A Long Journey to The WTO

By LIU HUAQIN

A Long Journey to The WTO

By LIU HUAQIN

Russia’s pending WTO entry will bring long-term gains despite temporary pains

After 16 years of marathon negotiations,Russia hopes to complete the final procedures and officially become a WTO member at the end of 2011 or the beginning of 2012.

Russia ranked 14th in the world in foreign trade in 2010, and is the biggest economy that has not yet joined the WTO. Joining the organization will de fi nitely have a major impact on its domestic economy as well as its trade partners.

Russia applied to join the General Agreement on Tariffs and Trade, the predecessor of the WTO, as early as 1993. It set up a working group to process the application in the same year. In 1995, when the WTO was established, the working group changed its mission and began WTO negotiations.

By 2008, after 13 years of work, Russia had basically completed the negotiations.But the process was interrupted in 2009,when Russia created a customs union with Kazakhstan and Belarus. The three decided to join the WTO as members of the customs union. But later, due to the relevant regulations of the WTO, they changed this plan and decided to join the WTO as individual nations. Because the customs union regulations conflict with Russia’s WTO commitments,Russia had to revise some of its WTO application documents, delaying the process further.

Obstacles

After joining the WTO,Russia will see a rise in oil and gas prices.This will drive up costs and fuel inflation,making its products less competitive internationally

Russia’s WTO application faced obstacles both at home and abroad. The external obstacles mainly came from the EU and the United States. Economically, the major points of contention between Russia and the EU included the opening up of Russia’s airspace rights, import tariffs on civil aviation technology and spare parts, and government policies supporting the aviation industry.

Another focus was energy, especially natural gas. The EU asked Russia to eliminate the price difference of natural gas on domestic and international markets. It required Russia to cancel the export tariff it places on natural gas, open up the crossborder gas transportation market, and eliminate the monopoly of Russian gas extractor Gazprom. The two sides also held fierce negotiations on the transition period for Russia’s entry into the WTO.

The United States was the last country to hold bilateral talks with Russia on WTO accession. The two sides argued over the opening of the Russian financial market,including banking and insurance. The United States asked Russia to cancel the import tariff on aviation technology and government subsidies for agro-industrial complexes. Intellectual property protection and quarantine of imported goods were also heated topics.

The main political obstacles for Russia came from the United States and Georgia.The Jackson-Vanik Amendment of the United States denies most favored nation status to countries with non-market economies that restrict emigration, and was occasionally applied to trade relations with Russia. But in June 2011, the Obama administration said it was making efforts to facilitate Russia’s WTO entry and may even repeal the Jackson-Vanik Amendment.

In 2004, Russia and Georgia signed a bilateral agreement on Russia’s WTO accession. But after their con fl ict in 2008, Georgia requested to reconsider the agreement.Their dispute focused on how to determine customs control over disputed territories.Currently, the two have not yet reached a fi nal agreement on this issue. And this may be the last obstacle restraining Russia’s accession to the WTO.

There were also internal obstacles for Russia. In order to stimulate economic recovery after the 2008 global fi nancial crisis,the Russian Government dramatically increased import tariffs on many commodities and established a number of restrictions.These actions added to the difficulty in its WTO accession.

For instance, the Russian Government issued a new rule in December 2010 requiring foreign companies engaging in car assembly projects in Russia to invest at least $500 million, and assemble at least 300,000 cars per year, of which 30 percent should use Russian engines.

If Russian-made parts exceed 60 percent of the whole car by 2020, foreign car companies will be allowed duty-free imports of certain spare parts. This provision hasaroused strong resentment from U.S. and European companies.

ELIMINATING BARRIERS:Russian President Dmitry Medvedev attends the EU-Russia Summit at the EU headquarters in Brussels on December 7, 2010

Impact

A recent survey showed 41 percent of respondents thought joining the WTO is good for Russia’s long-term interests. Russian experts predict that joining the WTO could increase Russian GDP by 1.2 percent per year. Experts from the World Bank predicted that in the long term, joining the WTO could help Russian products enter the international market and build a more effective international cooperation mechanism for Russian enterprises. It could also enhance the attractiveness of investment in Russia and expand Russia’s trade scale.

Russian officials believe joining the WTO may negatively impact certain enterprises or industries in the short term, but it will not affect the overall economy. In the long run, however, it will promote Russia’s economic development.

After joining the WTO, Russian products won’t be discriminated against when entering the international market. Russian companies can make full use of international trade dispute settlement mechanisms to resolve trade issues. Russian investors will have more overseas investment opportunities. And Russia’s in fl uence in international economic activities will be enhanced.

But joining the WTO could also have a negative impact. At the beginning, industries long protected by the government, including agriculture, light industry, machinery manufacturing, national defense, auto making, aircraft manufacturing, banking and insurance, will suffer competition from foreign companies.

After joining the WTO, Russia will see a rise in oil and gas prices. This will drive up costs and fuel in fl ation, making Russian products less competitive internationally.

In the meantime, Russia’s non-resource products lack competitiveness on the international market, and the opening up of its market may increase its dependence on imported commodities.

Transition

After entering the WTO, Russia will have to lower its average tariff on imported goods from 10.2 percent to 6.9 percent. In the meantime, it has set a four-to-seven-year transition period for various goods. In trade in services, Russia will make market access commitments in 116 of the 155 service subsectors de fi ned by the WTO.

In agricultural products, Russia will decrease its import tariff from 21.5 percent to 18.9 percent. From 2008 to 2012, it will provide a subsidy of $9 billion a year to its enterprises engaged in agricultural production and food export.

In addition, based on WTO regulations,Russia will revise the laws concerning customs procedures, technical barriers to trade,market protection, agricultural support,sanitation, animal and plant quarantine, and intellectual property.

Russia’s accession to the WTO can help it integrate into the multilateral trading system, a move that will allow its trade partners to enjoy a more open market and a more transparent trade and investment environment. This should create opportunities for Russia as well as the global economy.

The author is a research fellow with the Chinese Academy of International Trade and Economic Cooperation

SPACE PROWESS: Assembly line of Russia’s Soyuz TMA-20 spacecraft at the Russian-leased Baikonur Cosmodrome in Kazakhstan. U.S. and European companies are pushing for increased access to Russia’s aerospace market