Stewart M. Patrick

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A Rocky Start to Russian WTO Membership

by Stewart M. Patrick
August 22, 2012

Russia's (then) Prime Minister and (now president) Vladimir Putin (L) chairs a meeting on automobile assembly agreements, regarding the country's entry to the WTO, in Moscow June 9, 2011 (Alexsey Druginyn/RIA Novosti/Pool/Courtesy Reuters). Russia's (then) Prime Minister and (now president) Vladimir Putin (L) chairs a meeting on automobile assembly agreements, regarding the country's entry to the WTO, in Moscow June 9, 2011 (Alexsey Druginyn/RIA Novosti/Pool/Courtesy Reuters).

After the longest accession negotiations in the history of the WTO, Russia today has finally joined the World Trade Organization. This is an important milestone for the WTO—and for Russia, which according to the CIA possesses the world’s seventh largest economy, with a GDP of $1.9 trillion. For Moscow, it’s certainly been a long road. The Russians first submitted an application for WTO membership back in June 1993, under the newly democratic government of Boris Yeltsin.

So what took so long? A baby born in 1993, after all, would now be a legal adult. Russia’s political system, alas, has matured more slowly. During the 1990s, Russia’s political volatility, the slow pace of domestic economic reforms, a devastating ruble crisis, and opposition from (still) influential communists conspired repeatedly to delay WTO negotiations. During his first presidential term, Vladimir Putin began a concerted push for WTO accession, implementing necessary customs reforms. But his subsequent retrenchment on state control over the oil and natural gas sectors, as well as persistent frustrations over inadequate protection of intellectual property rights (IPR) damaged Russia’s candidacy. By 2009, Putin had abandoned Russia’s individual WTO application and proclaimed that Russia would apply as a customs union with Belarus and Kazakstan, an arrangement that subsequently fell apart.

Things began to turn around only after a June 2010 meeting between U.S. President Obama and President Medvedev, during which the leaders pledged to support Russia’s WTO bid, including through U.S. technical assistance. In October 2010, the office of the U.S. Trade Representative announced that outstanding issues, including Russia’s treatment of IPR, transparency questions, and Russian agricultural subsidies had been resolved. On December 16, 2011, WTO ministers approved the Russian accession package at their Eighth Ministerial Conference, giving Russia 220 days to pass relevant domestic legislation. The Russians did so last month, at the eleventh hour, enacting legislation in the Duma  (lower house) and Federation council (upper house).  Putin signed the accession papers, sending them to the WTO on July 23.

Accession should have a salutary impact Russia’s policies and institutions, accelerating the modernization and liberalization of an economy that continues to rely heavily on “inefficient import substitution and heavily subsidized industrialization.” All things being equal, adherence to WTO standards should lead to reduced tariff and non-tariff barriers, greater market access for foreign goods and services, more consistent and secure rules for the treatment of foreign investment, improved IPR protection , a reduction in trade-distorting agricultural subsidies, more transparency in public procurement, and more efficient customs administration.

In the short term, the growth of imports may bring dislocation, threatening uncompetitive Russian factories and farms. But the overall result should be to “lower prices for consumers and help shift resources to more efficient methods of production.” The World Bank suggests that WTO membership could boost Russia’s annual GDP by 3.3 percent ($49 billion) in the medium term and 11 percent in the long run, while wages could rise some 4-5 percent, benefitting the vast majority of the population. (Russia’s growth rate is currently 4 percent, down from 7 percent before the 2008 global recession, and fluctuates with fossil fuel and other commodity prices).  Domestically, opposition to WTO membership has been largely confined to the Communist Party, whereas the bulk of Russian citizens appear to regard accession  as an essential step “towards badly needed global economic integration.”

Russia’s trading partners are also likely to benefit. Under the new regime, average import tariffs will drop from 10 percent today to 7.8 percent, and then to 6 percent by 2015. Moscow has also committed to limit agriculture subsidies, opening up this politically sensitive sector to increased foreign competition. Foreign investors should also have cause to celebrate: The new deal will scrap current limits on foreign ownership of telecommunications and banks. Foreign companies will be allowed to apply for government contracts. Finally, the Russian government has pledged greater enforcement of IPR (though many international experts remain skeptical, given the power of illicit networks in the Russian economy).

The United States, which exports some $9 billion of goods and services to Russia annually, could double that figure, resulting in “thousands of new jobs”, according to Senators Max Baucus and John Kerry. But one big hurdle remains in the normalization of U.S.-Russian relations: the four-decade-old Jackson-Vanik amendment. A Cold War provision inserted into the 1974 Trade Act (Title 19, Chapter 12, Subchapter IV, Part 1, § 2432), Jackson-Vanik was intended to punish the Soviet Union for placing restrictions on Jewish emigration. The legislation prevents the U.S. president from establishing normal trade relations with any country that refuses to allow its citizens to emigrate or taxes them too heavily when they attempt to do so. The amendment does contain a waiver provision, however, and every administration since 1994–Democratic and Republican alike—has availed themselves of this has discretion to declare Russia in compliance. Moreover, as Democratic Senators Max Baucus of Montana and John Kerry of Massachusets recently noted, “the American Israel Public Affairs Committee, the National conference on Soviet Jewry, and even Israel now support the repeal of Jackson-Vanik for Russia.” Influential conservatives also support its repeal.

The Jackson-Vanik amendment is a clear violation of WTO rules, which mandate that every WTO member must grant all other members unconditional Permanent Normal Trade Relations (PNTR) status.  And yet, perversely, the provision lives on, thanks to an unusual constellation of political forces in Congress and a failure of White House leadership. American labor unions support Jackson-Vanik for protectionist reasons, and it’s unclear how many Democrats are prepared to break ranks with this constituency. Meanwhile, Republicans have little interest in tackling this politically charged issue themselves, particularly during a presidential election year. Republican legislators blame the President for failing to mobilize his own party behind repeal, and accuse Mr. Obama of meekness towards Russia (given his lack of support for the Magnitsky bill that would blacklist Russian human rights violators ). Senator Orrin G. Hatch, Republican of Utah and a member of the Senate Finance Committee that unanimously recommended the repeal of Jackson-Vanik, charged that the administration was asking “Congress to simply pass permanent normal trade relations and remove Russia from long-standing human rights law, while ignoring Russia’s rampant corruption, theft of U.S. intellectual property, poor human rights record, and adversarial foreign policies.” Thanks to these partisan differences, Congress declined to repeal the amendment and approve PNTR with Russia before taking its summer recess.

At this point, it’s uncertain exactly what effect this action (or inaction) will have. Under WTO rules, Russia would be “within its rights to withhold the benefits of its accession-related reforms from U.S. companies.” American business leaders have vociferously called for the repeal of Jackson-Vanik since they stand to lose the most. For now, Moscow has pledged to apply its new WTO trade rules consistently to all members, including the United States, despite Jackson-Vanik. But it certainly doesn’t make for a smooth start to Russia’s tenure with the WTO, and could easily have an impact on broader U.S.-Russian relations. More generally, the amendment serves as an enduring land mine any future administration or Congress could exploit for nakedly protectionist purposes.

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