One Year In The World Trade Organization
- By Mark H. Gay
- Jan. 13 2014 18:45
No one expected Russia's first year under the flag of the World Trade Organization to be plain sailing. But judging by several corporate decisions to expand Russian operations, companies are banking on a fair wind for commerce.
As Art Franczek, president of The American Institute of Business, and an expert on trade issues, argues in the accompanying interview, several global automakers announced decisions to expand their Russian operations once the terms of the WTO accession deal became clear.
"Renault-Nissan and Mercedes expanding their production, I don't think that is a coincidence. By August you had the certainty of the extension of the localization program and the 60 percent reduction in import duties," said Franczek.
Since joining the World Trade Organisation Russia has also begun to cut the stiff tariffs on the import of new cars. But it offset the import tariff with a new green tax.
Energy, chemicals and metals companies were the main Russian lobbyists in favor of joining the trade body.
It introduced the auto recycling fee days after it joined the WTO, to cover the future cost of recycling the car. However, the government does not impose such a tax on cars produced in Russia. The United States has joined the European Union and Japan to raise a trade dispute over what it says is an illegal trade barrier against imported cars.
The EU says there are still a wide variety of regulations that impose costs on trade, ranging from alcohol levies to combine harvesters. Russian politicians and some businesspeople complain that WTO membership opens the country to global competition too soon. The head of harvester manufacturer Rostselmash Konstantin Babkin said his industry was among the hardest hit.
The terrain was roughest for agricultural machinery makers like John Deere. Joining the WTO did not stop Russia hiking duties on combine harvesters or imposing quotas on machinery manufacturers.
The combine tax was initially implemented in March 2012 because the Russian combine industry was experiencing a decline in sales and profits, of as much as 45 percent. To protect the industry Russian authorities put a 27.5 percent anti-dumping tax on the import of combines.
John Deere is a producer of premium agricultural machinery and as such does not compete directly with Russian manufacturers, said Mark von Pentz, president at Deere's agricultural division for Europe, the Commonwealth of Independent States, Northern Africa, Middle East and Latin America. «There's a market for all of us," he said on a visit to Russia in the spring of 2013.
The company spent more than $130 million on local assembly plants. Its Orenburg facility now includes six models of seeding, tillage and crop care equipment. The penal duty rate was replaced in July with a quota, but that partially caps the profit it can earn from its localized plants, said Franczek.
With 9 percent of the world's arable land, and still in the early stages of rebuilding production, Russia attracts companies every stage of the food chain.
Duties on poultry declined to 25 percent, beef to 15 percent and pork to zero, though within tight quotas, above which duties rise steeply. Even so, retail pork prices fell 30 percent creating a challenge for local producers. Even the heavily subsidized Russian poultry industry was unable to ward off a 20 percent increase in poultry imports in the months following WTO entry.
Countries from Brazil and Australia, to Poland have taken much of the market. Poland is a neighbouring agricultural power whose expansion within the European Union is limited by the protectionism of earlier member states like France and Germany.
But U.S. hopes of a significant share of Russian meat sales were dashed by the local prohibition of ractopamine, a growth agent and tenderizer, already banned in the European Union.
Russian reaction to WTO membership still tends towards a licking of wounds. The Russia's Ministry of Economic Development estimates lost taxes and revenues at $5.7 billion in 2013 and about $7 billion over the following year. Franczek points out that this is not a cost-benefit analysis, which would be more informative.
The World Bank estimates that two-thirds of the benefits of joining the WTO come from opening up the service sector. Tariffs are down by 30 percent overall, which is a direct benefit to Russian producers who use imported parts, for example.
Daniil Markelov, an analyst at Investcafe, said the main Russian lobbyists for WTO membership were the oil, chemical and metallurgical companies. Since the products from this sector are export oriented, these companies intended to use membership of WTO as a way to enter new markets.
Trade Club Offers Certainty... Somewhat
Art Franczek, president of The American Institute of Business
After one year in the World Trade Organization, who has gained?
Only about a third of the duties came into effect in Aug 2012 and another third comes into effect over next couple of years. All reduced duties apply from 2018. That was specifically designed to ameliorate the impact on Russian industry.
Russia is very concerned about the automotive sector so it extended the localization program to 2018 meaning that if auto companies have the capacity to produce 300,000 cars, they get a 60 percent reduction in import duties and on VAT on these imports. It is a powerful program that has been in place since 2005.
It was almost a deal breaker with the WTO negotiations in September 2011. Once they got that certainty in August, you suddenly saw lots of companies announce expansion plans: Renault-Nissan, Peugeot and Mercedes. GM announced $1 billion over five years in August 2013. That corresponded to WTO entry and it made sense that they were waiting for WTO and then announced their move.
How much of a boost is WTO membership giving to industry?
Companies want certainty and you see a correlation between duties dropping off and investment picking up, particularly in information technology. Imports of I.T. goods increased by 16 percent in 2013, according to PMR marketing reports.
The WTO cut tariffs on high-tech goods to zero and Russia is on track to join the International Technology Agreement. One of Russia's policies has been to diversify the economy through innovation and modernization and I think you are seeing a strong effect of this.
Companies like Microsoft are seeing indirect effects from their partners: an increase in purchases of technology goods, renewing of licenses on encryption goods and better protection on intellectual property.
Has WTO membership succeeded in removing politics from trade?
Russia banned import of U.S. meat because of the U.S. use of ractopamine to fatten and tenderize meat. But it announced the meat ban a couple of weeks after the Magnitsky list was announced, almost corresponding with the ban on the adoption of Russian orphans. The ambassador says he has been getting an earful: he became an expert on ractopamine because of the protests he got over U.S. meat exports.
But there is a myriad of things that Russia can still do, like more strictly enforce valuation procedures and customs procedures, slow down the movement of goods. There are things they can do that violate the WTO but some others are things which customs can do to slow your movement of goods. You see that with the TIR crisis which is blowing up now, which may make the import of goods from the EU by truck much harder.
How are these disputes being resolved?
The U.S. meat ban has not gone to dispute resolution. The auto recycling tax is in the process of hearings, so after 60 days of hearings, they will appoint a panel, make a decision, and move to implementation.
The recycling tax is a violation of the national treatment status. The European Union, Japan and the U.S. say it is applied only to imported cars. If Russians applied it to domestically produced cars it would be a different matter.
Light commercial vehicles are another anti-dumping issue, which was raised by the Customs Union.
How does the Customs Union affect application of WTO rules?
Eurasian court judges say the WTO still applies. If there is a conflict, the working party report states that the WTO takes precedence over the Customs Union. It has the effect of an international treaty. Belarus and Kazakhstan are anyway likely to be a part
of the WTO within a year, and Ukraine has been part of the WTO since 2009.