Russia and the WTO

Russia first made its application in 1993 so has been negotiating its accession now for 18 years, by far the longest of any accession process by a WTO applicant. This reflects in part the country’s economic size (it is the sixth largest economy in the world on a PPP basis). Whereas normally 6-10 countries might seek to open bilateral negotiations with an acceding country because they had special trade interests at stake, in Russia’s case more than 60 countries made such requests.

But also China was a large economy whose WTO accession affected many countries, but despite the greater legacy of a command-and-control economy than in Russia’s case, China has now been a WTO member for a decade.

In Russia’s case, wavering within the political elite about the priority to be given to WTO membership played an important role in delaying progress. The twists and turns of the process are described in a brilliant essay by Anders Aaslund entitled Why Doesn’t Russia Join the WTO? in the April 2010 edition of the Washington Quarterly. The sudden and unexpected announcement in July 2010 that Russian intended to form a customs union with Belarus and Kazakhstan further complicated matters because it required the renegotiation of much of the report of the WTO Working Party on Russian accession.

EU’s agrifood sector and Russian WTO accession

Russia is the EU’s second largest export market for agri-food products after the US, and the EU is Russia’s largest supplier, accounting for 38% of its imports in 2010. 80% of the EU’s exports to Russia are final goods, mainly fresh fruits and vegetables, cheese, frozen pigmeat and drinks. Russia has seen its agricultural imports explode in recent years, apart from the downturn in 2009. However, Russia is also a major exporter of grain, particularly wheat, and its policies towards grain exports helped to destabilise world grain markets in recent years.

Russia’s agricultural policy has become steadily more protectionist over time. Its percentage PSE increased from 18% in 1995-97 to 22% in 2008-10, thus exceeding the OECD average of 20%. Around two-thirds of this support derives from market price support, largely due to border protection. In addition, producers benefit from budget transfers in the form of subsidies on variable inputs and investments, while livestock producers have benefited given that domestic grain prices have been held below world prices.

WTO membership for Russia will bring important benefits for the EU’s agri-food industry through creating greater security of market access and possibly opening some additional markets. Market access issues include Russia’s somewhat arbitrary use of SPS measures, the future of Russia’s TRQs especially for meat imports, and the overall level of its trade-distorting support for its agriculture in future.

Russia’s use of SPS measures to restrict imports was seen most recently this summer when it restricted all imports of fresh vegetables from the EU27 countries because of the e.coli outbreak in Germany. The EU protested that the measures were excessive and disproportionate and not based on the SPS procedures that would apply under WTO rules.

The WTO Working Party wants to make sure that Russia’s SPS regime is transparent and non-protectionist. A difficulty is that the customs union (RU, BY and KZ) now has formal control of the SPS conditions regarding imports and in many cases the SPS regime is not yet defined as the authorities of the three countries must agree on this.

In two other key areas of import tariffs and domestic support, Liefert and colleagues report that Russia in its accession negotiations has been asking for bound commitments above the existing levels (a bound tariff or support amount is a maximum allowable level in the future). Russia’s current average agricultural import tariff is about 18%, up from 10% in 2000. However, Russia is negotiating for bound agricultural tariffs above actual applied tariffs. On domestic support, Russia has been asking for annual bound support of $9.5 billion, which compares to its 2007 actual support level of $5.7 billion,

The OECD reports that in late 2010, Russia’s position is to accede with a commitment on Total Aggregate Measurement of Support corresponding to $9 billion and maintain this level until 2012 (the end year of the current State Programme for Development of Agriculture). The commitment level would then decline to $4.4 billion between 2013 and 2017. Some negotiating parties want to see lower commitment levels from the beginning of Russia’s membership, based on the average level of trade-distorting support in recent years. Russia no longer proposes to schedule entitlements to export subsidies in agriculture.

Prospects

While accession terms such as those indicated might not do much to liberalise Russian trade and support policies immediately, EU suppliers would still benefit because bound levels would provide a cap on any future rises in tariffs and support. Also, there would be a forum where potentially troublesome SPS restrictions might be challenged if they were imposed.

However, even if bilateral negotiations have been successfully concluded with its major partners, there still remain a number of potential stumbling blocks in the way of Russia’s WTO accession. One is the continuing border dispute with Georgia which is already a WTO member. The other is the future of the Jackson-Vanik amendment in the US which denies MFN status to a country with a non-market economy deemed to restrict emigration. If these hurdles can be overcome and Russia does become a WTO member this year, it would be a major boost for a body sorely needing some good news given the Doha Round deadlock. .

This post has been authored by Alan Matthews

The return of the subsidies has been widely criticised by agricultural exporting countries such as Australia. But concern has also been expressed within the EU itself. Germany is known to have been concerned that the subsidies are creating a damaging dumping effect in some developing countries.

Fischer Boel explained that in countries such as the Dominican Republic, the impact of subsidised EU exports is not to directly harm domestic produce. These markets are in fact a battleground between the EU and other developed world exporters, she argued.

Of course the EU is not directly competing on the liquid milk market in these countries. However, I recall reading studies by Oxfam and Cafod relating to the Dominican Republic and Jamaica. Small local dairy farmers found that their market in local processing factories was driven out by skimmed milk powder from the EU.

According to the Financial Times,

Mr Seehofer said the EU had very high standards on “the environment, on water, on health and social issues, that are also expensive for our farmers to implement. The EU should move step-by-step to ensure that third-world countries also have to meet these standards if they want to export to the EU.” He said this idea was broadly in line with France’s proposals on a “European preference” in farm products to reflect higher EU standards.

This shows Seehofer is dancing an elegant pas-de-deux with Michel Barnier, who last week raised the idea of a new era of community preference, based on (higher) EU standards of farming and food production. The argument that the EU’s standards are more about trade protection than consumer protection is has been raging for a long while, not least on this very blog. So it was very interesting to read today’s revelations by the Financial Times that European poultry producers are using a chlorine-washing process on EU chicken meat bound for the export market. According to the FT’s Brussels correspondent Andrew Bounds:

Internal documents from the European Commission show that chlorine washing is permitted for poultry being exported from the EU. “The French use [chlorine washing] for exports to Saudi Arabia. This fact has been concealed. Not once has it been mentioned in all the Commission meetings on this subject,” said a senior Commission official pushing to change the rules. “This is all about protecting vested interests.”

If the EU is serious about embarking on a new era of community preference based on EU standards of environmental, animal welfare and food production regulations, this kind of hypocrisy is going to make things very sticky, particularly when trading partners begin taking such cases for dispute settlement at the WTO. European Food Safety Agency has found that chlorine washing “does not indicate a safety concern”, which would suggest the EU is in breach of its obligations at the EU. Nevertheless, at least two Commissioners are thought to be concerned about the environmental and health implications of chlorine washing and a majority of member state farm ministers support continuing the import ban on chlorine-washed poultry. I’ve written previously on the importance of the ‘yuck factor’ in making decisions about food production, by which I mean paying attention to what non-expert consumers concerns about novel food production techniques, even if the ‘experts’ declare the techniques ’safe’. Remember, the experts once said that feeding sheep and cattle remains to cattle was ’safe’. And we all know where that ended.

Personally, having worked at the Ministry of Agriculture in the UK for three years, and having read many of the reports about the inner workings of the poultry sector, I give almost all chicken, whether washed in chlorine or not, a very wide berth. If you’re interested in reading more about how most chickens reach your plate, an excellent book is Planet Chicken, by Hattie Ellis, who just happens to be the sister of Alex Ellis, UK Ambassador to Portugal and former trade policy adviser to Commission President Barroso… It’s a small world!

The answer is that the contraction of EU exports of low value, low margin bulk commodities like skimmed milk powder, cereals and sugar has been more than counterbalanced by the rapidly increasing competitiveness of its food and drinks industry and the growth of the world market in ‘final products’. Brazil and the US may seek to be the world’s granary, but the EU is fast becoming the world’s grocery store: wines, spirits, tobacco, soft drinks, cheeses, processed meats, fruits and vegetables all feature in the EU’s €6 billion positive trade balance. As the authors of the report put it:

The EU has succeeded in carving out a market for itself in the area of high value final products thanks to adjustments in production, both in the farm sector and in the food industry. The continuous reform of the CAP played a key role in this process, with the move away from product-based support and the stronger focus on sanitary and quality standards. This has improved market orientation, therefore the EU agriculture and food sectors are in a better position to react to dynamic developments on the demand side.

It is not easy to tell whether it is CAP reform that can take the credit or rather European gastronomic heritage leveraged by the logistics and marketing skills of giant European food and drinks companies like Diageo and Danone. But it is certain that message for European farmers from the European Commission analysts who compiled this report is that the future is in quality production, high standards of food safety regulation and the integration of farmers in a high value-added European agri-food sector.

Export subsidies benefit big export-oriented agri-business that dump cheap produce into poor countries. Investment subsidies mainly given to high-performance and input-intensive farms and the food processing industry push export orientation and distort trade. Price pressure on small farmers is increasing.

In short, the dumping policy is based on “three pillars”: inept qualified and unfairly distributed direct payments, export subsidies, and investment subsidies. This dumping policy is used as a tool by the European Union to increase the profit margins and the competitiveness of the processing industry and the distribution sector. The nature and environment, and family farming in Europe and in poor countries are losing out.

Subsidies are not per se bad, to the contrary they are an indispensable instrument to provide incentives for needed policy changes in the Common Agricultural Policy. Re-coupling direct payments to environmental and social criteria is the very first step needed for a change of the CAP into the right direction.