lithuania. The company is also represented in Kazakhstan, Denmark and Canada.

Today RITO is a leading manufacturer of knitwear in Ukraine. It is a private factory with a complete cycle of modern technological equipment and 92 workers, 6 (!) collections and 25,000 product units per year, including the fashion line RITO knits, RITO women, RITO home and RITO kids. www.rito.com.ua 68

The way into the fashion world for the Ukrainian designer Golda Vinogradskaya was not that easy. Having never even been carried away by fashion and working in the strict business sphere in the energy sector, the future designer started to dream about beautiful clothes. Unable to either sew or paint, she asked experts to translate these dreams into reality for a design competition. The result of this experiment was a change in this woman’s life: she left her stable business, opened a studio named GOLDA and started to study design.

Almost immediately, Golda was invited to a show in Berlin. Thus, Golda’s brand entered the international market. It is important that while studying design in high school, she came to know a lot about fashion-business in real life, and eventually, different parts of information gradually formed a holistic puzzle.

Experience of working with clients from different countries reveals a mental difference in the understanding of clothes of different consumers and, therefore, requires a different approach to business. Thus, Germany appreciates practicality, Japan – creativity, France – elegance, China – manufacturability, USA – ideology and profitability, and the Persian Gulf countries – a new interpretation of Islamic fashion. However, all this must be related to a single recognizable brand style. Each show or exhibition of brand GOLDA, even though they have been in nearly 20 countries around the world – is not just a demonstration of clothes, it is an idea that is brought to society, and the entire act takes the audience into another world.

The desire to share experiences and the active social position of Golda Vinogradskaya became the impetus for the establishment of a National sectoral partnership in the textile and garment industry of Ukraine-Fashion Globus Ukraine. It is a Ukrainian promotion platform for designers and manufacturers of the light industry in the world. Partnership participants are invited to a set of services on the adaptation of Ukrainian goods to the standards and requirements of a particular country, a presentation the customer’s product to potential partners, business development schemes (if necessary), and a business-support contract. “What is difficult to do alone, by the power of those who are united” is the slogan of the Union manufacturers. Therefore, the main thing is to desire to discover new horizons, and those who will help, will always be found! www.goldafashion.com UKRAINIAN E-COMMERCE EXPERT is a communication platform dedicated to business processes and the regulation of activities of the companies on the Ukrainian market of electronic commerce.

The UKRAINIAN E-COMMERCE EXPERT helps to develop the e-commerce market in Ukraine, aims to attract the best world experience and to create standards for the industry.

The competences: • E-commerce Market Analytics (of Ukraine and the world); • The audit and certification of online shops;

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• Promotion and PR of e-commerce and service segments; • Organization of industry events; • Participation in lawmaking and lobbying interests of the industry; • Consulting and training e-commerce projects.

E-COMMERCE EXPERT’s events are aimed at ensuring communication and networking among e-commerce market players. That’s why we raise the most relevant topics, including: import to Ukraine, e-commerce export, social commerce, global and regional development of e-commerce, CRM, Big Data, development of marketplaces etc. Throughout the year our events are attended by around 2,500 representatives of leading companies in the market.

The invaluable experience gained at our e-commerce events, especially on the business meetings “Cross-border e-commerce” and E-Export 2016, has enabled hundreds of companies to open new horizons for cross-border trade and to ensure the implementation of the most innovative and effective practices in cross-border business. www.e-comex.com.ua

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PROJECT TEAM

Ukraine Investment & Trade Facilitation Center (ITFC) Olena Kudliak – Executive Director of the ITFC, Project Manager Anzhela Makhinova – leading expert in international trade law Victoria Mykuliak – expert in international trade law Ivan Baranenko – expert in international trade law http://tradecenter.org.ua info@tradecenter.org.ua

SE Ukrainian Industry Expertise Volodymyr Vlasiuk – Director of SE, expert in the development of solutions for business development, research of Ukrainian and international markets and industrial policy Yuriy Dobrovolskyi – expert in analytical studies of industrial and consumer markets, export consulting specialist Mykola Mostovyak – expert in marketing and sectoral studies of Ukrainian and international commodity markets, export consulting specialist Taras Tkachenko – expert in market research, business planning, business development and policy analysis http://www.expert.kiev.ua expert@expert.kiev.ua

Involved experts Golda Vinogradska – President of the national sectoral partnerships in the light industry of Ukraine Fashion Globus Ukraine http://www.fashionglobusukraine.com export_space@fashionglobusukraine.com

Iryna Holod – Director of Ukrainian E-commerce Expert www.e-comex.com.ua info@e-comex.com.ua

Project team

Involved experts