Vol.5, Issue 06, June 2003 - Ksenia Yudaeva - Joining the WTO: Is a Political Decision the Only Hope?

In trying to reinforce its shaky status as a great power, Russia has recently been striving to become a member of every possible international organization: the G-8, NATO, the OECD, and so on. Moreover, typically, the country first decides to join something and, only afterward, considers the question “What for?”. This is apparently what happened with WTO entry: here is a club of nations of which Russia is not a member, so the decision was made to join it. After 9/11, it seemed that this could be done in one fell swoop: just drop a hint to Mr. Bush and WTO membership would be in the bag. It turned out, however, that the American president’s ability to make political decisions is limited by his relationship with popularly elected bodies of power, while the WTO has bureaucratic bodies other than the U.S. Administration.

After this unsuccessful blitzkrieg, Russia opted for more gradual tactics: first, it obtained market-economy status, now there’s a push to get the Jackson-Vanik amendment repealed. Meanwhile, inside Russia the debate on WTO entry has all but died down: in response to opposition from lobbyists, it was announced that Russia was no longer in a hurry to join the WTO. Negotiations on a great many topics have reached a dead end, and there is only one way out: there must be a political decision.

Is a Political Decision Possible?

It has become quite fashionable to talk about political decisions with regard to the WTO. For example, there are many who claim that China’s admission was the result of a political decision. And this was the case to some extent: at any rate, China had by that time already become a major world economic power, and its joining the WTO would benefit a large part of the European and American business communities. It is important to remember that China made substantial concessions in order to become a member, and many consider its obligations to be almost revolutionary for the nation's economy. The situation is very much the same for those countries of the CIS that recently joined the WTO: they were accepted quite quickly, but had in return to assume rather harsh obligations for opening up their markets. In principle, joining the WTO is a long, drawn-out, bureaucratic process, in which the country concerned must assume obligations for liberalizing its trade regime that will satisfy all the members of the organization. In return, all countries get the same thing: the rules of the WTO apply equally to all of them, and they can take advantage of the mechanisms for conflict resolution provided by the WTO. There is a transitional period, during which the joining country partially carries out its obligations; however, it can also run up against additional barriers erected by the member states.

Unfortunately, for now, the European and American business communities see no great benefit for themselves in Russia’s joining the WTO; on the contrary, they are most likely afraid of seeing Russia’s presence on their markets expand. Therefore, despite the many official statements in support of Russia’s decision to join the WTO, the Western business world is more inclined to oppose Russia’s membership than to lobby for it. So it is too early to expect major concessions from Moscow's negotiating partners. This slowdown could lead to additional losses for Russia, since the demands of the other side might eventually - especially following the end of the Doha Round of negotiations - become even harsher. Something like this happened with China, which ultimately joined the WTO under much tougher terms than the ones presented before the end of the Uruguay Round. So, despite the statements that Russia has no problem with waiting until 2007, it would be better to join the WTO before the end of the Doha Round. But for this to happen, the Russian public must get a clear explanation of why it is necessary and of just how awful - or, perhaps, beneficial - the concessions being demanded of Russia are. This has certainly not been done recently. There also has not been sufficient coordination between WTO entry and other processes of foreign economic integration.

The Benefits of Membership

In discussions within Russia, describing the benefits of WTO entry usually boils down to the mythical $2.5 billion that Russia loses every year in anti-dumping disputes. This argument is easily countered with the fact that even if Russia joins the WTO, many of the current anti-dumping measures would remain in effect. Moreover, the anti-dumping problem itself would not disappear; it would just assume a somewhat more civilized form. In fact, the losses from anti-dumping measures could be considerably reduced only if the method for determining dumping margins based on costs in third countries ceases to be used with respect to Russian goods. A key factor in this matter is natural gas prices. Due to the dual pricing practiced in this sector, the European Union has retained the right to use third-country costs in its anti-dumping disputes against Russian products even after awarding Russia market economy status. This is based on the assertion that the natural gas industry in Russia is not market-oriented. We shall return later to the peculiarities of Russia’s position, and that of its partners, in negotiations regarding this sector.

 From an economic perspective, the benefits of liberalizing trade to the extent required by membership in the WTO lie in the fact that, in the long term, the country will get a more efficient economy, which specializes to a greater extent in those industries where Russia has comparative advantages. It should be noted that with respect to trading in goods, these benefits, which can be expected only in the relatively long term, would not be great - and neither would the short-term losses. The Russian level of tariff protection is now quite low and reducing it further (say, by half) would, without additional changes in the productivity of domestic enterprises, lead to a rise in consumer welfare of around 0.9% of the overall level of consumption. [1]

The main benefits can be expected from non-tariff measures that would follow (or should follow) admission to the WTO. Russia is a country where the bureaucracy traditionally has too many opportunities, not restricted by law, to influence policy. Joining the WTO should lead to a reduction in the level of government interference in the economy. This would involve abolishing numerous (and often not at all transparent) subsidies, as well as generally regulating the methods by which the government interferes in the operations of various companies, repealing or simplifying many of the technical barriers associated with foreign trade deals, streamlining customs operations, etc. Everyone knows that unpredictable policies can have just as negative an effect on the economy as bad policies. Many of the measures provided for in the WTO agreements are aimed at lowering the level of unpredictability in areas connected with trading in goods and services. Generally speaking, WTO entry should be one more step toward building a rule-of-law state in Russia, which, as international experience has shown, is absolutely necessary to achieve sustainable growth based on domestic resources, rather than growth of the “catch-up-with-and-overtake” variety.

It is quite difficult to give a quantitative estimate of the consequences of non-tariff measures. As an indirect criterion for such an assessment, one can consider the effect WTO entry has on direct foreign investment. It is widely known that measures for lowering tariff protection can have a negative impact on horizontal foreign investment directed at servicing the domestic market. At the same time, improvements in the investment climate have a positive effect on all types of direct foreign investment. International experience shows that in the past 20 years the influx of direct foreign investment from developed nations into developing countries and countries with transitional economies grew, on average, by $4 billion in the year the latter joined the WTO. This demonstrates that admission to the WTO is usually regarded by foreign investors as proof of a substantial improvement in the investment climate.

 Recently, methods have been developed for quantitatively assessing the consequences of liberalizing the services sector. The results of such assessments are of special importance to Russia, since a number of the more serious differences in negotiations have been precisely in this area. According to calculations based on the general equilibrium model, lifting barriers to foreign investment in Russia’s services sector would raise consumer welfare by 5.9% of overall consumption. [2]  International experience also shows that increasing the number of foreign banks in a country, or increasing the transborder credits to the non-financial sector, leads to a substantial acceleration in the rate of economic growth. [3]

The telecommunications services sector - in particular, abolishing the Rostelecom monopoly - is one of the great stumbling blocks in Russia’s negotiations on WTO membership. This state of affairs has persisted despite the fact that the development of new means of communication, such as mobile phones, has undermined the “natural monopoly” status of the telecommunications sector; in order to speed up development of this sector, Russia will have to move toward more modern methods of regulating it.

 Yet another consequence of joining the WTO will be greater pressure on Russia to beef up its measures for protecting intellectual property rights. This may make it easier for Russia to finally start realizing its second most important comparative advantage after natural resources: the existence of a highly skilled workforce and scientific personnel. [4]

A positive effect can also be expected in agriculture. Russia’s negotiators, and agriculture lobbyists as well, are very much concerned at the moment with keeping open the future option of major subsidies for Russian agriculture. Agriculture experts claim that, in order to support the agricultural sector, it is entirely unnecessary for Russia to start using the expensive, prohibited measures from the WTO’s “amber box” - which only serve to distort incentives for farmers - and that it would be sufficient to use the officially sanctioned “green box” measures. That is, instead of getting farmers hooked on subsidies, as they do in the European Union, Russia can build grain elevators in ports or support agroeconomic research and development. On the other hand, once it has renounced amber-box measures, Russia can apply for membership in the Cairns Group, which would, in the future, allow it to lobby more effectively for lowering the barriers to exporting its agricultural produce to developed countries. The latter would be a much stronger incentive in promoting the development of agriculture than government subsidies.

The Costs: Do We Really Need All This?

The Russian public’s attitude toward WTO entry is largely skeptical and is associated with fears of negative social consequences. Those who lobby against joining the WTO use figures like “WTO entry will jeopardize the jobs of 10,000 workers in this or that industry.” This phrase, however, does not mean that all 10,000 jobs will be jeopardized, especially in the near future. Even in those sectors where WTO entry could lead to certain losses, it would not be the entire sector that is jeopardized but only some of its least competitive segments. Later, we shall dwell in more detail on the estimates of jobs lost as a result of WTO entry. It is another matter altogether that even without joining the WTO, Russia needs structural reforms to its economy, which will lead to the need to find new jobs for or retrain an enormous number of people (even if they remain at their old jobs). WTO entry might spur this on somewhat, but the process will go on regardless of membership.

 So far as the direct liberalization of foreign trade policy is concerned, its effect on employment will be quite small. Several studies have been done recently to assess the negative consequences of WTO entry. To the disappointment of the lobbyists, these studies have shown that the short-term losses in employment will be minimal. In Russia as a whole, and in the majority of its regions in particular, they will not exceed 0.5-1% of the overall volume of industrial employment. [5] Such a reduction in employment could be more than compensated for by the increased employment demand associated with economic growth. This result is not at all surprising: in recent years, import tariffs have changed approximately in the same proportion in which they would change following admission to the WTO, and this has had almost no effect on employment in various industries. The real hard currency exchange rate - which is, in turn, determined by fluctuations in the price of energy resources - has a much greater influence on the state of Russian industry than tariff policy does.

 One must understand that any rise in unemployment that is due to a rise in imports cannot be permanent. Imports have to be paid for with something; i.e., exports must be increased. If there is no reciprocal rise in exports, there will be nothing with which to pay for the imports, the exchange rate for the ruble will go down, and the domestic production of imports will once again become competitive. According to existing calculations, WTO entry could, in the middle-term, require the moving about of some 5.5% of the workforce - which is not all that much. [6] Thus, the short- and middle-term social problems directly connected with WTO entry are quite small and cannot serve as an adequate reason for not joining the WTO.

Quite often, one hears that Russia should join the WTO only after the country prepares itself. Unfortunately, this is impossible, since it is impossible to create effective incentives for companies to prepare themselves for admission. Throwing someone who cannot swim into the water really is cruel, but one cannot learn to swim without going in the water.

One Stumbling Block: Natural Gas Prices

Among all the sticking points in Russia’s negotiations on WTO entry - the EU’s demand for reforms in the natural gas industry, talks on financial and telecommunications services, agricultural subsidies, membership in the civil aviation agreement, tariffs on certain goods (especially automobiles) - the key issue, in the opinion of many, is natural gas prices.

Originally, the European Union insisted on abolishing the dual pricing of natural gas. Several months ago, this was replaced with the demand to carry out reforms in the natural gas sector aimed at reducing government interference in the industry’s operations and at its making the transition to market principles.

It should be noted that the reform of the natural gas industry is badly needed, as is the reform of other natural monopolies. The question of transparency in setting independent producers’ conditions for access to pipelines is especially important, as is the possible creation of a competitive wholesale natural gas market. At the negotiations on WTO entry, the Russian side has often stated that this reform is internal and its inclusion in the list of membership obligations violates the country’s sovereignty. However, there is serious opposition within the country to carrying out this reform, especially from Gazprom, the state-run natural gas monopoly. Given these conditions, it would likely do more good than harm to include this reform in the list of Russia's international obligations.

A topic of great interest here is the result this reform would have on domestic (and foreign) natural gas prices. This question can easily be split into two parts: (1) What would be the maximum costs of producing and transporting natural gas? and (2) At what prices should gas be sold to domestic and foreign consumers? In the opinion of a majority of researchers, the current prices for industrial consumers are lower than the long-term maximum costs by approximately 30-50%. Moreover, some researchers believe that the difference between prices and maximum costs is no greater than 35% and that maximum costs will come down after the reforms are implemented, since the natural gas industry will, on the whole, become more efficient.

How natural gas pricing should be set up for domestic and foreign consumers is an entirely separate question. Obviously, the current situation, when prices are lower than maximum costs, is economically unsound and reform should lead to prices rising at least to the level of maximum costs. It is another matter that, even if such reforms take place, a gap between the prices paid by domestic and foreign producers is possible - due, for example, to export tax. As a producer with a certain monopolistic power on the natural gas market, Russia stands to lose several billion dollars if it drops dual pricing in this sector (or the export tax on natural gas). An estimate of the size of Russia’s losses from abolishing dual pricing was included in the notorious World Bank report that was never published due to fears that the EU would make plain its deep dissatisfaction with it.

As one of the arguments in favor of evening out export and domestic prices, EU representatives often refer to the fact that higher natural gas prices will serve as an impetus to energy conservation in Russian industry. However, setting domestic consumer prices higher than the level of long-term maximum costs is economically ineffective and, in the long term, fraught with possible distortions, such as the use of exorbitantly expensive energy-saving technologies.

Russian industry’s excessive energy consumption results not only from low energy prices, but also from the non-restructured nature of most enterprises. In these conditions, lowering energy consumption does not require a sixfold hike in energy prices; all one has to do is tighten up budgetary constraints and to develop the long-term credit market. In the absence of the last two measures, any significant increase in energy prices would simply lead to an exacerbated nonpayment gridlock.

Foreign Trade Policy Toward the CIS Nations: In Need of a Strategy

With regard to the CIS nations, Russia’s foreign trade policy boils down to numerous declarations about creating all sorts of new and improved associations: a Customs Union, or its new incarnation, a Eurasian Economic Space; CIS Free Trade Zones; a Single Economic Environment; and so on. In practice, none of these associations work and the upshot is losses to the budget due to a customs mess and tariff wars over rival producers from neighboring countries. (An example of the latter is the introduction last year of restrictions on imports of Ukrainian steel.) There is also no mechanism for resolving disputes between parties, as there is in the WTO. In this sense, the accession of CIS nations to the WTO - and their taking advantage of the conflict resolution mechanisms that exist within the organization - appears to be a more sensible strategy than attempting to preserve the de facto non-functioning associations.

It should be noted that, until recently, there had been no attempts to coordinate the formation of all these associations with the process of joining the WTO. For example, the existence of a customs union presupposes a uniform level of tariff support in its member countries. However, not a single country in the Customs Union - Russia included - discussed adjusting its tariffs to correspond to those of other members during the talks on joining the Union. Today, in essence, Russia and Kyrgyzstan cannot be members of the same customs union, unless of course Russia lowers its tariffs to the Kyrgyzstani level. Only recently did Russia come to its senses, issuing a statement on joint entry. There has even been talk that after Ukraine signed its protocol with the European Union, Russia tried to insist that the protocol be annulled and that Moscow’s approval be sought on the issue. Recently, since it has become virtually obvious that the idea of a customs union between a large number of CIS nations has fallen through, the emphasis has once again begun to be placed on creating a Free Trade Zone. The problem with the workability of such a plan is that it would result in imports being re-directed to countries with lower tariffs and subsequently re-imported into countries with higher tariff rates. As a result, the Free Trade Zone would have just as many problems as the Customs Union does and it is possible that, in practice, this idea will never be fully realized.

On the whole, all the initiatives in the area of foreign trade relations with the nations of the former USSR smack of imperial ambition in word and of complete indifference in deed. Given these conditions, it is necessary either to draw up a more precise and coordinated policy - under which one would clearly have to make concessions to neighbors, rather than trying to dictate one’s own terms - or to give up trying to create associations that no one needs and to concentrate on solving one’s own problems. It is entirely possible that the latter strategy could turn out to be of greater benefit: if, for instance, Russia tightens up its southern borders, it will have more opportunities to get a less restrictive visa regime from the EU nations.

Organizing the Negotiating Process: Who Wins Out from Secrecy?

The contradictory nature of Russia’s foreign economic policy is evident not only in the lack of coordination between efforts to join the WTO and create a multitude of associations with the CIS nations. The entire strategy looks problematic: thus, in the government’s Middle-Term Program of Economic Development, most of the section on opening up the economy focuses on methods for shielding domestic producers and on other protectionist measures. Moreover, despite the declared aims of opening up the economy and joining the WTO, the overall level of protectionism in the economy has increased in the past 18-24 months.

In our view, this results from the fact that the formulation of foreign policy has become the exclusive domain of a tiny group of negotiators and is not subject to broad public control. So far as the Russian public is concerned, both Russia’s negotiating position and the demands of the other side are classified material. The information contained in official reports from members of the negotiating group is very limited and incomplete. This makes it easier to incorrectly interpret even that information which is aboveboard. Thus, several months ago, many people concluded from official statements that the EU was demanding an increase in the price of electricity supplied to the public (which was in fact not true), or that Russian import tariffs would rise at the moment of WTO entry (which was never planned). The level of secrecy in the information on joining the WTO exceeds even that in other nations of the CIS. The only country where there was a similar or even greater level of secrecy was China. There, however, the fact that a great many measures aimed at radically reshaping the Chinese economy were incorporated into the draft membership obligations was also classified information. Many economists are certain that WTO entry was used by the Chinese leadership to create an “anchor” for further reforms. This is quite probable, especially when one considers that the membership agreement was signed by the previous Chinese leadership, which was worried about finding ways to ensure continuity in reform policy.

In Russia, there has not yet been any evidence that this secrecy involves some special radicalization of membership obligations. Moreover, the secrecy is not all-encompassing: industrial enterprises have been given open access to information on negotiations in their sectors - something that is not being done with respect to consumers or the academic and policy research community. It is this, apparently, that lies at the heart of the recent turn toward protectionism. And it is noteworthy that the measures for tariff and non-tariff protection are primarily being introduced for industries that have fallen into the sphere of interests of the “oligarchs.”

It is clear that Russia is not the only country whose leadership is more concerned with the interests of business, especially big business, than with those of the consumer. To overcome this tendency, greater transparency is needed in the negotiating process. Likewise, there must be serious discourse on the consequences of WTO membership, so that companies can start preparing for it now.

Conclusion

In the opinion of many experts, the problems that now remain in Russia’s negotiations on WTO entry can be resolved quite quickly. Since the EU dropped its demand for the abolition of dual pricing for natural gas, there is no longer any demand from our negotiating partners that could lead to serious losses for Russia’s economy. Concessions are possible on all the remaining issues - concessions that would often be good for the development of the economy as a whole and would bring along minimal short-term losses. The latter might even go unnoticed if the economy continues to grow at its current rate. In order to make this clear to those taking part in domestic discussions, there should be an emphasis on advocating the advantages of WTO entry, rather than simply trying to conceal all information on the negotiating process. So far as a political decision is concerned, Russia itself will have to be the one to make it.

Notes

[1] Jensen, J., Rutherford, T., Tarr, D. The Economy-Wide Effects of Russia’s Accession to the WTO. World Bank. S.1., 2003. Mimeo.

[2] Ibid.

[3] See: Yudayeva, K. et al. Sectoral and Regional Analysis of the Consequences of Russia’s Joining the WTO: An Estimate of Costs and Benefits. The Carnegie Moscow Center. Moscow, 2003. (Working Materials, No.3)

[4] In order for this to happen, the “privatization” of intellectual property rights must also be undertaken; however, this issue is beyond the scope of the present work.

[5] A similar conclusion is reached in the works of the National Investment Council and the Moscow Office of the International Labor Organization, an official report drawn up by the Higher School of Economics, and the above-mentioned work by Yudayeva et al.

[6] Jensen, J., Rutherford, T., Tarr, D. Op cit.