Russia is poised to join the World Trade Organization (WTO), solidifying its 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is whether the United States will embrace Russia as a fellow WTO member or forfeit the benefits for the sake of an outdated policy rooted in the Cold War.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. WTO members are expected to approve Russia's admission at the organization's ministerial meeting in Geneva, Switzerland, December 15–17. 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. 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 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.
Daniel Griswold is director of the Herbert A. Steifel Center for Trade Policy Studies at the Cato Institute. Douglas Petersen is a former research assistant at the center.
More by Daniel GriswoldThe 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,1 even though it is the world's 11th largest economy in exchange-rate terms.2 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.3 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.4
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.5 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 2010.6 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.7
PNTR Key to Expanding U.S. 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 would 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.8
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.9 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.10 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.11
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 2010.12 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.13
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.14 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.15
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. AlthoughRussia 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.16
Lingering Objections to Normalizing Trade with Russia
Balanced against those advantages, certain members of Congress have raised a number of potential objections to granting permanent normal trade relations to Russia. The biggest issues raised are remaining trade barriers that the Russian government maintains against certain goods of export interest to the United States, lack of adequate protection of intellectual property, the misuse of sanitary and phytosanitary (SPS) regulations as trade barriers against agricultural goods, and ongoing political restrictions in Russia. While each of those concerns is real, none of them justify withholding permanent normal trade relations.
Abuse of Food Safety Regulations
A key issue for agricultural exporters will be Russia's commitment on sanitary and phytosanitary standards, which concern the application of food safety and animal and plant health regulations. Among the major remaining issue is that of equivalence, which is a WTO SPS requirement committing members to accept exporting members' differing SPS standards and procedures so long as they are demonstrably and objectively sufficient to satisfy the importing member's SPS protections. Russia allegedly neither explains its SPS measures nor utilizes specific and consistent scientific procedures in its evaluations. Examples of allegedly inconsistent and WTO-illegal requirements include antiquated and prescriptive rules for slaughter plant hygiene, a zero tolerance for antibiotics in meat, opposition to chlorinated washes for poultry, and nonscientific standards for food-borne pathogen control.
Also relevant to SPS, a regional customs union of which Russia is a member requires Russia to ensure that any SPS customs union regulations (which are still being developed) with Belarus and Kazakhstan are consistent with WTO rules. Russia thus must coordinate SPS issues with not only major WTO partners such as the United States and the European Union, but also customs union partners and several domestic agencies.
One of the most contentious issues in U.S.-Russia trade relations is the treatment of imported poultry from the United States. Due to rising per capita Russian incomes that have resulted in increased demand for meat, Russia is one of the largest export markets in the world for American poultry producers. On January 1, 2010, Russia implemented new regulations on imported poultry, which made it more difficult for U.S. exports to meet Russian requirements for sanitary preparation.
Ensuring that SPS measures do not become disguised trade barriers is one of the most valuable contributions of WTO membership. The U.S. government is right to press this issue with the Russian government, but it should not become a barrier to passing PNTR. The United States will be in a better position to challenge Russia once it is a WTO member by using, or threatening to use, the organization's dispute settlement mechanism. By joining the WTO, Russia will have committed to following the organization's detailed SPS rules, which the United States can then seek to enforce through established procedures rather than brinksmanship.
Automobile Sector and Other Protection
Another politically sensitive issue is Russia's significant remaining trade and investment barriers on automobiles. Russia recently updated its automobile investment policy in a way that contradicts the WTO's existing rules on trade-related investment measures (TRIMs). The Russian program allegedly "doubles the local content rules that foreign companies need to observe in order to benefit from tariff cuts for imported parts."17 The program requires, for example, foreign manufacturers to "use up to 60 percent of local content in their Russia-made vehicles, register a certain amount of intellectual property in Russia and build entire components such as engines within Russia in order to receive tariff reductions on the parts and components they import into Russia."18
In addition, the program also requires that foreign auto companies located in Russia invest in Russian-based research and development. According to Russian media, Russian prime minister Vladimir Putin has stated publicly that Russia will not repeal the auto investment program. In fact, Russia's auto policy was amended in December 2010 (Decree 166) to increase local content requirements — a clear sign of movement counter to liberalization.
Negotiations with Russia over tariff-rate quotas for beef, pork, and poultry have made little progress and met resistance. The United States and other potential exporters (especially the European Union) have pushed Russia for concessions, while Russia has failed to specify TRQ levels to which it is willing to commit. U.S. farmers stand to gain significantly from improved market access for agriculture if issues such as the TRQs can be addressed. Again, the U.S. exporters will stand a better chance of prevailing in such disputes if Russia is a member of the WTO and the United States is a full participant in its membership.
Lack of Adequate Intellectual-Property Protection
Intellectual property rights (IPR) are also frequently cited as an issue in U.S.-Russia trade. In 2010 the U.S. International Trade Commission listed Russia on its "priority watch list" of nations who are failing to meet their obligations to enforce intellectual property rights. According to the annual USITC report on IPR enforcement:
While Russia has made some progress over the past several years in improving IPR protection and enforcement, concerns remain, particularly with respect to Russia's continued failure to implement fully its commitments in the November 2006 Bilateral Agreement on Protection and Enforcement of Intellectual Property Rights.19Particular areas of concern for the USITC were optical disc and internet piracy, "unfair commercial use of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products," and music and movie counterfeiting.
Russian accession to the WTO requires a commitment from the Russian government to protect and enforce intellectual property rights. Reportedly, the United States is "satisfied with the intellectual property section of Russia's working party report, which includes legislative and enforcement obligations."20
United States satisfaction stems largely from recent changes made by Russia to its IPR laws. However, the extent to which Russia will enforce its new protections remains uncertain. Many high-technology U.S. firms and industries remain skeptical, and a Russian social networking website remains one of the world's most popular sources for illegal music downloads. Some reports suggest that additional Russian legislation ensuring that internet service providers will be held liable for IPR infringement may be a prerequisite for WTO accession or U.S. granting of MFN status.
Like the concerns over the abuse of SPS regulations, intellectual property protection in Russia is a legitimate concern. But like SPS, it is no reason to oppose granting of permanent normal trade relations. As a fellow WTO member with Russia, the U.S. government will be able to insist on compliance with the full weight of the WTO's dispute settlement mechanism.
Human Rights Concerns
Beyond those commercial concerns, members of Congress may be reluctant to grant PNTR to Russia unless the legislation can be used as a bargaining chip to pressure Russia on human rights.
House Foreign Affairs chairman Ileana Ros-Lehtinen stated on July 7, 2011, that PNTR for Russia is "simply not an option" absent human rights reform, a sentiment shared by other members of Congress.21 Some kind of compromise on human rights might become a necessary trade-off in order to obtain congressional support for MFN and repeal of Jackson-Vanik. One option would be a bill mandating asset freezes and/or travel bans for certain Russian individuals, particularly those involved in the murder of Sergei Magnitsky, a Russian lawyer who had recently unearthed tax fraud by the Russian government and then died while in custody.
Although such narrowly crafted bills may provide the kind of compromise that is needed, conditioning PNTR on an overall improvement in Russia's human rights record would be a mistake. Trade policy has proven to be an ineffective tool for imposing fundamental political changes in other countries. The World Trade Organization was not set up to enforce human rights but more narrowly to promote trade liberalization among its members. Promoting respect for human rights around the world is a worthy cause, but threatening to withdraw trade access for an entire nation is not a proper human-rights tool.
Just as WTO member governments pursue a wide range of trade policies, they also represent a wide range of political regimes. Of the organization's 153 members, more than 20 are at least as or more repressive of human rights than Russia, as measured by the annual survey of Freedom House. The list of WTO members that, like Russia, are classified by Freedom House as "Not Free" includes Bahrain, Cambodia, Chad, China, Cuba, Egypt, Jordan, Oman, Qatar, Rwanda, Saudi Arabia, Vietnam, United Arab Emirates, and Zimbabwe.22 It would be inconsistent with the spirit of the WTO, as well as established U.S. policy, to oppose Russia's membership in the organization because of its restrictions on political and civil freedoms.
The Mechanics of Jackson-Vanik
Once those objections are overcome, the last remaining obstacle will be the permanent graduation of Russia from the Jackson-Vanik amendment. This amendment is yet another example of a law that remains on the books long after its original justification has ceased to apply. The law originated in the Cold War between the United States and the Soviet Union, which spanned four decades from the late 1940s to the fall of the Berlin Wall.
The United States suspended, in 1951, MFN status to all communist countries (with the exception of Yugoslavia) under Section V of the Trade Agreements Extension Act (later superseded by Title IV of the Trade Act of 1974).23
Domestic U.S. law, in the form of Title IV of the Trade Act of 1974 (as amended), in fact mandates that MFN status be withheld from certain countries — that is, nonmarket and communist countries unable or unwilling to satisfy Section 402 of the Trade Act of 1974. Also known as the Jackson-Vanik amendment, Section 402 requires foreign adherence to certain freedom of emigration requirements in order to qualify for MFN. Section 402 stipulates that "to assure the continued dedication of the United States to fundamental human rights ... products from any non-market economy country shall not be eligible to receive nondiscriminatory treatment (normal trade relations)."
Specifically, Section 402 states that the United States cannot conclude a commercial agreement with any such country so long as that country
1. Denies its citizens the right or opportunity to emigrate;Although Jackson-Vanik has not expired, the majority of countries originally susceptible to the amendment have shifted toward economic liberalism and joined (or applied to join) the WTO. Former or remaining communist countries that have joined the WTO (by date of accession) include Slovakia (1/1/95), Romania (1/1/95), Czech Republic (1/1/95), Hungary (1/1/95), Bulgaria (12/1/96), Mongolia (1/29/97), Kyrgyzstan (12/20/98), Latvia (2/10/99), Estonia (11/13/99), Georgia (6/14/00), Albania (9/8/00), Lithuania (5/31/01), Moldova (7/26/01), China (12/11/01), Armenia (2/5/03), Cambodia (10/13/04), Vietnam (1/11/07), and Ukraine (5/16/08). Other former communist countries that have applied for WTO membership and are in accession negotiations include Azerbaijan, Belarus, Kazakhstan, Russia, Tajikistan, and Uzbekistan.
2. Imposes more than a nominal tax on emigration or on the visas or other documents required for emigration, for any purpose or cause whatsoever; or
3. Imposes more than a nominal tax, levy, fine, fee, or other charge on any citizen as a consequence of the desire of such citizen to emigrate to the country of his choice.
Under WTO rules, MFN must be applied "unconditionally." However, WTO Article XIII permits the nonapplication of multilateral trade agreements (e.g., MFN) among particular members under predetermined conditions. Specifically, Article XIII states that nonapplication "may be invoked between original Members of the WTO which were contracting parties to GATT 1947 only where Article XXXV of that agreement had been invoked earlier and was effective as between those contracting parties at the time of entry into force for them of this Agreement." In addition, Article XIII states that WTO agreements "shall not apply as between any Member and any other Member if neither of the Members, at the time either becomes a Member, does not consent to such application." Application of Article XIII essentially amounts to an official and legal declaration that any and all WTO privileges, obligations, and mechanisms are nonexistent and inapplicable between the newly acceding WTO member and the member invoking Article XIII. The United States remains the only country to have evoked Article XIII.
When a WTO member thus "determines that it cannot, for political or other reasons, accede to this or any other GATT/WTO principle toward a newly acceding member, it can 'opt-out' of its obligations toward that member by invoking the non-application provision."24 In this way, a current WTO member such as the United States can legally refrain from granting unconditional MFN to a newly acceding member such as Russia. The catch is that the member opting out of such an obligation is not entitled to benefit from the increased trade liberalization that the new member has agreed to in its accession protocol. So if Congress refuses to pass PNTR, Russia will become a member of the WTO regardless, but U.S. producers will be denied the same full access to the Russian market that will be available to other WTO members.
From Cold War to Normal Trade Relations
For the past several years, the United States has granted Russia conditional normal trade relations status, which has provided the United States with limited trade benefits inferior to those that would be fully available after Russian accession to the WTO. Legally, the conditional normal trade relations may be extended only if the U.S. president decides that the country in question is in compliance with the emigration rights requirements of Jackson-Vanik. Semiannual compliance reviews occur, and U.S.-Russia trade continues to be artificially and legally restrained.
As explained above, WTO accession does not necessarily require that the United States grant Russia MFN/PNTR. Rather, the United States may invoke the WTO's nonapplication provision and, by so doing, refrain from a WTO-protected bilateral and reciprocal trade relationship with Russia. However, in order for the United States to fully benefit from Russian accession to the WTO, the United States must grant Russia permanent normal trade relations and most favored nation status, a step that will require approval by Congress.
When policymakers weigh the ineffectiveness of the Jackson-Vanik Amendment against all the advantages of ushering Russia into the WTO, denying permanent normal trade relations simply should not be an option. The best policy toward Russia at this stage in our relationship is to repeal any and all Jackson-Vanik Amendment restrictions against Russia immediately and prior to Russia's accession to the WTO. Procedurally, Congress should terminate application of the amendment, thereby enabling President Obama to grant MFN status to Russia, which he should do. When and if Russia accedes to the WTO, the United States should grant Russia permanent normal trade relations and not invoke the WTO's nonapplication principle.
Pursuing such a policy would yield immediate and tangible benefits for the American economy without sacrificing any vital foreign policy goals.
By any measure, the Jackson-Vanik Amendment has failed in its purpose to promote emigration rights. It was not the amendment that secured those rights for the citizens of the former Soviet Union but rather the system's own collapse in 1989–91 under internal and external pressures. While the desire for improved human rights abroad is laudable, economic sanctions have proven to be an ineffective means by which to promote these human rights goals. Mandating that trade liberalization cannot occur absent emigration freedom is misguided. A more effective strategy for improving human rights, in fact, is to increase trade liberalization, thereby enhancing opportunities for people with limited human rights to enrich themselves and interact more frequently with people with greater human rights.
By granting Russia conditional most favored nation status annually beginning in 1994, the United States has implicitly acknowledged that Russia is in full compliance with the Jackson-Vanik Amendment's emigration requirements. Rather than continuing this hollow exercise with no discernable purpose, the United States should formally and officially revoke Jackson-Vanik restrictions as they pertain to Russia.
Contrary to popular belief, Jackson-Vanik itself does not prevent Russia from becoming a full member of the WTO. Rather, failure by the United States to revoke Jackson-Vanik restrictions and grant MFN/PNTR (in the light of Russian WTO accession) would mean that the United States must invoke the WTO's nonapplication provision and, by so doing, refrain from a WTO-protected bilateral and reciprocal trade relationship with Russia.
The United States would benefit more from having Russia in, rather than out of, the transparent, multilateral, and rules-based trade system. Application of WTO Article XIII (the nonapplication provision) essentially amounts to an official and legal declaration that any and all WTO privileges, obligations, and mechanisms are nonexistent and inapplicable between the two concerned WTO members. Currently, the Russian economy operates largely outside of the formal, rules-based international system to which the vast majority of countries belong. In doing so, Russia denies American and other foreign firms potential benefits and protections available via WTO-monitored U.S.-Russia trade. Russian accession to the WTO (and U.S. granting of PNTR) thus would impose on Russia new levels of transparency and legal obligations relative to U.S.-Russia trade.
Finally, granting Russia MFN trade status prior to WTO accession may function as a source of goodwill, motivating Russia to liberalize more quickly, deeply, and transparently. While no results can be guaranteed, granting Russia permanent normal trade relations would expand the freedom of American companies to reach new customers while further encouraging Russia's uncertain progress toward a more open, modern, and globally integrated economy.
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