CC BY
236Russian Journal of Logistics and Transport Management, Vol.1, No. 2, 2014
©Iuliia Taranova Saimaa University of Applied Sciences
CASE-STUDY: TRENDS AND CONSEQUENCES FOR RUSSIA
FROM WTO ACCESSION (Review article)
Abstract
The Russia' WTO membership is considered in the article from the internal and external points of view. Starting with the idea and the principles of the World Trade Organization, the positive aspects for the country's future are analysed. In regard to the pros and existing critics, the development of business of the case study company (e.g. the biggest private tire distributor in Finland) was examined so as to underline the alternative avenues in the contextual framework.
Keywords: World Trade Organisation, Russia's membership, business development. 1 Introduction
The dynamic growth of international trade forcing developing countries adopts standard rules and terms of such cooperation. In the article, possible consequences of Russia's accession to World Trade Organization (WTO) are analyzed in connection with the company's businesses based on the case study approach. Starting from 22nd of August, 2012 onwards, a further prediction of company's actions and strategies in regard to the changes that took place after the accession are required.
The studied company is the biggest private tire distributor in Finland, existing on the market over 17 years. The outlets are located in the Southeast part of the Finland that specialized in sales for Russian private customers and wholesalers. In 2013, the company became an official distributor of world-famous premium tire brand, considering possibilities to grow on the Russian market with official representatives in different regions. Based on this plans for development, the author tries to understand how WTO can impact on business activities in Russia and logistics issues, as well.
According to Karamysheva et al. (2013) the membership of Russia had to bring the import flows of containerized cargo, underlining the positive aspects of the membership. A better future for the general cargo traffic and development of a transport sector is proposed by the study of Hilmola and Korovyakovsky (2012). Laisi and Panova (2013) also summarized positive influences, such as an improvement of overall investment environment, development of the market of transport services, and increase of country's involvement in world trade at large.
However, Russia's WTO accession is not synonymous with its bright economic future due some critics (Lacarte, 2014). For this reason, the purpose of this study is to determine possible pros and cons of Russia's accession to WTO and understand the further trends for the company in the future.
2 The idea of World Trade Organisation
World Trade Organization WTO is an international organization founded on 1 st January, 1995 for the purpose of international trade liberalization and regulation of trade and political relations between the Member States (Newinspire.ru, 2014). WTO was established under the General Agreement on Tariffs and Trade (GATT), concluded in year 1947. For almost 50 years, in fact, it was acted as an international organization, however, not an international organization in the legal sense.
WTO is responsible for developing and implementing new trade agreements, as well as enforces the members of the organization of all agreements signed by most countries and ratified by their parliaments. WTO builds its activities based on decisions taken in 1986-1994 in the framework of the Uruguay Round and earlier GATT agreements. WTO discuss issues and make decisions on global questions and the prospects for further liberalization of the world trade held in the framework of multilateral trade negotiations (rounds).
WTO headquarters is in Geneva, Switzerland. WTO CEO - Roberto Carvalho de Azevedo. In the state of the organization is approximately 640 people. On March 2, 2013 the WTO consisted of 159 countries (Wto.org, 2014).
WTO rules provide a number of benefits for developing countries (Newinspire.ru, 2014). Currently, developing countries - WTO members have (on average) a higher level of customs tariff protection of their markets compared to developed countries. Nevertheless, in absolute terms, the total size of the customs and tariff sanctions in developed countries is much higher. That is why the access to markets of highbrow products is seriously limited to developing countries.
WTO rules regulate only trade and economic issues. Attempts by the U.S. and several European countries to start a discussion about working conditions (which would be considered a lack of legal protection for employees as competitive advantage) were rejected because of the protests of developing countries, who argued that such conditions would only worsen the welfare of workers in connection with the reduction of the number of jobs, declining incomes and the level of competitiveness (Newinspire.ru, 2014).
3 Brief history of WTO
The idea of establishing an international organization designed to regulate international trade appeared before World War II (Newinspire.ru, 2014).
Basically, the U.S. and UK forces in 1944 at the Bretton Woods conference were based International Monetary Fund and the International Bank for Reconstruction and Development (Newinspire.ru, 2014). In 1946, the International Conference on Trade and Employment was convened in Havana, which was to develop a substantive framework of an international agreement to reduce tariffs, invite interested countries a charter of this organization, take a coordinating role in the facilitation of foreign trade, and reduce customs burden on the flow of goods from country to country. Already in October 1947, the General Agreement on Tariffs and Trade (GATT) was signed, which was originally considered only as part of a comprehensive agreement under the new international trade organization. This agreement is regarded as temporary, entered into force on the 1st of January, 1948.
USSR was not invited to participate in the Havana Conference, and refused to be a member of the IMF and the IBRD. The Soviet Union government was afraid that the great influence that the United States had in these organizations and the beginning of the confrontation between ideological blocs (Cold War) would not allow with proper degree takes into account the interests of the Soviet Union in the framework of these organizations (Newinspire.ru, 2014).
Thereby, nearly 50 years after unsuccessful attempts to create an international organization and the existence of temporary construction GATT regulating issues of foreign trade, from 1 January 1995 the WTO has started to work (Lacarte, 2014). Russia joined the World Trade Organization and became its 156th member on the 22 August 2012.
4 WTO and the Russian Federation
On the August 23, Russia became a member of the World Trade Organization, but the debate about whether it is a mistake or a blessing, do not cease. What Russia will gain in the WTO? What are the threats of joying WTO for Russia? Further, the accession of Russia to WTO is considered, and the possible impact on Russian economic situation is analyzed.
Protocol on Russia's accession to the Marrakesh Agreement establishing the WTO was signed in Geneva on 16 December 2011 (Eng.news.kremlin.ru, 2012). Thereby, the negotiation process, which was conducted actively by Moscow since year 1995, ended (Wto.org.press, 2012).
Russian Federation is an essential part of the global community. Determining an individual path of economic and political development, Russia, however, cannot stand away from the processes taking place around. The modern world is dictating its terms, and any country shall be entitled to decide whether to accept them or not.
Russia's accession to the WTO, to which the country was preparing around 18 years, was a significant step. Considering the main provisions of
world economic processes, Russia could not take them completely due to a number of national peculiarities. In addition, on this way to join the World Trade Organization faced many obstacles - both political and economic, and social nature. Even referendum took a place against Russia's WTO accession, however, did not succeed (Government.ru, 2013).
Thus, August 22nd, 2012 can be considered the starting point of a new stage of development of the Russian Federation since the country became an official 156th member of the WTO on favorable terms. By the way, Russia has made it to the last of the "Big Twenty". However, argues on this issue are still existing.
Later on, the benefits of the Russia perspective will be analyzed, as well as some downsides to Russia's accession to the World Trade Organization will be discussed.
Why world needs WTO?
The World Trade Organization was established in 1994 and is the successor to the General Agreement on Tariffs and Trade (GATT), which has existed since 1947 (Glo.bmwe.org, 2000).. Nowadays, the organization controls about 97% of the world trade. The main objectives of the WTO are the liberalization of international trade, promote economic growth of member countries, and hence the welfare of their citizens. The decisions of such serious problems, which are directly taken by the structure documents, are due to implementation by all Member States.
Meanwhile, WTO agreements were accused for unfair partial priority transnational corporations and rich countries (Glo.bmwe.org, 2000). Critics also believe that small countries have very little impact on the WTO, and, despite the stated goal, i.e. to help developing countries, the developed countries focus primarily on its commercial interests. Also, according to them, the issues of health, safety and environmental protection is constantly ignored in favor of additional benefits for the business, which, however, is directly contrary to the purposes and the WTO charter. In particular, the WTO is often criticized and condemned by anti-globalists.
Undoubtedly, Russia's WTO accession is not synonymous with its bright economic future because every process has both positive and negative sides.
Pros of Russia's accession to WTO:
- One of the pluses of Russia's accession is obviously the improving image of the country as an equal participant in world trade.
- Reducing of the barriers of international trade market. Reduction of duties. As a result, imported goods become cheaper. Also, export duties
will decrease, which lead to the fact that Russian exports will increase likewise. For this reason, the natural resource industries will benefit primarily. Therefore, there are clearly visible pluses for businesses, operating in the commodity segment.
- Reduction of import duties on a number of products (drugs, food, clothing, IT- products, etc.). Foreign companies will be more active in the Russian market, and competition will increase. As a result, Russian goods will also be cheaper. It means that consumers will benefit, but manufacturers may have losses.
- Free access to established international dispute resolution schemes in the field of trade (WTO acts as part of the Commission for the settlement of disputes). Joining the WTO - a serious step for the country. Russian foreign economic activity will become more predictable and stable. Consequently, the state can expect the number of foreign investments. Also, probably, the ruble will become less volatile.
- More opportunities for Russian investors to participate in the economies of countries - members of the WTO.
- Increasing of the competition in the financial sector. The result may be to reduce lending rates for households and small and medium-sized businesses.
- Modernization of the national economy in accordance with the requirements for the modern stage of development of trade and economic relations. Many of Russian producers to enter the world market will be forced to pay particular attention to the quality of their products so as to ensure its high competitiveness.
- Transparency of the trade law for WTO members. Build trade and economic relations, of course, it is always easier with a clear understanding of the parties' positions, without pitfalls.
- Support trade and economic interests of the country in the process of adoption of new legislation in the field of international trade.
Based on the facts mentioned above, the following conclusion can be drawn. Apparently, the main advantage of joining the WTO will be felt by exporters. It will be easier to operate, since a membership in the organization excludes the possibility of the introduction of protective duties on exported Russian products. As a result, export-oriented industries will be developed,
providing the profitable high added-value, which will improve the structure of the Russian economy and reduce dependence on oil and gas exports (US-Russia.org, 2014).
Cons of Russia's accession to WTO:
- The threat of rising unemployment if Russian companies cannot compete with foreign manufacturers. Especially, the situation could get worse in mono with one-company towns.
- Reduction of import duties could lead to a number of goods that would be unprofitable to produce in Russia. The greatest risk exists for the agricultural sector (both crop and livestock).
- Reduction of duties on imports negatively can affect the domestic automobile industry. The influx of second-hand imported cars is a direct threat to Russian automakers.
- Reduction of export duties. Reduction of export duties will lead to further budget deficit, which will be covered by issuing government bonds, respectively resulting in the increase in public debt, with further consequences.
Nowadays, most of Russia's WTO accession allows to neighboring countries benefit. Due to the reduction of duties on dairy products and new, fewer stringent rules of foreign exchange, on the domestic market came products from Finland, the Baltic States and the CIS countries. Just after few months, Russian shelves have doubled with foreign cheese, condensed milk and butter, and milk powder imports increased more than three times. In 2014, import duties were reduced even more, and subsidies to domestic producers were also declined. In such circumstances, the Russian dairy industry will not be able to deal with imports.
Another victim was the Russian pork production. Pork imports increased by 50% immediately after joining the WTO. As a result, prices for raw pork collapsed from 94 to 65 rubles per kilogram, making the rearing of pigs in Russia next year unprofitable. For consumers, increased competition in the meat industry is the inevitable decline in prices (Goreglyad et al., 2013).
Russian car industry still manages to survive in the WTO, experts say, but only because of the introduction of the recycling collection, which compensated for the abolition of import duties on foreign cars. The jump in car imports was recorded in August, and then the market is back to the usual volume. Authorities managed to protect domestic producers, but increasing taxes on imports does not solve the main problem (e.g. low quality of Russian cars).
Concerning the tire industry, in which the case company is operating, there are many fears from local Russian tires produces. Over 75% of tires produced in Russia are selling inside the country, in other words, this branch is orientated only on the inside market. The levels of customs duties for imported tires at the end of 2014 were:
- For car tires - 20%, but not less than 6,2 EUR for one tire;
- For track tires - 15%
Since Russia became a member of WTO, the expected custom duties are:
- For car tires - up to 10% in year 2017
- For track tires - up to 10% in year 2015
Local producers were expecting high competition from imported tires, especially from China and South Korea, and foresee the threat of dumping.
According to the level of protectionism, in recent years, Russia is firmly occupied one of the first places in international rankings. Experts predict that the WTO accession domestic market will become more open. In turn, other countries will also be forced to removing barriers.
5 Conclusions
The purpose of WTO is international trade liberalization and regulation of trade and political relations among the Member States. None of the regional or cross-regional free trade agreements have such a broad scope of regulation, which is achieved in the framework of the WTO agreements. That is a significant advantage of the multilateral system and the availability of a universal mechanism for dispute resolution.
Protocol on Russia's accession to the Marrakesh Agreement Establishing the World Trade Organization (WTO) came into force over a two years ago, on August 22, 2012. During the discussion of the conditions for the Russian Federation, many experts predicted the collapse of the economy, if not the whole, the individual sectors. However, after years, even with some easing of tariff protection, the economic situation in Russia remains quite stable.
Foreign trade generates more than half of the federal budget, so Russia's participation in the WTO is of great importance and carries certain risks. However, so far, there is the impact on the industry can only be ascertained. Among the victims, as expected, there are agriculture, light industry, and metallurgy.
Based on the results of this study, it is possible to say that Russia's accession to WTO might help the company to start operating on the Russian market due to reduction of customs duties for imported tires to 10% in 2017. However, according to author opinion, Russian government might establish additional trade barriers as a method of protectionism for local producers.
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