On December 16th, the World Trade Organization’s 153 members unanimously approved Russia’s accession as a member. This will solidify Russia’s transition from a closed communist economy to a full participant in the global marketplace. The only question is whether the United States will embrace Russia as a fellow WTO member or forfeit the benefits for the sake of an outdated policy rooted in the Cold War.

Russia’s petition to join the WTO dates back to 1993. Since that time it has negotiated accession agreements with all major WTO members, including the United States, committing to open its economy further and to accept WTO rules on nondiscrimination, dispute settlement, intellectual property, and a range of other trade-related issues. To enjoy the enhanced access to Russia’s market, the U.S. government will need to grant permanent normal trade relations (PNTR) to the Russian Federation.

In The Spotlight

Under the 1974 Jackson-Vanik Amendment, Congress is required annually to pass a special exemption for Russia extending it conditional access to the U.S. market. The law was originally intended to withhold normal-trade-relations status from communist countries that did not allow Jewish citizens to freely emigrate. Even after the fall of the Berlin Wall in 1989 and the dissolution of the Soviet Union in 1991, the law continued to apply to most former communist countries because of their continued status as “nonmarket economies.”

As a condition of membership in the WTO, all members are expected to grant unconditional most-favored nation (MFN) status to all other members. This means each WTO member must offer the same level of market access to other members without attaching special conditions to that access. Continued application of Jackson-Vanik to Russia would be a violation of unconditional MFN status, since it depends on Congress granting renewal each year.

If Congress does not grant PNTR to Russia by repealing Jackson-Vanik, then the enhanced market-access commitments Russia has made in its accession protocol would not apply to exports from the United States. Producers in the other 150-plus members would enjoy those benefits but not producers in the United States.

The stakes are high. Russia is a major yet still underdeveloped market for a range of American exports, from poultry to aircraft. If U.S. exporters are not granted the more favorable access under Russia’s accession protocol, they will face discriminatory tariffs that will put them at a disadvantage against competitors in other major trading nations. That market share, once lost, would be difficult to regain. Granting PNTR to Russia thus becomes important to promoting U.S. trade as a sustainable boost to the sputtering U.S. economy.

Expanding U.S.-Russian Commercial Relations

Russia has emerged as a major commercial partner of the United States, although the relationship remains underdeveloped relative to the size of Russia’s economy and the considerable economic liberalization following the collapse of the Soviet Union. Through the first three quarters of 2011, Russia ranked 31st among nations as a market for U.S. goods exports, and 16th as a source of U.S. goods imports. In two-way trade (exports plus imports), Russia ranks as America’s 23rd largest trading partner, just below Thailand and Nigeria, even though it is the world’s 11th largest economy in exchange-rate terms. Russia remains by far the largest economy and the only member of the G-20 group of major economies still outside the World Trade Organization. Of the 50 largest economies in exchange-rate terms, the oil-exporting Islamic Republic of Iran is the only other one that is not a member.

Trade with Russia has, however, grown significantly over the past decade. From 2000 to 2010, U.S. goods exports to Russia increased by 187 percent and U.S. imports from Russia increased by 235 percent. During the same period, total U.S. exports and imports grew 63 percent and 57 percent respectively. The growth in import value from Russia can be attributed at least partially to an increase in the world prices of natural resources such as oil and natural gas, which account for a large share of U.S. imports from Russia. Over this same time period, world prices for crude oil have increased by 183 percent.

U.S. trade with Russia is highly concentrated in a few select industries. In 2010 the top five import categories (according to the 2-digit Harmonized System) made up over 70 percent of total U.S. imports from Russia. These categories included precious stones and metals, inorganic chemicals, mineral fuels, aluminum, iron and steel, and fish and other seafood. Examining the industry concentration of imports using the North American Industry Classification System (NAICS) produces an even greater level of concentration: just three NAICS 3-digit categories (petroleum and coal products, oil and gas, and primary metal manufacturing) made up 86 percent of imports from Russia in 2010. U.S. exports to Russia are also highly concentrated: aircraft, machinery, and meat (according to the 2-digit Harmonized System) make up about 60 percent of U.S. exports to Russia. A calculation using comparable NAICS categories yields a figure closer to 54 percent.

PNTR Key to Expanding American Exports

American producers will be in a better position to expand their exports to Russia if the United States can participate fully in Russia’s membership in the WTO. And that can happen only if Congress grants Russia permanent normal trade relations.

Russia’s accession to the WTO will almost certainly result in increased U.S. exports, thereby contributing to President Obama’s National Export Initiative goal to double exports from 2009 to 2014. Following a dip during the “Great Recession” of 2008–09, U.S. exports to Russia have rebounded strongly. The increasing economic liberalization and development of Russia in recent years has coincided with increased U.S. exports, with the growth rate of U.S. exports to Russia twice as large as the growth rate of U.S. exports to the rest of the world. By some estimates, U.S. exports to Russia could double in the five years following its accession to the WTO.

Demand within the Russian market for U.S. goods and services is significant and increasing. Moreover, that demand spans across multiple economic sectors, including agriculture, services, capital equipment, manufactures, machinery, and advanced technologies. In 2010, for example, 66 million Russians were Internet users. This number is expected to jump by 20 percent in 2011, stoking demand for U.S.-branded computer software and hardware. As a condition of its WTO entry, Russia has committed to joining the Information Technology Agreement, which eliminates duties on a wide range of IT, communication, and other high-tech hardware. Also, Russia is the 8th largest market for U.S. exports of PVC and other polymers, and exports of these goods grew 500 percent between 2008 and 2010.

Furthermore, Russia will require an estimated 960 new civilian aircraft in the next 20 years to replace its aging fleet, and a proposed reduction from 20 percent to 7.5 percent in tariffs on wide body aircraft would benefit U.S. producers significantly. Growing demand for Russia’s vast natural resources—including farming, mining, oil, and energy products—drives Russian demand for heavy and complex machinery, which the United States is in an optimal position to export. Russia has committed to a bound tariff (upon entering the WTO) of 5 percent in this sector.

Meat is another area in which Russia’s accession would greatly benefit the United States. Despite a temporary decline in exports to Russia due to a chemical-based ban on U.S. poultry, Russia remained one of the top 10 markets for U.S. poultry exports in 2010. As a member of the WTO, Russia would have to adhere to international standards in regulating its meat imports, ensuring greater predictability for U.S. exports.

This is also true for pork products, and U.S. pork exports increased tenfold in the five years preceding the economic crisis. Exports of U.S. beef to Russia also have risen, jumping to $102 million in 2010. Russia’s agreement to bind its tariff and comply with WTO standards in agriculture will both increase the standards of meat within Russia and help to ensure and expand the market for U.S. goods.

Russia has also committed to liberalization measures in its financial sector. This has opened up Russia as a potential recipient of considerable foreign direct investment. The U.S. financial sector is poised to gain from Russian accession commitments to allow 100 percent foreign ownership of banks and financial institutions, to liberalize financial services across borders, and to allow internal securities trading by foreign firms. Similarly, such U.S. sectors as telecommunications, professional services providers, and distribution operators would benefit from Russian liberalization of foreign investment and ownership, and several high-tech industries would benefit from Russia’s adherence to the WTO’s Trade-Related Aspects of Intellectual Property (TRIPs) agreement.

It is important politically (if not economically) to note that Russia exports mainly natural resources, energy products, and high-value goods, which typically face low to zero tariffs already. Those who misguidedly argue that increased U.S. trade with countries such as China, Mexico, and smaller, less-developed countries has had a detrimental impact on certain more labor-intensive U.S. industries need not worry that liberalized trade with Russia will produce similar results. Moreover, Russia seeks to import U.S. technologies, capital equipment, and advanced machinery. In sum, U.S.-Russia trade is significantly less competitive than it is collaborative and complementary.

Finally, Russia’s entry into the WTO would benefit the United States indirectly by spurring economic growth in Russia and institutionalizing economic reforms. Although Russia remains a mixed economy with widespread government intervention, it has been liberalizing its trade regime. The average level of import tariffs in Russia has dropped from 14 percent to 8 percent, according to World Bank economist David Tarr. Membership in the WTO would help to lock in those gains. The World Bank also predicts WTO membership would increase the size of the Russian economy by as much as 11 percent in the long run, further boosting demand for U.S. exports.

Douglas Petersen, a former research assistant at the Herbert A. Steifel Center for Trade Policy Studies at the Cato Institute, contributed to this article. This article appeared in Impact Analysis, January-February 2012.
Share

Daniel Griswold
About The Author Daniel Griswold [Full Bio]
Daniel Griswold is senior research fellow and co-director of the Program on the American Economy and Globalization at the Mercatus Center.




www.mercatus.org


Talkback

  • No comments found

Leave your comments

0

Quick Search

Stock Watch

1 DOW 20,931.48
-49.85 (-0.24%)    
2 NASDAQ 6,047.61
-1.33 (-0.02%)    
3 S&P 2,384.08
-4.69 (-0.20%)    

FREE Impact Analysis

Get an inside perspective and stay on top of the most important issues in today's Global Economic Arena. Subscribe to The Manzella Report's FREE Impact Analysis Newsletter today!