On August 22, 2012, after 18 years of negotiations, Russia became the 156th formal member of the World Trade Organization (WTO). With the world’s ninth largest market, a $1.9 trillion economy, and—with a population of 140 million—Europe’s number one consumer market, Russia was the largest economy in the world that was not a member of that august international trade governing body. As part of its accession package, Russia agreed to implement a host of economic reforms that will further open the country’s markets to the goods and services of its WTO trading partners, ensure greater respect for the rule of law, better protect intellectual property rights, and safeguard foreign investors.
Unfortunately, however, U.S. companies are not able to immediately take advantage of these trade concessions because an outdated relic of the Cold War—a U.S. law known as the Jackson-Vanik amendment—stands in their way. Simply stated, for U.S. companies to take advantage of Russia’s WTO accession commitments, that country must be afforded permanent normal trade relations (PNTR) status by the United States. To grant such status, Russia must be “graduated” from coverage under the provisions of Jackson-Vanik. That simple step—which has been taken for a number of other countries covered by the terms of the amendment upon their accession to the WTO—has, at least [hopefully] temporarily, run into the roadblock of election-year politics.
This report highlights the potential benefits of Russia’s WTO accession for U.S. manufacturers, explains the strictures of the Jackson-Vanik amendment and why they are outdated with respect to Russia, and points out the political reality behind the delay in granting Russia PNTR.
What Russia’s WTO Accession Potentially Means for U.S. Manufacturers
For the United States to grow manufacturing employment, it must rely on exports to faster-growing economies around the globe. As mentioned previously, Russia is the world’s ninth largest market, with a $1.9 trillion economy. The country has a growing middle class that is said to value high-quality goods and services. In 2011, Russia imported $300 billion in goods. While the United States’ exports to Russia have grown in recent years, they represented only about 5 percent of that country’s total imports in 2011. Clearly, there is room for growth. The President’s Export Council estimates that U.S. exports of goods and services to Russia could double or triple over the next five years as a result of the recent WTO accession. Many U.S. companies already enjoy a Russian presence, and the American Chamber of Commerce in Russia has more than 700 members. For those companies, Russia has proved to be a lucrative market and their number can only grow with the country’s WTO membership.
U.S. manufactured exports to Russia, which totaled $8.3 billion in 2011, consist of a wide array of goods, including construction machinery, automobiles, aircraft, chemicals, and optic and medical instruments. Concerning specific opportunities to foreign investors, consider the following:
- Machinery and equipment made up 44 percent of Russian imports in 2010. In dollars, Russia’s imports of these products grew at least 40 percent annually from 2004 to 2010. According to recent reports, 60 percent of Russian industrial enterprises will be seeking to replace obsolete and outdated equipment within the next five years.
- Russia is forecast to become the world’s fifth largest automobile market by 2015. Today, 34 percent of the cars sold in the country are imported. Another 42 percent are manufactured locally by foreign companies.
- Russia has 8 percent of the world’s farmland, and the country is said to need to replace 70 percent of its aging agricultural machinery in order to fully develop its agricultural resources. Imports of U.S.-made agricultural equipment are expected to grow 140 percent between 2011 and 2013. Russia has committed to cutting tariffs on combine harvesters from 15 percent to 5 percent.
- Key industries in Russia rely on high-quality chemicals—a need only half fulfilled by domestic producers. Russia has agreed to slash tariffs on chemicals to 5.3 percent from as high as 20 percent.
- Nearly two-thirds of Russia’s medical equipment is obsolete, creating high demand for medical devices; 60 percent of the demand is met through imports. While tariffs on imported medical devices are as high as 15 percent, these tariffs will be bound at 7 percent or less as a result of WTO accession.
- Over the next 20 years, Russia is expected to need more than 1,000 new passenger aircraft—a value of about $95 billion. Russia has agreed to lower tariffs on wide-bodied commercial aircraft over the next four years from 20 percent to 7.5 percent.
- The total cost of needed infrastructure spending in Russia over the next five years is conservatively estimated at $500 billion, creating significant opportunities for foreign companies.
Overall, Russia has agreed to cut tariffs on manufactured products from the current average of 9.5 percent to an average of 7.3 percent, but there will be steeper cuts for priority goods. Duties on information technology products will be eliminated.
Other benefits foreign concerns will realize from Russia’s WTO membership include the opening of the services market. Foreign firms will be allowed to own 100 percent of companies in banking, securities, non-life insurance, telecommunications, audiovisual, and other sectors.
Moreover, Russia agreed to meet the intellectual property commitments of the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), enhancing copyright, patent, and other IP protections there. Those exporting to Russia will find that maximum customs clearance fees will be cut by two-thirds.
Perhaps as important as any of the advantages mentioned above is the fact that by virtue of its membership in the rules-based global trading system, Russia’s trading partners will have access to the WTO’s dispute settlement process to ensure that the country lives up to its accession commitments.
As indicated previously, the U.S. government must establish PNTR with Russia for U.S. companies to benefit from the WTO membership commitments Russia made as part of its accession package. Under WTO rules, every member country must grant other members unconditional PNTR (formerly known as most-favored nation status). This rule mandates that any advantage granted by one WTO member to another member must be afforded unconditionally to all other members. Because Russia is subject to the provisions of Jackson-Vanik, it has to receive annual certification of its compliance with the terms of that law to receive normal trade relations status; that is to say, the status is not permanent. Since 1992, U.S. presidents from both parties have issued these certifications every year.
The United States will be in clear violation of WTO rules if it does not graduate Russia from Jackson-Vanik and afford it the PNTR status it gives all other WTO members. As such, Russia is fully within its rights to follow through on its pledge to withhold the benefits of its accession-related reforms from U.S. companies. The United States’ foreign competitors thus have a head start in accessing the $300 billion Russian market.
Just What Is the Jackson-Vanik Amendment?
The Jackson-Vanik Amendment (Section 401, Title IV of the Trade Act of 1974, Pub.L. 93-618) was crafted to put pressure on the Soviet Union for human rights abuses but has evolved into a symbol of tension in the overall U.S.-Russia relationship. In August 1972, the former Soviet Union began assessing exorbitant “education reimbursement fees” (so-called “diploma taxes”) on citizens wishing to emigrate. This assessment’s professed justification was that it was necessary to repay state expenses incurred in public education. The measure is believed to have been targeted primarily at Soviet Jews and intended to combat the brain drain Russia faced from the growing desire of that group—and other members of the Soviet intelligentsia—to emigrate to the West.
These diploma taxes prompted an international uproar. The U.S. Congress’ response to the clamor was the unanimous passage of the Jackson-Vanik amendment, which got its name from two key sponsors—Sen. Henry Jackson (D-WA) and Rep. Charles Vanik (D-OH). The amendment makes no specific reference to Soviet Jews or the diploma taxes, and instead focuses generally on barriers to free emigration. The law provides that in order to receive the benefits of normal trade relations with the United States, non-market economies—which originally meant Communist countries—must comply with free emigration policies. The Soviet bloc stopped charging education reimbursement fees in late 1972 but Jackson-Vanik was still included as a provision of Title IV of the Trade Act of 1974. While the language of the statute mentions only emigration, it has provided the United States with leverage over human rights violations of all types in the target countries.
Today, the United States denies normal trade relations treatment to only two countries—Cuba and North Korea. A number of former Soviet states, however, including the Russian Federation, still fall under the jurisdiction of Jackson-Vanik. The law authorizes the president to waive the application of its provisions and afford conditional normal trade relations with the United States to countries that are covered under its terms through an annual certification. Congress can disapprove such certifications with a joint resolution. As noted, presidents from both political parties have issued annual certifications of Russia’s full compliance with the Jackson-Vanik amendment every year since 1992. A country that has conditional normal trade relations with the United States under the amendment enjoys the same financial and trade advantages as a country with PNTR.
“Graduating” a country from the application of the amendment and granting PNTR by an act of Congress permanently exempts that state from the Jackson-Vanik test. By refusing to graduate Russia, Congress has been able to use the amendment as a vehicle for expressing disapproval of the country’s trade practices, foreign policy, and human rights offenses. Most trade and foreign policy experts maintain that application of the amendment is an irritant in U.S. relations with Russia and has outgrown its relevance.
Routinely, a country’s accession to the WTO has warranted its graduation from the application of Jackson-Vanik. Again, WTO rules require all member states to establish PNTR with one another. Congress and the president have addressed the amendment’s incompatibility with this requirement by voting to graduate Albania, Armenia, Bulgaria, China, Czechoslovakia, Estonia, Georgia, Hungary, Kyrgyzstan, Latvia, Lithuania, Mongolia, Romania, Ukraine, and Vietnam in correspondence with each country’s WTO accession.
The time seems ripe for similar treatment being afforded to the Russian Federation.
What Is the Holdup?
Most political commentators agree that there is broad bipartisan support for granting Russia PNTR. The administration has identified such action as its number one trade priority in this session of Congress. Notwithstanding this apparent favorable disposition to the measure, election-year politics seem to be responsible for postponing action until the lame duck session after the November 6 election or possibly later. Neither the presidential candidates nor the political parties seem to want to be viewed as being “soft” on Russia in view of that country’s support for the governments in Iran and Syria, its opposition to a missile defense system in Europe, and its overall human rights record. The issue was drawn when Republican candidate Mitt Romney (former governor of Massachusetts) referred to Russia on the stump as the United States’ “greatest political enemy,” a statement he later modified to “number one geopolitical foe.” This heightened rhetoric seems to have impressed upon the president that there is little electoral upside in pushing to graduate Russia from Jackson-Vanik and that such action might even hurt his re-election efforts.
Some in Congress who support graduating Russia and affording it PNTR status still think the United States needs a way to hold Russia’s feet to the fire on human rights and other contentious issues. Hence the specter of the Sergei Magnitsky Rule of Law Accountability Act, a bill named in memory of a Russian lawyer who was apparently beaten to death in police custody in 2009 after spending a year in prison following his accusation of official corruption in his country. As introduced, this bill is not linked to trade, but would force the United States to deny visas and freeze the assets of individual Russians linked to Magnitsky’s death or other human rights abuses. It would also require the U.S. government to publish names of the affected miscreants. The administration initially objected to this legislation, saying that it is unnecessary since such visa bans have already been put into place and that affected individuals have long since transferred any funds they had in the United States. As such, passage of the bill would simply be a “naming of names” intended to embarrass President Putin’s regime in Russia.
House and Senate Committees have passed varying versions of this measure. Seemingly in acceptance of what is inevitable, the administration has worked with the primary author of the Senate bill—Sen. Ben Cardin (D-MD)—to allow for a public list of offending individuals as well as a confidential annex that would keep some names from the public for national security reasons.
Ideally, the Magnitsky bill and the PNTR bill will proceed on separate legislative tracks. There is a danger, however, that the measures will be linked. Some lawmakers feel strongly, as does Sen. John McCain (R-AZ), that Russian PNTR status should not be approved absent corresponding passage of a Magnitsky bill that provides for public disclosure of the names of all involved offenders.
The delay in graduating Russia from the dictates of Jackson-Vanik and affording it PNTR status, despite broad bipartisan support for such action, is an example of government at its ineffective worst. It should be pointed out that extending PNTR to Russia does not make one concession to that country, which has had conditional normal trade relations since 1992. As such, the United States does not alter a single tariff on goods it imports from Russia or in any way alter U.S. market access commitments. Extending PNTR to Russia is all about giving the benefits of that country’s WTO accession commitments to U.S. manufacturers, service providers, farmers, and workers. By opening the Russian markets to more U.S. exports, PNTR status for the country should properly be viewed as a critically important jobs bill in the United States.
More than 150 other countries are currently seizing the opportunities created by market openings related to Russia’s WTO accession while the United States is watching from the sidelines. Hopefully, this situation will be rectified as soon as Congress reconvenes.
 These statistics were derived from information provided by the U.S. Chamber of Commerce, the National Association of Manufacturers, the U.S. government, and other highly reputable sources.