Russia joined WTO today

On August 22, 2012 Russia became the 156^th member of the World Trade Organization (WTO). 18 years of negotiations resulted in commitments of Russia to substantially liberalize trade in goods and services, which will be done gradually during the 2013-2020 transition period. After all commitments are implemented, most favoured nation (MFN) import tariffs will fall from 11.5 percent to 7.9 percent. Russia has also committed to improve market access to foreign providers of financial, business, and telecommunication services.

This development is an opportunity for Russia to open a new page in its trade relationships with other CIS countries, stop thinking in terms of trade wars with zero-sum game and start thinking in terms of cooperation where economic interests prevail over politics.

On WTO commitments

Shepotylo and Tarr, using the most detailed trade statistics, calculated that, by 2020, the average tariff of the Russian Federation will decline to 7.9 percent on an un-weighted average basis and to about 5.8 percent on a weighted average basis. It means that the tariff cuts on the more traded import items will be higher. For example, an average tariff on cars will fall from 23.8 to 12.1 percent and on electrical equipment and machinery from 9.1 to 5.0 percent. Together imports of these products constitute more than 25 percent of the value of total imports of Russia.  The sectors whose tariffs are projected to decline the most are: timber, wood, pulp and paper (6.1 percentage points); light industry (4.1 percentage points); and the food industry (4.6 percentage points). Most of the changes will be done by 2017.

Foreign services providers in financial and telecom sectors will get an opportunity to expand their business in Russia, because of commitment to soften restrictions in these areas. Russia also committed to treat foreign providers in professional and business services –  lawyers, architects, accountants, engineers, health care professionals, advertising, and market and management services – equally to local professionals. Finally, Russia has agreed to develop and apply international standards on Sanitary and Phytosanitary (SPS) measures and to refrain from suspending imports based on results of onsite inspection of foreign companies before given the opportunity to propose corrective measures.

Positive effect on Russian economy

Experience of other countries joining the WTO shows that liberalization of trade in goods and services has positive effect on economic performance. China and India have been the two major winners of the liberalization in trade of goods and services during the last two decades. After heroic efforts in meeting the WTO standards, China joined the WTO in 2001 and within a decade became the top world exporter and the second world importer.

The main anti-WTO argument that trade liberalization leads to shut down of local companies and whole industries turned out as a false one, rarely observed in reality. Studying the WTO accession of India in 1995, Topalova and Khandelwal found that one of the main results of rapid and comprehensive trade liberalization in India – average MFN import tariff fell from 87 percent in 1990 to 43 percent in 1996 – led to increase in export performance of India, driven mainly by increased productivity of manufacturing firms. Experience of WTO accession of the Czech Republic, studied by Arnold, Javorcik and Mattoo, shows that services liberalization gives an additional boost to performance of local firms. As I pointed in earlier column in Forbes, liberalization of services sector in Ukraine has been the most important positive result of the Ukrainian WTO accession, leading to improved performance of local companies.

Analysis of the expected positive effects of the Russian WTO accession is not limited by referring to other countries’ experience. Tarr and Ruzerford, employing a state of the art model of Russian Economy featuring 55,000 representative households, predict that Russian households will increase  consumption by 7 percent just after accession and up to 24 percent in the long run.

Relationships with CIS countries and Ukraine

The Russian WTO accession is undoubtedly positive news not only for Russia, but also for its neighbors. For long time the economic space of CIS countries has been a grey area with no clear and predictable rules on how international trade between the former parts of the Soviet Union is performed. Frequent, often politically motivated trade wars, lack of the mechanisms of trade dispute settlements, questionable and selective application of the SPS measures severely plagued trade relationships of Russia with its closest neighbors.  Under the WTO membership, Russia will have to follow the WTO rules, including the principle of the most favoured nation which prohibits discriminatory treatment of Latvian fish, Georgian wines, or Ukrainian cheese. The WTO also offers clear, transparent mechanisms of implementation of its own rules, including monitoring changes in trade policies and providing mechanisms of trade dispute settlements.

Last but not the least, trade liberalization of Russian external trade will lower the pressure on Ukraine of choosing the vector of integration between the EU and the Customs Union of Belarus, Kazakhstan and Russia. Once import tariffs of Russia will converge to the levels of European and Ukrainian ones, leaders of EU, Russia, and Ukraine can start thinking of the free trade area stretching from the cliffs of Cabo da Roca in Portugal to Big Diomed island in Chukotka.