U.S. - RUSSIAN TRADE RELATIONS & WTO ACCESSION. Sara Scarbro George Mason University. [Independent Study, Dr. Malawer -- Fall 2006.]

U.S. - RUSSIAN TRADE RELATIONS & WTO ACCESSION.

Sara ScarbroGeorge Mason University.

[Independent Study, Dr. Malawer -- Fall 2006.]

• Background: – Current Trends in US Russian Trade & FDI– US-Russian Economic & Political Relations

• Road to Accession:– Economic Reforms– Motivations for WTO Accession– Domestic Views on Accession

• Russia’s Accession: US Perspectives– Economic Concerns– Foreign Policy Concerns– Interest Groups & Domestic Views on Accession– US Congress

• Costs & Benefits of Russia’s WTO Accession– Economic Costs & Benefits – US– Economic Costs & Benefits – Russia – Political Costs & Benefits – US– Political Costs & Benefits – Russia

• Conclusion

OVERVIEW

BACKGROUND

Current Trends in US-Russian Trade & FDI

• Russia is the 33rd largest market for US exports• Exports have increased from $2.1 billion to $3.9 billion

between 1992 and 2005• Major US exports to Russia: nuclear reactors &

equipment (24.5%), vehicles (16%), aircraft & spacecraft (12.9%), electronics (5.3%) and medical equipment (3.9%)

• US trade deficit with Russia was $11.3 billion in 2005

BACKGROUND

Current Trends in US-Russian Trade & FDI

• Russia’s trade with the US accounts for 5% of total trade• Exports have increased from $0.5 billion to $15.3 billion

between 1992 and 2005• Major Russian exports to the US: oil and fuel (51%),

aluminum (10.5%), iron and steel (9.5%), copper and nickel (6.2%), coins and pearls (4.2%)

• Majority of Russian trade is with the European Union

Current Trends in US-Russian Trade• Russia is far behind other former-communist countries in

terns of FDI inflows• Between 1990-2000, average FDI inflows were $2,373

million compared with $3,669 million for Poland• Russia is ranked 87th, behind El Salvador and

Venezuela, by UNCTAD’s FDI performance index• US is the largest investor in Russia at $2.2 billion in 2004• The largest sectors receiving FDI are transport,

distribution services and food processing

BACKGROUND

US-Russian Economic & Political Relations• Jackson-Vanik Amendment: Amendment added to the

1974 trade act that allowed the President to deny PNTR to any country not receiving treatment in 1975

• Because of the Jackson-Vanik Amendment, Russia can be denied PNTR, which is required for accession to the WTO

• Most former-communist countries have been removed from the Jackson-Vanik Amendment

BACKGROUND

ROAD TO RUSSIA’S ACCESSION

Early Economic Reforms

• After the fall of communism, Russia implemented several key reforms including: privatization of state property, removal of price controls for producers and consumers, and a floating exchange rate

• The success of Russia’s reforms were less successful than other former-communist countries due to a weak mechanism for privatizing SOEs and the rise of corruption and crony capitalism

ROAD TO RUSSIA’S ACCESSION

Reforms Implemented for WTO Membership

• 1990: Granted observer status by the GATT• 1992: Adopted Harmonized Tariff System• 1990 – Present: Reduction in tariff rates • 1999: Investment Law• 2001: IPR Licensing Law• 2004: New Customs Code created• 2004: New Law on Copyright and Related Rights

ROAD TO RUSSIA’S ACCESSION

Motivations for WTO Membership

• Reassume global dominance lost after the fall of communism

• Reintegrate Russian economy with the rest of the world

• Rational needed for Putin to implement difficult economic reforms for many Russians

ROAD TO RUSSIA’S ACCESSION

Domestic Views on Accession• Some fear elimination of protection against competition,

particularly in the automobile, aviation, furniture, financial services, telecommunications and agriculture industries

• Political fear that strategic industries and natural resources should be protected from foreign investors

• Loss of jobs in uncompetitive sectors• Despite opposition, most Russians have little interest or

knowledge on the topic of WTO accession

US PERSPECTIVES ON WTO ACCESSION

Economic Concerns

• IPR protection and enforcement: Russia on 301 Priority Watch List

• Dual pricing system in the energy sector: different prices for domestic and international market

• Discriminatory SPS measures• Limits on foreign investment in the services sector

US PERSPECTIVES ON ACCESSION

Interest Groups Views on Accession• Steel Industry: Could face increased competition from

Russian imports• Recording Industry: Weak IPR protection and

enforcement in Russia• Very few US industries will be effected by increased

Russian inflows of goods

US PERSPECTIVES ON ACCESSION

Foreign Policy Concerns

• Mixed human rights record• Strong central power and weak democratic system• Cooperation with Iran on nuclear enrichment• Nuclear and military capabilities

US PERSPECTIVES ON ACCESSION

US Congress

• US Congress has to approve any bilateral trade deal and the granting of PNTR to Russia (removal of J-V amendment)

• Skepticism in Congress on Putin’s support for democracy

• Disdain for Putin’s human rights record• House & Senate want Russia to do more on IPR

enforcement and protection

COSTS & BENEFITS

Costs & Benefits for the US• Costs:

– Russian imports represent 0.9% of all imports entering the US due to limited export base in Russia: imports will have a limited affect on US producers

– Some import-sensitive industries could face increased competition, particularly steel

– Lack of IPR protection in Russia will create losses for US companies that depend on protection

COSTS & BENEFITS

Economic Costs & Benefits for the US• Benefits:

– Competitive Russian exports (oil, gas, natural resources) are in demand in US and elimination of tariffs would reduce costs for consumers

– National Treatment for US companies invested in Russia – improve investment environment

– WTO membership will provide forum for US to challenge Russia to change energy pricing structure, reduce non-tariff barriers to trade under the DSU

COSTS & BENEFITS

Economic Costs & Benefits for Russia

• Costs:– Increased imports in import-sensitive industries will

force uncompetitive industries to close– Additional effects of closures on employment and

standard of living for labor in those industry areas

COSTS & BENEFITS

Economic Costs & Benefits for Russia• Benefits:

– Increase in exports of gas (2%), chemical products (3%), non-ferrous metallurgy (7%)

– Reduction of tariffs will increase Russian value of consumption by 2.5%

– Inflow of cheaper imports will reduce prices to consumers

– Increased FDI inflows will increase Russian value of consumption by 5.5%

– Membership to WTO will force reforms to economy and increase cooperation with other governments

COSTS & BENEFITS

Accession Benefits the

Economies of US & Russia• Increased economic activity and productivity in Russia• Cheaper energy imports for US consumers• Improved investment climate in Russia for US MNCs• Mechanism for Russia to reform economy and for

resolution of trade-related disputes with the US• Increased integration of Russia into world economic

community

COSTS & BENEFITS

Political Costs & Benefits for the US• Costs:

– By permitting WTO Accession, US may be seen as tolerant of Russia’s mixed human rights record

– However, US has permitted Saudi Arabia (monarchy) and Pakistan (former military dictatorship) to join the WTO

COSTS & BENEFITS

Political Costs & Benefits for the US• Benefits:

– Approving accession fits within the new National Security Strategy: strengthening global alliances and increasing global growth through trade

– Accession will engage Russia in the fight against terrorism and preclude Iranian uranium enrichment

COSTS & BENEFITS

Political Costs & Benefits for Russia• Benefits:

– Russian government fully supports accession, no perceived political costs

– Russia will benefit strategically from greater integration into the global economy

– Russia will benefit from the gains from trade that will increase economic growth

COSTS & BENEFITS

Accession Benefits both the US & Russia• Accession will engage Russia in a viable international

entity• Engagement is better than disengagement given

Russia’s weapon capabilities and strategic influence in Asia, Europe and the Middle East

• Granting WTO accession will provide the US with a bargaining chip for dealings with Iran and Iraq

CONCLUSION

WTO Accession is beneficial for US & Russia

• Russia is the largest country not included in the WTO • Russia’s inclusion in the WTO will benefit consumers

and business in the US and Russia• Engagement of Russia by approving bilateral trade deal

and granting PNTR is better than disengagement

CONCLUSION

Outlook for Accession• US-Russia signed bilateral market access agreement at

November 2006 APEC meeting– Russia still must be granted PNTR by the Congress to

complete WTO accession• Midterm Elections November 2006: Democrats will control

congress in January 2007– Not as supportive of trade as Republicans nor tolerant of

Russia’s human rights record• If Russia makes a good faith effort with Iran or other

strategic interest, Congress could approve accession in 2007

REFERENCES

Bureau of Economic Analysis, US Department of Commerce. www.bea.gov Bureau of Democracy, Human Rights and Labor, US Department of State Country Report on Human

Rights Practices Washington: GPO, 2006. EastWest Institute, Regional Report, vol. 7 no. 22, July 10, 2002. “How to become a member of the WTO”, World Trade Organization, www.wto.org, 2006. Jensen, Jesper, Rutherford, Thomas, Tarr, David, “Economy-Wide and Sector Effects of Russia’s

Accession to the WTO, The World Bank .Sabelinkov, Leonid “Russia on the Way to the World Trade Organization” New Currents in Trade

Policy Thinking April 1996.Trade Stats Express, International Trade Administration, Department of Commerce.

www.tse.export.gov United States Congressional Research Service Russia Washington: GPO, 2006. United States Congressional Research Service Russia’s Accession to the WTO Washington: GPO,

2006. United States Trade Representative, USTR Annual Report 2006 Washington: GPO, 2006.The White House, National Security Strategy, March 2006 World Investment Report 2006, UNCTAD, FDI Statistics. World Trade Organization, Draft Report of the Working Party.World Trade Organization, Draft Report of the Working Party on the Accession of the Russian

Federation to the World Trade Organization. Yergin, Daniel. The Commanding Heights New York: Touchtone Books, 2002.