The recent announcement that the U.S. and Russia have reached agreement in principle on a WTO Bilateral Market Access Agreement for Russia to join the WTO is the latest step in a 12 year process that has had more negative than positive news. The agreement can be viewed as either Russia accepting the disciplines that come with WTO membership or the addition of another member to the WTO that will further weaken efforts to facilitate more trade.
When the negotiations began 12 years ago, Russia was picking up the economic pieces after the disintegration of the former Soviet Union. It was looking to the developed world for a way to create a market economy. Since then Russia has gone through periods of market openings and closings. The sharply higher petroleum and natural gas prices of the last few years have allowed Russian to regain its economic footing. President Putin has used this increased cash infusion to move away from market-based economic decisions and reassert the power of government agencies and government-controlled companies. It is ironic that Russia is making progress in joining the WTO while rejecting market-based, domestic economic policies.
There are plenty of reasons why Russia should be a member of the WTO. With a population of 143 million, per capita GDP of $11,000 per year on a purchasing power parity basis and average real personal incomes growing by 12% percent annually over the past five years, Russia is a developing consumer market. Exports of $250 billion per year are double imports of $125 billion per year. The economy has grown by an average of 6.4 percent per year since the financial crisis of 1998. International investment in the first half of 2006 was $23.4 billion, up 42 percent from the first half of 2005.
Russia also has major economic imbalances. Inflation in 2005 was 12.7 percent and the population is expected to decline by 0.4 percent in 2006. Oil, natural gas, timber and metals make up over 80% of its exports. Russia`s manufacturing industries are not internationally competitive and need to be modernized to achieve domestic economic growth beyond natural resource exports. Its banking system is weak and there is a lack of trust in market institutions that are taken for granted in most developed countries.
Poultry meat and red meat have been major sticking points in the WTO talks. The collapse of Russian agriculture in the early 1990s left the country with a shortage of meat. That gap was mostly filled by U.S. poultry meat, pork and beef imports. President Putin’s government has tried to promote self sufficiency and restrict meat imports, but has also needed to meet consumer demands. Beginning in April of 2003 Russia imposed a 1.05 million metric ton (MT) annual import quota on poultry meat, and tariff rate quotes of 420,000 MT for beef and 450,000 MT for pork to reduce meat imports from the U.S. In September 2003, the U.S. and Russia worked out an agreement to increase those amounts through 2009. The U.S. did not sign the agreement until June of 2005, but Russia partially implemented it beginning in 2004. Sanitary and phyto-sanitary issues continued to cause uncertainty in the market. This latest agreement will continue the 2003 Bilateral Meat Agreement in force through 2009 and provide the framework for treatment of meat when Russia joins the WTO. The WTO sanitary/phyto-sanitary rules should increase certainty of Russia’s regulations of imported meat.
U.S. agricultural exports to Russia were $921 million in fiscal year (FY) 2006, the year ending on September 30, up from $659 million six years ago in FY 2000. At $554 million, poultry meat accounted for 60 percent of exports in FY 2006. Red meats accounted for another $134 million, 14.5 percent of exports. Bulk commodities, mostly tobacco, accounted for only $52 million of sales. Intermediate products accounted for $86 million of sales and were spread across a wide range of products. Consumer products beyond the meats totaled $95 million, with tree nuts at $37million and fruits and vegetables at $16 million. U.S. agricultural imports from Russia were only $23 million in FY 2006. Given Russia’s northern climate, even with increased investments in agricultural production, it will likely be a major importer of crops not grown in the country and of seasonal fruit and vegetable products.
The bilateral agreement should be good for both Russia and the U.S. Russia desperately needs to modernize its manufacturing industries, create market-based financial institutions for businesses and consumers and provide access for consumers to a wide array of food products. It has agreed to reduce tariffs on manufactured goods to an average of 8 percent. The discipline imposed by WTO rules on sanitary and phyto-sanitary issues, intellectual property rights and tariff limits may allow the government to implement economic policies that it could not do on it own strength.
Even with the U.S. bilateral agreement, Russia is not done negotiating trade issues. The U.S. Congress must provide permanent normal trade relations (PNTR) with Russia and remove restrictions on Russia under the Jackson-Vanik amendment to the Trade Act of 1974 that ties trade policy for communist countries to emigration policy. Russia must also complete bilateral discussions with several small countries and then conclude a multilateral ascension agreement with the WTO on changes that it will implement upon becoming a member. The U.S. and other developed countries appear to have left some of the most contentious intellectual property rights issues to be resolved in those multilateral talks.
Supporters of a more open world trading system are usually optimistic people. That attitude will be tested as Russia moves toward becoming a WTO member. By clearly outlining what Russia must do to become a member of the WTO, supporters of freer trade will reduce the potential for Russia to become part of the foot-dragging crowd in the WTO.