WTO's Tough Medicine Is Good for Russia
Published: August 15, 2013 (Issue # 1773)
On Aug. 22, 2012, Russia was formally admitted as a member of the World Trade Organization after an unprecedented 19 years of negotiations. Although there were some detractors, the Kremlin cited it as evidence that economic reforms are being instituted. This view was generally shared by industry leaders and business groups at home and abroad.
Barely 12 months later, the deal has attracted many more critics in Russia's business community while both the European Union and Japan have brought formal charges against Russia for alleged violations of membership rules. No other country has ever been accused of a violation so early in its membership.
So, is membership actually a really bad idea for the country, as many of the vocal critics are now shouting? Should the Kremlin consider suspending membership, if that is even possible, as some State Duma opposition groups are calling for? Or should it ignore the international criticism and impose even more import tariffs to protect fledgling or inefficient domestic industries as some lobby groups suggest?
The sensible answer to all of these demands is "absolutely not." WTO membership was a major step forward for the country. The membership agreement should be used exactly as intended: as a timeline for domestic industries to get their act together to better compete in quality and price with imported competition.
Let's turn the clock back 12 months and recall what was accepted by a majority of business leaders and economists, according to many surveys. The headline statements were that entry into the WTO would initially cost the federal budget about $14 billion in lost tariff revenue over the first two years, and that some industries — such as the food and light industry manufacturers — would face more immediate import competition than others. Some Duma members have now exaggerated that expected loss to $15 billion annually as they crank up pressure against the trade agreement.
At the same time, however, it was also acknowledged that complying with WTO rules would provide a necessary catalyst for the broader business reform agenda. It was believed that the entry terms allowed enough time for domestic industries to become more competitive. The World Bank estimated that membership could add an additional 3.3 percent to overall gross domestic product, or about $65 billion in the first three years. This is expected to rise to an 11 percent benefit, or $220 billion, within 11 years after WTO membership. Moscow's New Economic School calculated the net membership benefit at a sustainable 0.5 percent addition to annual GDP growth. If you aggregate all those statements you get a well known and universally proven cliché: "no pain, no gain." That was also widely acknowledged and accepted as a necessary tradeoff at the time.
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