15 November 2012
Implications of Russia’s New Membership in the WTO
Implications of Russia’s New Membership in the WTO
By Cassie Yip
As one of the “BRIC” countries (Brazil, Russia, India, and China), Russia is a force to be recognized as its economy continues to grow. Currently, its economy, which has been one of the world’s fastest growing over the last decade, is now the world’s 7th largest and has the highest per capita income of the BRIC countries.
In August of 2012, the World Trade Organization (WTO) ended nearly two decades of negotiations with Russia and accepted it as a member. Membership in this prestigious global organization will enhance business and trade relations for Russia and other WTO members. The purpose of the WTO is to standardize international trade. Therefore, as a WTO member, Russia will not receive special treatment but rather must now play by the same rules as other WTO members. The standards of the organization will be applied to all sectors of the Russian economy both by changing export and import rates in the short and long terms and by gradually lowering many tariff rates. US businesses will benefit from lower tariffs and more predictability and transparency from Russia.
Lower tariffs will benefit American businesses by cutting costs and making entry into the Russian markets easier and more flexible. While some new tariff rates went into effect immediately after Russia was given membership, roughly 80 percent of the final bound rates will be implemented gradually over a three-year period. Should Russia raise their bound tariff rate above the agreed amount, WTO members can use the organization to require Russia to reduce it back to the initially agreed amount or provide tariff cuts for other products.
The medical equipment sector will benefit greatly from lower tariffs. The US annually exports almost $748 million worth of medical equipment to Russia. Currently, Russia charges tariffs on US medical equipment of up to 15 percent. With WTO membership, Russia must grant the US the same tariff rates they grant other countries. For example, Russia currently has lower tariffs with Belarus and Kazakhstan than the US. As a WTO member, Russia must apply equal treatment to all countries that they do business with. This will likely bring the bound rate for the US down to 5 percent or less. The states that will benefit the most from lower bound rates are California, Massachusetts, Wisconsin, Tennessee, New York, Washington, Pennsylvania, Ohio, Texas, and Illinois as they produce the most medical equipment in the United States. Additionally, the Russian government has begun to pay more and more attention to the healthcare sector in their country. Roughly two-thirds of the equipment currently being used is outdated, providing sales opportunities for U.S. medical equipment providers and giving these states a much-needed economic boost.
Another sector that will benefit greatly from lower tariffs is consumer goods. Tariffs will be lowered to a bound rate of 10.3 percent – down from as high as 13.3 percent. The US has exported an average of $213 million worth of consumer goods per year to Russia since 2008. Lower tariffs will cut costs for US consumer goods providers providing more opportunities for US sellers to expand their presence in the Russian consumer market.
The state of Massachusetts will also benefit because part of the work force there depend on world markets including Russia. Metropolitan areas such as Boston, Worcester, and New Bedford exported a total of two billion dollars’ worth of merchandise each in 2009. Russia’s economy partially depends on exports from the IT, agricultural, and medical sectors in Massachusetts. Membership into the WTO will enhance and encourage more exports as trade normalization and standardization through lower tariff rates will cut costs on both sides.
Overall, Russia will have to make significant changes to its trade practices and conform to WTO standards. They will have to lift restraints on much of the economy in order to improve trade relations with all countries including the US. However, for both Russia and the US to benefit, the US must also extend the same trade practices it currently grants other countries in accordance with standards set by the WTO for its members. There is, however, one problem with granting Permanent Normal Trade Relations (PNTR).
During the Cold War, a law was put in place to confront what the US saw as a violation of the human right to emigrate. The 1974 Jackson-Vanik amendment prohibits granting PNTR to non-market economies who, in the eyes of the United States government, have infringed upon human rights. Top US government officials such as Secretary of State Hillary Clinton and the now re-elected US President Barack Obama are urging Congress to repeal Jackson-Vanik. Top representatives from both the American and Russian governments have stated that they would like to see economic and diplomatic relations grow and prosper. Initially, Clinton projected that the amendment would be repealed by the end of September. However, due to division between the Democrats and Republicans, changing of legislation was put on hold. The US Ambassador to Moscow, Michael McFaul, however, now believes that by the end of the year the cold-war era amendment will be repealed and replaced with a new amendment.
Although Russia’s accession to the WTO is great news, its ability to fully exercise equal trading practices with the US is being hindered by an outdated amendment. Both business owners and politicians hope to see legislative change that will benefit both parties before the end of the year. Until then, we can watch as a bright and positive future for US-Russia business and diplomatic relations develops.
Cassie Yip is a part of the Marketing and Project Management team at Language Connections, a translation and localization company based in Boston, MA. For more information about Language Connections’ services, visit the website www.LanguageConnections.com.
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