Wednesday, July 28, 2010

The EU’s challenge to Russia’s Customs Union and WTO-accession

by M. Ulric Killion
“The United States supports Russia’s integration in multilateral organizations” (Russia’s accession to WTO, OEDC to promote democracy - U.S. report, AFP, July 27, 2010).  

In June 2010, speaking on behalf of the European Union (EU), Catherine Ashton, the EU foreign policy chief, expressed concern about the enactment of the Customs Union between Russia, Kazakhstan and Belarus (Customs bloc between Russia, Belarus, Kazakhstan concerns EU, Xinhua news, June 17, 2010). Ashton warned that the customs union might harm international trade and pose “an additional barrier fencing Astana, Minsk and Moscow off the World Trade Organization (WTO).” Ashton went on to characterize the customs union as of the variety that may hinder rather than assist international trade. By the vehicle of the Customs Union, Moscow, Minsk and Astana earlier announced in 2009 that they will join the WTO as a single entity, though Russia may also seek to join the WTO as a separate entity. Russia intends to join the WTO by the end of 2010.
In response, Russian First Deputy Prime Minister Igor Shuvalov announced that Russia’s participation in the Customs Union will not prevent its entry into the WTO, and there are not any contradictions between the WTO rules and founding documents of the Custom Union (Russian official: Custom Union not obstacle for WTO aspirations, Xinhua news, June 17, 2010).  From the Russian perspective, as Shuvalov explained, they are merely taking the EU’s economic model and adapting it for a modern reality and capacity of the three countries.
As for challenges to Russia’s WTO-accession bid, on July 19, 2010, Russian President Dmitry Medvedev announced that problems in copyright and intellectual property rights protection will hamper Russia’s WTO accession. “In Soviet times the amount of such cases [on copyright protection] was insignificant, the protection of intellectual property rights was imperfect,” as President Medvedev explained, adding that subsequently Russia took on Western protection standards, but the country still remains vulnerable in this issue (Russia’s Medvedev says copyright protection bone in WTO accession, RIA Novosti, July 19, 2010). 

During his July 19, 2010 interview, President Medvedev made no mention of the Customs Union as challenging Russia’s application to join the WTO. Medvedev did, however, during an earlier interview on July 15, 2010 address this issue. According to Medvedev, Russia is making progress toward WTO accession. From his perspective, Russia’s entry into the Customs Union has not halted their efforts toward WTO membership (Merkel hopes Russia’s WTO accession not hampered by Customs Union, RIA Novosti, July 15, 2010).
Although earlier announced that the customs union would take effect on July 1, 2010, it was in Astana, Kazakhstan, on July 6, when the leaders of the three nations actually signed a declaration stating that the customs union came into effect. The delay was attributable to Belarus’ objections to export taxes charged by Russia for its oil supplies. Moscow in response announced a waiver of the oil tax on January 2012; a date corresponding to the eventual establishment of a full-fledged common economic space by the three countries (Vladimir Radyuhin, Russia, Kazakhstan, Belarus launch a customs union, The Hindu, July 6, 2010).
Additionally, the new Russian-led Customs Union have reportedly “seriously hampered” progress on talks concerning a new Russian-EU partnership pact, which is a new Partnership and Cooperation Agreement (PCA) between Russian and the EU. According to Marc Franco, the EU’s ambassador to Moscow, “The new scheme (for Russian WTO entry) completely changes the existing picture.” Russian WTO membership, as Franco explains, “was a sort of platform that allowed us to plan the future, but now there is a great deal of uncertainty on how to move forward” (New Russia-EU pact ‘stalled by WTO shift’, Agence France-Presse, July 6, 2010). Russian-EU negotiations, according to Thomas Bertelman, the ambassador representing EU president Sweden, were being conducted on the assumption that Russia would soon become WTO member.
For these reasons, and other reasons, there is a great deal of controversy concerning Russia’s accession to the WTO. In the public debate, the issues are widely ranging. While Anders Aslund and Fred Bergsten perceive the lack of trust as a main obstacle, David Christy distinguishably characterized Russia’s approach as turning “WTO accession on its head by acting as a deal maker, not a deal taker,” while refusing to bulge on key issues (Simon Lester, Russia and the WTO, International Economic Law and Policy Blog, June 25, 2010).
All of this prognosticates that the EU’s objections to both the Customs Union and Russia’s pending WTO-accession may grow increasingly weak with the passage of time. This is because of the fact of Russia’s economy being an oil economy or oil-driven economy. While a new WTO report providing an up-to-date analysis of the recent economic developments and policies in Russia characterizes Russia’s road to economic recovery as a bumpy one, the report notably mentioned that, “Oil prices are expected to average US$78 a barrel in 2010 and slip to US$74 a barrel in 2011” (World Bank’s Russian Economic Report No. 22, June 16, 2010).
The strength or weakness of an EU objection is, actually, largely contingent on Russia’s oil economy. As David Christy observed, “The European Union has yet to place pressure on Russia, presumably because of the reliance of many of its member states on Russian energy.” Just as oil (i.e., the oil tax) was a critical factor for Belarus in joining the Customs Union, the dependence of EU members on the Russian energy supply is equally compelling.
(Dmitry Medvedev and Angela Merkel in Yekaterinburg, Merkel hopes Russia’s WTO accession not hampered by Customs Union, RIA Novosti, July 15, 2010; “We want Russia’s accession to the WTO to be completed and hope the Customs Union will not make the situation more complicated. We want to see transparent investment conditions,” Merkel said.).
As earlier mentioned, there is also the EU’s potential objection, as characterized by Catherine Ashton, the EU foreign policy chief, which premises on the Customs Union potentially harming international trade. The objection as couched by Ashton also serves as a reminder of Jacob Viner and his classic customs union theory (Customs Union Issue, 1950). Notwithstanding exceptional cases of some Least-Developed Countries (LDCs), in terms of economic orthodoxy such as Jacob Viner and his classic customs union theory, these South-South agreements generally produce welfare-reducing trade diversion or a deeper protectionism and decrease in efficiency, rather than welfare-enhancing trade creation (M. Ulric Killion, Regional Economic Integration: The Chinese Way, The Analyst-Finance Magazine: Global Economy Special Issue, August 2008).
Additionally, the United Nations Office of the High Representative for the Least Developed Countries (UN-OHRLLS) does not designate the member countries of the Customs Union (i.e., Russia, Kazakhstan, and Belarus) as LDCs (“About LDCs”, Least Developed Countries. UN-OHRLLS). The same is true regarding the WTO, which recognizes as LDCs those countries which have been designated as such by the UN-OHRLLS (UNDERSTANDING THE WTO: THE ORGANIZATION - Least-developed countries).
The three member countries of the Customs Union are actually developing countries. As such, the customs bloc between Russia, Belarus, and Kazakhstan, according to Viner’s thesis, characterizes a South-South agreement. A problem is that South-South agreements or agreements between developing countries generally produce welfare-reducing trade diversion or a deeper protectionism and decrease in efficiency, rather than welfare-enhancing trade creation. In this respect, the objection of the EU (i.e., the customs union might harm international trade) to the formation of the Custom Union may have merit.
For every given rule (e.g., Viner’s thesis), however, there is always the exception. In the case of Viner’s thesis, there is the earlier mentioned exception of LCDs. There is also the possible development of other exceptions (e.g., in international trade statistics, the Southern African Customs Union is also treated as a developed region (“Composition of macro geographical (continental) regions, geographical sub-regions, and selected economic and other groupings (footnote C)”. United Nations Statistics Division)). The case of the 2004 ASEAN-China FTA may also eventually present a new exception to the rule, if not simply a refutation of the rule or thesis (Killion, 2008; M. Ulric Killion, Chinese Regionalism and the 2004 ASEAN-China Accord: The WTO and Legalized Trade Distortion, North Carolina Journal of International Law and Commercial Regulation, Vol. 31, No. 1, pp. 1-64, Fall 2005). 

A problem of the WTO rules is that do not directly address what characterizes legalized trade distortion in the world multilateral trade system (Killion, 2005). The proliferation of customs unions between developing countries, and the lack of trade laws directly addressing the problem of legalized trade distortion, reduces the issue of the proliferation of customs unions that may be welfare-reducing or harm international trade to a political –based decision. 

This also presents issue of the rigidity or flexibility of the WTO rules governing accession. As a result of seemingly vague and flexible rules governing accession, the decision concerning accession is often a political rather than rigid, rules-based decision (e.g., China’s 2001 accession to the WTO despite a Western-perceived-need for reform of its judiciary). For these reasons, one reasonably suspects that the EU’s objections, if any, to the Customs Union and Russia’s pending WTO-accession will probably grow increasingly weak with the passage of time, while also eventually reducing the issue of Russia’s WTO-accession to a political-based decision. As one source observed, “Russia first submitted its application to join the global trade organisation in 1993, but the country’s bid has hit a number of roadblocks - political and otherwise - along the way. The customs union itself currently lacks a common position on WTO membership. Whether Russia can even join the WTO as part of a group is unclear. . . .” (Russia Bolsters Regional Influence with New Customs Union, Bridges Weekly Trade News Digest, Vol. 14, No. 26, Jul 14, 2010).
Copyright © Protected - All Rights Reserved M. Ulric Killion, 2010.