RUSSIAN STEEL AND THE WTO

By A.I. Kolganov

For a long time, one of the main arguments cited by supporters of Russia’s entry into the WTO has been the promise of significant benefits resulting from the lifting of the various trade barriers which currently prevent Russian goods breaking into the world market. In particular, discussion centered around the long-awaited revocation of the Jackson-Vanik amendment, which denied the Soviet Union the status of most-favored trading nation as long as its citizens were denied the freedom to travel to other countries.

But expectations of the greatest benefits were raised by the prospect of the United States lifting economic sanctions against Russian steel producers. Over a year ago, Washington decided to introduce strict quotas on steel imports from Russia, and the annual losses sustained as a result by Russian steel producers were estimated at over US$2 billion. Government experts promised that joining the WTO would enable Russia to get these sanctions lifted, with substantial advantages for the country. Andrei Illarionov, President Vladimir Putin’s economic adviser, maintained that the benefits for Russia in the next five years would be worth as much as US$12 billion.

The recent U.S. decision to impose tariffs on imported steel has affected not only Russia, but many WTO member countries too. Europe, Australia, New Zealand, Japan and Brazil have all protested against this decision to the secretariat of the WTO.

It would appear that WTO membership does not of itself provide any guarantee against the imposition of trade barriers at the whim of individual national governments. So the strongest arguments put forward by the supporters of Russia’s membership of the WTO have proved to be seriously flawed.

They might say that WTO membership makes it possible to contest decisions on the introduction of quotas or tariffs on imported goods. This is true, but the regulatory procedure for handling this sort of conflict may be so protracted that it no longer makes any real economic sense. First the WTO secretariat will spend several months examining the matter, then there may be a U.S. appeal against any decision. Of course, retaliatory sanctions might be introduced, but their effectiveness depends on the actual economic potential of the country seeking to impose them.

IS EUROPE READY FOR A TRADE WAR?

The U.S. sanctions against European steel producers are not a matter that the European Union has been able to ignore. Without waiting for the sluggish WTO mechanism to gain momentum, EU countries are currently giving active consideration to the steps they might take to counter the U.S. move. Senior European and EU officials have been quite outspoken on the subject. The European Commission (the EU’s executive organ) is prepared to respond to the U.S. steel tariffs by imposing their own tariffs on steel imported from the United States into Western Europe. But as this measure is unlikely to have a huge impact on the American steel industry, the commission is also working on further measures that might hit America harder.

In particular, there are proposals to introduce economic restrictions on operations by foreign airlines (which are chiefly American) in Europe. This move is in response to the fact that the US$15 billion subsidy that the U.S. government has awarded its airlines since September 11, 2001 has allowed them to reduce substantially the tariffs on transatlantic flights, which amounts to a unilateral anticompetitive advantage for the American airlines over their European counterparts. By way of compensation for the U.S.-imposed steel tariffs, the EU also plans to propose that the United States should lower import tariffs on other goods, to the tune of about US$2 billion. So Europe is to all intents and purposes prepared to get involved in a trade war. What about Russia?

THE SECOND ATTEMPT

The decision to ban the import into Russia of chicken legs (which the Russians dubbed “Bush’s legs” after George Bush Senior, who was U.S. President when these they first appeared in Russia) looks like a response to the import tariffs on Russian steel. Perhaps it is. However, it should be noted that this decision is not motivated by economic considerations.

Some years ago, Russia’s health and safety inspectors tried to halt the import of chicken drumsticks from the United States on the basis that they did not conform to Russian hygiene standards. At the time, however, under pressure from the Yeltsin administration, the decision was overturned. The current move is motivated by the same concern that the drumsticks imported from the United States do not meet national hygiene standards: They contain various potentially harmful additives (antibiotics and hormone preparations) and may carry the risk of salmonella infection. The Americans have failed to respond to repeated questions about the exact nature of the preparations and chemical additives used in the production of the drumsticks.

It should be noted that a decision was taken by Ukraine several months ago to halt imports of U.S. poultry, for the same reasons as are being given for the current Russian move. The issue of the need for tighter hygiene controls on the chicken drumsticks imported into Russia from the United States has been raised repeatedly, including in recent months. So the decision now taken has in fact been on the table for some time. For both Russia and the Ukraine, it is also certainly the case that one of the foremost arguments in favor of the decision has been the state of their own national poultry producers, who have been losing out in competition with the imported produce.

IS THIS SERIOUS AND WILL IT LAST LONG?

It is hard to avoid the feeling that the decision to ban the import of chicken drumsticks would probably not have been taken–despite all the medical and economic arguments–had there not also been a deterioration in Russian-American relations as a result of the import tariffs on Russian steel. However, Russia’s leaders could have avoided risking aggravating relations with the U.S. even when confronted with the steel tariffs. After all, the strict quotas imposed on Russian steel by the United States over a year ago did not provoke any retaliatory measures.

The decision to suspend U.S. chicken imports was most probably taken (and remains in force) because of increasing tension in Russian-American relations, for political as well as economic reasons.

The decision of the Putin administration to support U.S. antiterrorist operations after September 11, 2001 did not win the universal approval of the Russian people. And the reaction of the United States to this decision appears very odd (to say the least) to the overriding majority of Russians. The U.S. military incursion first into Afghanistan, then into the Central Asian CIS republics, then into Georgia; the unilateral abandonment by the U.S. of the ABM Treaty; renewed criticism of Russia’s handling of events in Chechnya–all of this looks like the continuation of a U.S. offensive against Russia’s national interests. In this context, the decision to introduce import tariffs on Russian steel is widely seen as just the latest phase of their anti-Russian policy.

The worst aspect of all this is the long drawn out issue of the Jackson-Vanik amendment. It has been possible to travel perfectly freely outside Russia for over ten years now, yet the amendment remains in force and Russia is still denied most favored nation trade status.

However, it remains unclear how long the Putin administration will be able to conduct policies that are dictated by the need to protect Russia’s economic interests. To date, periodic efforts in this direction have been very short-lived or confined to the realms of political rhetoric.

THE PROBLEM OF POWER

The problem here is that Russia’s ability to actively defend her economic interests is hampered by her own economic weakness and the lack of the political will to overcome this weakness. For example, the decision by the EU to introduce a ban on flights into Europe by aircraft with high noise levels means that most of Russia’s passenger and transport aircraft, which are technologically obsolescent, are likely to be excluded from European air corridors. The ban may well also affect not only Russia’s most modern aircraft, but even future designs. Russia is hardly in a position to respond to these decisions with her own retaliatory sanctions (although there has been no shortage of calls to do so). After all, for European airlines the Russian air traffic market is not hugely significant, and the introduction of barriers limiting access to Russia will not represent a serious blow to the interest of these airlines. But Russia’s aviation industry, deprived over the last ten years of any government support, has become substantially weaker, both economically and technologically. Russia’s aircraft-building factories are no longer in a position to provide a rapid solution to these problems, as there is a catastrophic lack of the resources needed to develop technologically advanced aircraft engines. But in the current situation, neither does the Russian government have any intention of reviewing its policy of not supporting the aviation industry. One possible solution to the problem might be to replace Russian-produced engines with foreign models, from the United States for example. But in that case the prospects for Russian manufacturers of aircraft engines will be distinctly gloomy.

Andrei Kolganov is a doctor of economics and a senior research fellow at Moscow State University.