September 03. 2012 9:00AM

Global economy will feel impact as Russia joins WTO

Dispatches from China

By Einar Tangen

  
On Aug. 22, Russia joined the World Trade Organization (WTO). The entrance raises fhe questions: Will Russia follow China economic miracle? Who will benefit? Is this a competition between the U.S. and China, or just globalization?

First, let's examine the timeline:
  • 1993 - Russia formally applies for membership in the WTO.
  • 1995 - The application was taken up by the WTO.
  • Dec. 16, 2011 - Russia is invited to join the WTO.
  • July 23, 2012 - The Russian Parliament votes to ratify the WTO Agreement.
  • Aug. 22, 2012 - Russia became a member of WTO.

In joining the WTO, Russia has committed to bring its trade laws and practices into compliance with WTO rules. By doing so, it is taking a major step toward integrating its trading systems with the largest trading block in the world.

Those commitments include nondiscriminatory treatment of imports of goods and services; reducing tariffs and binding tariff levels; ensuring transparency when implementing trade measures; limiting agriculture subsidies; enforcing intellectual property rights (IPR) of foreign holders of such rights; forgoing the use of local content requirements and other investment measures that limit imports; and opening government procurement contract opportunities to foreign firms.

While this sounds good, many key industries, such as automotive, will have between a three- to seven-year grace period, and as has been seen in the United States and China, many things like government procurement contracts tend to follow political rather than WTO priorities.

According to Trading Economics, Russia has more than 140 million consumers; it is the world's 11th-largest economy by nominal GDP; and has the highest per capita GDP ($13,236) of the BRIC countries.

Metals and energy make up more than 80 percent of Russia's exports. The country is the world's largest oil producer and the largest exporter of natural gas, nickel and palladium. Energy sales contribute almost half of Russia's budget revenue. The Russian fishing industry is the world's fourth-largest.

Russia's main export partners are Netherlands, Germany and Italy. The United States ranks 10th on that list. Its second-largest import partner is China. Russia has more than 17 million square miles spread out over nine time zones so it has enormous infrastructure needs.

Will Russia follow the China's economic path?

No, Russia is a middle class country with high-cost labor, inefficient industries and abundant natural resources. The only thing today's Russia has in common with pre-2001 China is inefficient industries. The real question is why is this even being asked? For Russian politicians, it may be a sop to overcome the lost revenues that will occur as tariffs, which averaged 10 percent in the past, are reduced to 8 percent.

Is this a competition between the United States and China or just globalization?

It is more about globalization than a competition, but in terms of a contest, China is the likely winner.

Russia was the United States' 31st-largest export market and the 14th-largest exporter to the U.S. in 2011. Russia accounted for 1.16 percent of total U.S. trade, making it our 20th-largest trading partner overall. U.S. exports to Russia in 2011 were $8.3 billion, the highest since 2008, and a 39 percent increase from 2010. This is more than double the growth rate for overall U.S. exports, which were up only 16 percent.

Russian exports to the United States were $35 billion, up 21 percent from 2010. Russia's leading trade partners are: Netherlands, China, Germany, Italy, Ukraine and Turkey. As usual, the United States has an edge on high-tech exports and specialized machinery but we are concerned about IPR issues and by U.S. technology transfer laws. Luckily, our European competitors will be all too happy to supply many of the things we cannot.

The big issues for us are price and whether we shoot ourselves in the foot. In terms of price, Russia has enormous needs, but cost is a major consideration, and with Europe, China and India at their doorstep, we will be pressed.

In terms of shooting ourselves in the foot, once Russia accepted its membership in the WTO, all the other 155 WTO member countries were required to grant Permanent Normal Trade Relations (PNTR) status to Russia. Failure to pass such measures could expose the country or countries to higher tariffs or restrictions, to which they would have no recourse to the WTO.

On June 12, 2012, Senator Max Baucus introduced a bill (S. 3285), with bipartisan co-sponsorship, to authorize PNTR for Russia. Both the Senate and House of Representatives have passed similar bills, which repeals the 40-year-old Cold War Jackson-Vanik Amendment and accepts Russia as a PNTR, but includes a provision aimed at pushing Russia on human rights and democracy, the Magnitsky Amendment. Magnitsky was a Russian lawyer who died in 2009 after a year in Russian jail. The amendment would bar Russian officials guilty of human rights violations from traveling to the United States and freeze assets they hold in U.S. banks.

Unfortunately, it is doubtful that this will have its intended effect and could rebound on American businesses trying to compete in the Russian market. It might have been easier to just refuse such applicants a visa and/or use existing legal means to go after their finances.

China has, on the other hand, accepted Russia as a PNTR with no reservations and is about to embark on a yearlong cultural exchange. China produces low-cost industrial machinery and can offer an unending supply of consumer goods from both foreign and domestic brands. Overall trade has been trending up as direct investment has been trending down. China is importing mostly natural resources, oil, gas, wood and minerals. According to Russian's economic envoy to Beijing, Vladimir Tsyplakov, Russian exports to China were up 56 percent year-on-year, mainly due to the recent strength in global commodity prices. In 2011, Russian oil deliveries to China totaled 19.7 million tons or a 29.4 percent increase year-on-year in terms of volume, but up 87.3% year-on-year in terms of value. Timber exports to China were marginally down at 13 million tons in terms of volume, but up 16% year-on-year in terms of value. It is estimated that bilateral commerce will reach about $90 billion in 2012. However, Chinese businesses apparently remain disinterested in any sort of long-term direct investments in Russian industries.

In 2011, Chinese investment in Russia amounted to a mere $300 million, or down 49 percent year-on-year, according to Chinese statistics. The number represented just 0.5 percent of China's total foreign investment in 2011.

Let us put aside the issue of closer political and economic ties between Russia and China and the implications that will have for our foreign policy. China has a trade surplus with Russia. China ships value added items in return for raw materials and energy. This is a good position for China and will get better as lower tariffs take effect. It is not clear that this is going to work long term for Russia, which may have little to show, initially, for its trade liberalization other than lost tax revenues.

A suggestion, it might be worth thinking about going at Russia through China or India by using their lower-cost production costs and avoiding politically motivated tariffs.

Einar Tangen, formerly from Milwaukee, now lives and works in Beijing, China. He is an adviser to Heilongjiang Province, Hebei Province QEDTZ, China.org.cn, China International Publishing Group, Beijing Baotong and DGI DESIGN. He is also a weekly public affairs commentator for CCTV News' Dialogue and the author of "The Kunshan Way," an economic development history of China's leading county level city. While in Milwaukee, he was a partner at Jackson, Morgan and Tangen, president of E-Tech and a senior vice president at Stifel Nicolaus. He chaired various boards in Milwaukee and was a member of the Federal Home Loan Bank of Chicago. Readers who would like to submit questions or suggest areas of interest can send an e-mail to steve.jagler@biztimes.com.

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