Tuesday, August 21, 2012

Congratulations, Non-US Exporters, Investors and Consumers!

Tomorrow, Russia will officially become the World Trade Organization's 156th Member.  At that time, exporters, investors and consumers from around the world will immediately begin to enjoy myriad new trade benefits that the newly-liberalized Russian market will offer - benefits that, unfortunately, their US counterparts will not share because of their government's incompetence. 

Before I get into all that nonsense, however, a little backstory on Russia's WTO accession is necessary.  Last month, the Russian government finalized its pre-accession obligations, and the WTO announced that the country would become a WTO Member on August 22 (tomorrow):
Russian President Vladimir Putin signed into law 21 July Parliamentary legislation bringing Russia’s trading laws into compliance with the international standards set under the WTO. The presidential approval follows passage of accession implementation legislation 18 July by the Federal Council, the upper house of Parliament and by the lower house, the Duma, on 10 July. Today, Russia officially notified the WTO Secretariat that the ratification process was completed thereby clearing the way for the country to become the organization’s 156th member on 22 August....

In 2011, Russia was the world’s ninth largest exporter, shipping $522 billion in goods and $54 billion in services to its trading partners. Last year, Russians imported $323 billion in goods and $90 billion in services.

Russia’s terms of membership, including the Working Party Report for Russia’s Accession, the Protocol of Accession were adopted by the WTO at the eighth Ministerial Conference on 15-17 December 2011.
As the release makes clear, the Russian economy is pretty big, and the WTO's December announcement of Russia's accession details the many ways that this pretty big market will be liberalized starting tomorrow.  I won't get into all of those tonight, but here are a few highlights with respect to other WTO Members' goods exports to Russia:
On average, the final legally binding tariff ceiling for the Russian Federation will be 7.8% compared with a 2011 average of 10% for all products...

The average tariff ceiling for agriculture products will be 10.8%, lower than the current average of 13.2%. The ceiling average for manufactured goods will be 7.3% vs. the 9.5% average today on manufactured imports.

The final bound rate will be implemented on the date of accession for more than one third of national tariff lines with another quarter of the tariff cuts to be put in place three years later....

Quantitative restrictions on imports, such as quotas, bans, permits, prior authorization requirements, licensing requirements or other requirements or restrictions that could not be justified under the WTO provisions would be eliminated and not (re) introduced.
The WTO release explains similar trade benefits for services imports, investment, intellectual property, and it elaborates on how the Russian government has - or has committed to in the near future - liberalized its economy with respect to subsidies, price controls, export restrictions, technical regulations/standards, government procurement, and transparency.  Thus, WTO Members' citizens stand to reap nice economic gains from Russia's WTO accession.  These hypothetical benefits for the United States were made clear in a December 2011 Cato Institute study which noted, among other things, the following facts about the expanding US-Russia trade relationship:
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....

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....

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.... 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....

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.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.
So, clearly, Russia's WTO accession is an economic no-brainer for the United States.  For this reason, I boldly predicted back in April that, before Russia become a WTO Member in August 2012, Congress would pass and the Obama administration would sign a new law granting Russia permanent normal trade relations (PNTR) - a basic prerequisite for the United States (including its exporters, investors and consumers) to reap any of the benefits of Russia's WTO accession. (WTO rules require Members to provide each other with PNTR on a reciprocal basis before the trade between them will be covered by the WTO Agreements.)

I was wrong.

In a classic case of "government being government," the Obama administration, the Democratically-controlled Senate and the Republican-controlled House could not get their collective act together before the August recess to grant Russia PNTR, despite the fact that (i) all sides (leadership, at least) agreed that they wanted to make PNTR happen; (ii) both key committees (Senate Finance and House Ways & Means) had overwhelmingly approved their respective PNTR bills; (iii) the US business community strongly supported PNTR; (iv) US labor unions - typically the biggest impediment to congressional approval of trade-related legislation - were relatively quiet on PNTR; and (v) all sides had appeared to agree on passing human rights legislation - the "Magnitsky Act" - to calm any nerves that approval of PNTR (and the Putin regime's seemingly constant thumb in the United States' eye) might fray in Congress.  And when our political "leaders" failed to get PNTR done, they all blamed each other for this grave injustice and then promptly went on vacation.

Like I said, classic government. (And, yes, I feel like Flounder for ever trusting them.)

So tomorrow, American exporters and investors will be at a disadvantage versus their foreign competitors in the Russian market.  Word on the street is that the US business community expects Congress to pass legislation granting Russia PNTR in mid-September after they return from summer break, and I'm still inclined to agree (reinforced belief in government incompetence, notwithstanding).  If that actually happens - an admittedly big "if" - then the short delay here shouldn't really matter much from a strictly economic perspective - some of Russia's biggest trade liberalizing moves won't instantly happen tomorrow, and a few weeks' delay shouldn't dramatically disadvantage US companies. 

That said, any economic harm here is simply inexcusable, given that Russia PNTR was pretty much the only major trade item on the US government's 2012 Trade To-Do List and that there was bi-partisan support for getting it done.  Even worse, however, is the broader signal that this whole episode broadcasts to the rest of the world.  Since 2009, I've lamented waning US leadership in the global economy - a problem starting in the White House but definitely permeating Congress too - and the United States' utter inability to implement a no-brainer, one-sided trade measure is yet another example of America's slow fall from the top the international trade food chain.  So while tomorrow's PNTR snafu may not hurt US businesses too much, it has definitely hurt the already-injured reputation of a country that not too long ago was the world leader on international economic issues.

And that's a shame, regardless of the newly-opened Russian market.

UPDATE: Cato's Bill Watson has more here.  He comes to a similar conclusion but notes a nice stat that I missed: "The Peterson Institute for International Economics has estimated that increased access to Russia's market due to its entry into the WTO will increase annual U.S. exports to Russia to $22 billion — double the current $11 billion — within five years."

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