Russia’s Accession to the World Trade Organization: Why the Jackson-Vanik Amendment Should Be Repealed

Russia has just joined the WTO, but unless a piece of Cold War-era legislation is done away with for good, American companies will not only be rendered less competitive, but will lose out on opportunities to greatly expand exports.

By Sabrina M. Peterson
Managing Editor

On August 22, 2012, after 19 years of negotiations, Russia finally joined the World Trade Organization. The World Bank estimates that WTO membership will boost Russia’s GDP by about 3 percentage points. In addition, Russia’s accession will open Russian markets to foreign competition and should create an important opportunity for American exporters. However, an outdated piece of Cold War-era legislation threatens to not only prevent American companies from reaping the benefits of newly opened Russian markets, but also weaken American companies vis-à-vis international competitors.

The legislation, known as the Jackson-Vanik Amendment, was passed in 1974 to pressure the Soviet Union to allow Jews to emigrate. Under the law, the United States must renew normal trade relations with Russia every year. As Russia has allowed free emigration, its normal trade status has been renewed every year since 1994. However, with its accession to the WTO, Russia is now part of an organization whose members must be treated equally by all WTO members. This means that because the United States technically does not have permanent normal trade relations with Russia, it is in violation of its WTO commitments. Because of this violation, Russia can discriminate against U.S. products.

On the export side, it is uncertain how much Russia will benefit economically from WTO membership, as most Russian exports are products whose free entry other countries do not wish to inhibit, such as oil, gas, and minerals. But Russia has much to gain from opening its markets up to imports. Russia has a $400 billion import market and a rapidly expanding middle class. Consumption is growing in Russia, but as domestic industry falls short for a variety of reasons, including an ineffective banking sector, high interest rates, and government control, there is a high demand for foreign goods.

By joining the WTO, Russia has agreed to lower tariffs by an average of about 6 percentage points. Although Russia has agreed to apply the lower tariff rates to U.S. products, the continued existence of the Jackson-Vanik legislation means that Russia is not bound by WTO terms and could raise tariffs on American imports at any time. If this happens, more than 150 other countries would reap the benefits of lower tariffs, at the expense of U.S. exporters, including major American companies and employers such as General Electric, Caterpillar, and Deere.

Moreover, entire industries stand to be affected by higher tariffs. For example, the healthcare sector is one area in which American and European companies have been competing for the Russian market. If import tariffs for healthcare equipment fall from 15 percent to 5 percent for European companies, while American companies are still subject to the 15 percent tariff, then American companies will lose out. Yet if Jackson-Vanik is repealed and the United States has competitive access to Russian markets, it is estimated that U.S. exports to Russia could reach $22 billion by 2017. In 2011, this figure was almost $8.3 billion.

The reluctance amongst American lawmakers to repeal the Jackson-Vanik legislation stems from Russia’s human rights abuses. Because of this, the effort to repeal Jackson-Vanik has now become intertwined with a piece of human rights legislation, the Magnitsky bill, which seeks to deny visas to certain offending Russian officials and would also freeze their assets. Debates in Congress as to whether human rights should be tied to the issue of granting Russia permanent normal trade relations have proved contentious, and there is little expectation that an agreement will be reached before U.S. elections in November.

U.S. lawmakers should not make a repeal of the Jackson-Vanik Amendment contingent upon the Magnitsky bill. Human rights abuses are undoubtedly a serious subject in Russia, but should be treated separately from the issue of granting Russia permanent normal trade status. Repealing the Jackson-Vanik Amendment should not be viewed as a gift to Russia, but rather as a benefit to the United States: American businesses will be the ones primarily affected if the legislation is left on the books. Repealing the legislation and granting permanent normal trade relations would support the U.S. economy and American jobs. Lawmakers should act sooner rather than later, lest the United States miss out on a valuable opportunity to benefit from Russia’s accession to the WTO.

Photo courtesy of WTO/Studio Casagrande via Wikipedia Commons.

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