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. Last Updated: 07/27/2016

Another Weapon To Fight a Trade War

For Russia, graduating from the school of non-market economies is a bit like turning 18 in the United States: You become old enough to vote and go to war, but you still have years to wait before you can legally celebrate with a drink.

There is little doubt that Thursday's status upgrade by the U.S. Commerce Department is a positive development -- President Vladimir Putin called it a "powerful signal that the Russian economy is ready to be fully functional." But the political goodwill of the gesture is likely to be more valuable than any economic gains; given the details of the decision, it may be premature to crack open the champagne just yet. Indeed, as companies with the most to gain by having freer access to America's market are quick to point out, the decision was a minor victory, a battle won amid a much larger war.

"Market economy status is a political decision, it doesn't have any direct economic impact," said Alexei Goncharov, spokesman for SUAL, the nation's second-largest aluminum company, which has faced anti-dumping cases in the United States -- the kind of thing market economy status is supposed to help alleviate.

"Restrictions on individual products, like foil, will remain in place," he said.

Even so, the decision is good PR.

"It will certainly have a positive effect on the perception of Russia and that should have a positive effect on investment decisions," said Andrew Somers, president of the American Chamber of Commerce in Moscow. "Russia has now joined the universe of 'acceptable' countries to invest in."

For the government, the real prize is entering the World Trade Organization on standard terms. The U.S. decision, coupled with the European Union's recent announcement that it, too, would grant Russia market economy status before winter, lends strong support to that pursuit.

However, the Commerce Department appears to have left itself room to continue viewing Russia as a non-market country in certain instances. Even the steel producers who led the petition for the change in status are unlikely to see major gains in the near future.

Russia is a market economy only with regard to anti-dumping cases filed after the effective date set by the Commerce Department, April 1, 2002. Non-market economy methodology -- applying prices and costs from a surrogate country to calculate whether Russia is exporting goods below cost -- and higher tariff penalties will still be used for any anti-dumping cases filed before April.

For future cases where the "period of investigation" extends before April 1, the Commerce Department will decide on a case-by-case basis whether to apply its non-market or market economy rules if there is sufficient information. In the 30-page report that contained the decision to grant Russia market economy status, posted on its web site, the Commerce Department said it "retains its authority to disregard particular prices or costs when prices are not in the ordinary course of trade, costs are not in accordance with generally accepted accounting principles, the costs do not reasonably reflect the costs associated with the production or sale of the merchandise, or other situations."

"This appears to leave a door open to continue to apply the [non-market economy] methodology if the Commerce Department deems a particular industry sector to be operating under non-market conditions on a case-by-case basis," said Lynn Fabrizio, a trade lawyer at the Moscow office of White & Case.

Additionally, several Democrats in the House of Representatives have pledged to introduce legislation that would allow interested parties the right to request non-market treatment for certain sectors of the Russian economy.

For cases that were decided before April 1, non-market rates will continue to apply until "they are changed as a result of a review... of a sufficient period of time after April 1, 2002." According to a Commerce Department official, the period is usually six months to one year.

Russia's new status also opens it up to the threat of harsh countervailing duties, which can be applied to subsidized companies.

Countervailing duties are unlikely to be assessed until an "adequate" amount of market information is available, which is expected to take about a year. After that, Russian companies will be extremely vulnerable if Russia doesn't sign an agreement with the United States narrowing how far investigations can look back to the post-privatization period. Energy-intensive companies will also be open to attack due to low domestic energy tariffs.

The U.S. side has rejected a draft agreement submitted by Deputy Economics and Trade Development Minister Maxim Medvedkov as too general, a source close to the government said.

Furthermore, until Russia accedes to the WTO or gains permanent most-favored-nation status from the United States, U.S. companies do not have to prove that Russian goods are causing injury to a relevant industry in a countervailing duty case. "This can result in high damages or tariffs," Somers said.

Another point of contention is that Congress has yet to revoke the Jackson-Vanik amendment, which links trade relations to emigration policy, or grant permanent MFN status. Without MFN, Russia could lose one of the main benefits of WTO membership -- equal rights to dispute settlement options.

"Market economy status from the U.S. and the EU is just one -- albeit important -- factor in the [WTO] accession process," Fabrizio said. "But tariff concessions aren't really affected by market economy status because they tend to be negotiated in terms of dollar value and the value of accession to each of the partners."

"We see [market economy status] as one step on the path to WTO accession," SUAL's Goncharov said. "Unfortunately, the revocation of Jackson-Vanik, which we're all waiting for, still has not happened. As soon as the U.S. Congress revokes the amendment, the next step will be discussing WTO accession terms."

Revocation of the Jackson-Vanik amendment and WTO accession will still not guarantee Russia truly free trade. But Russia will be an equal trading partner with equal weapons to fight future trade wars.

"The United States has demonstrated repeatedly that neither market economy status nor membership in the WTO precludes them from imposing sanctions on other countries," said Alexei Moiseyev, economist at Renaissance Capital.