As Russia prepares to become a member of the World Trade Organization (WTO) next month, much debate on Capitol Hill centers on the future of U.S.-Russia economic relations, as well as the deteriorating human rights and rule of law situation in Russia. Last week, the Senate Finance Committee unanimously approved bipartisan legislation to grant permanent normal trade relations (PNTR) status to Russia. The House Ways and Means Committee marked up H.R. 6156 (Russia and Moldova Jackson-Vanik Graduation Act), which was reported favorably by voice vote this week.
Unless it extends PNTR to Russia, the United States stands to lose out on significant economic opportunities from Russia’s WTO accession. To understand these potential benefits, it is important to have a clear picture of the current trade relationship between the two countries.
At $45 billion, bilateral trade flows between the United States and Russia are surprisingly low, especially since they are the world’s largest and seventh-largest economies, respectively. The United States runs a $26 billion trade deficit with Russia – the eighth-largest with any of its trading partners. But American exports to Russia barely outpace those to the Dominican Republic, and the United States lags far behind other developed economies, particularly the European Union, when it comes to investing in Russia.
As detailed in a prior post – and more extensively in a BPC task force paper – Russia’s recent WTO accession could create significant opportunities for U.S. exporters and investors. Specifically, American exports to Russia could double in five years – to $20 billion – which could spur job creation and growth at home, while simultaneously helping to rectify the trade imbalance between the two countries.
This is driven by strong Russian demand for U.S. goods and services. The average Russian’s disposable income has grown 10 percent annually for more than a decade, but they tend to save very little. Instead, they prefer to channel Russia’s GDP growth – the highest in Europe, at roughly four percent for 2012 – into consumer spending. Because much of Russia’s non-energy economy is outmoded, its citizens look to more advanced economies like the United States for a variety of products. In addition, Russia has a major currency surplus from years of high energy exports and prices, contributing further to its desire to increase imports. As a result of these factors, a wide range of U.S. companies across the country stand to benefit, from Silicon Valley to America’s agricultural and industrial heartlands.
Agricultural products: Russia is the world’s second-largest importer of beef, pork and poultry products. This is the largest category of U.S. exports to Russia, and U.S. investment in Russia’s food industry (e.g., Coca-Cola and PepsiCo) has proven very successful in recent years. WTO accession could expand these exports by constraining Moscow’s often arbitrary trade restrictions, which are designed to protect domestic producers and apply political leverage against the United States. Russian demand for U.S.-made agricultural machinery (e.g., Deere & Co.) is also significant.
Aerospace and automobiles: Taken together, civilian aircraft, passenger cars and related equipment are the most valuable category of U.S. exports to Russia. Importantly, Russia is Europe’s largest automobile purchaser (with demand projected to double by 2020), and major U.S. automakers like Ford and General Motors are looking to penetrate the Russian market more deeply. In addition, Moscow is courting U.S. companies like Boeing to help modernize its economy. WTO accession could reduce protectionist measures and other trade barriers set up by Moscow in these areas.
Industrial equipment: Russia’s abundant natural resources and struggling heavy industry generate strong demand for U.S.-made machinery to explore, extract and transport energy and other natural resources across the country’s vast expanses. Combined, these commodities form the third-largest export category. WTO accession could improve the business climate for U.S. companies operating in these sectors – always a primary concern – on top of raising Russia’s import quotas and lowering tariffs. Demand for U.S. products is likely to grow and Moscow looks to maintain production levels by discovering and exploiting new reserves.
High-technology products and services: Once at the forefront of scientific research, Russia now lags behind the developed world. Existing U.S. exports and investment are minimal here, but the potential for growth is significant. Moscow is seeking technology-sharing and investment agreements with the West to boost innovation and upgrade infrastructure, and Russia’s rapidly-aging population is ill-served by the country’s healthcare industry. Beyond lower trade barriers, WTO accession could compel Russia to better ensure intellectual property and investor rights.
The United States can only enjoy these benefits of Russia’s WTO accession if it graduates Russia from the Jackson-Vanik amendment and extends PNTR status. Failure to do so, however, would give Moscow legitimate grounds under WTO rules to discriminate against U.S. businesses, and thus likely cause the United States to lose market share to companies from the European Union and perhaps East Asia. It could also alienate Russia and undercut our bilateral relations.
At the same time, Congress has expressed the valid concerns of many Americans over Russia’s record on human rights and rule of law, most notably in each chamber’s version of the Sergei Magnitsky Rule of Law Accountability Act, which is intended to penalize human rights violations in Russia and elsewhere. The bills, which have been sent for a full vote in each chamber, could be attached to any graduation measure. This echoes the BPC’s task force paper, which argued that graduation should be a part of a comprehensive policy framework – developed by the Executive and Legislative Branches, as well as other concerned parties – for building a constructive bilateral relationship with Russia. If Congress and the Administration are able to reach an agreement on these matters and graduate Russia from Jackson-Vanik, the impact for many U.S. economic sectors will be significant.
- Wide Range of U.S. Industries Stand to Benefit from Russia’s Accession to WTO
June 29, 2012
- The U.S. Economic Benefits of Russian WTO Membership
April 11, 2012
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