Cold-War Law Blocks Doubling U.S. Trade With Russia Under WTO

The U.S. risks losing out on a potential doubling of exports to Russia unless Congress repeals a Cold War-era law passed to punish the Communist Soviet Union.

The World Trade Organization’s pending approval of Russia’s membership may leave the U.S. unable to take advantage of a 22 percent reduction in tariffs that European and Asian nations will enjoy.

The obstacle is the Jackson-Vanik amendment, passed by Congress in 1974 to bar favorable trade relations with the Soviet Union because it wouldn’t let Jewish citizens emigrate. Lawmakers such as Representatives Chris Smith and Ileana Ros- Lehtinen have questioned repealing the law and easing trade with Russia because of its human-rights and economic policies.

“Unless Congress passes a repeal, the U.S. business community is not on equal footing with European and Asian competitors,” Randi Levinas, executive vice president of the U.S.-Russia Business Council, with members such as Boeing Co. (BA), General Motors Co. and Exxon Mobil Corp. (XOM), said in an interview. “They won’t get the same benefits when Russia joins.”

President Barack Obama has said he supports Russia’s entry into the WTO, the international trade arbiter. Membership for the largest nation outside the 153-member group will be put to a vote at a meeting of trade ministers Dec. 16 in Geneva. Russia’s Duma, the lower house of parliament, has until mid-June to ratify the accord, the final step before it takes effect. Maxim Medvedkov, Russia’s chief WTO negotiator, said Nov. 10 in Geneva that Russian lawmakers will probably approve membership early next year.

Russian Chief Negotiator Maxim Medvedkov, right, smiles with a t-shirt he received from of the World Trade Organization Director-General Pascal Lamy, left, after formal negotiations on Russia's membership bid to join the WTO during a press conference at the WTO headquarters in Geneva. Photo: Fabrice Coffrini/AFP/Getty Images Close

Russian Chief Negotiator Maxim Medvedkov, right, smiles with a t-shirt he received from... Read More

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Russian Chief Negotiator Maxim Medvedkov, right, smiles with a t-shirt he received from of the World Trade Organization Director-General Pascal Lamy, left, after formal negotiations on Russia's membership bid to join the WTO during a press conference at the WTO headquarters in Geneva. Photo: Fabrice Coffrini/AFP/Getty Images

More Open

U.S. exports to Russia may more than double in five years, to $19 billion from $9 billion in 2010, under WTO membership, according to a report last month from the Peterson Institute for International Economics in Washington.

More important is that WTO rules would require Russia to become a more open trading partner, with greater respect for intellectual property and more consistent food-safety regulations, according to Levinas. Such transparency may improve Russia’s ranking at 120th of 183 nations in the World Bank’s report on the ease of doing business.

The U.S. had a $19.7 billion trade deficit with Russia last year, according to the U.S. Trade Representative’s office. Trade between the two nations has increased almost sevenfold since 1993, when the U.S. began granting annual waivers from the restrictions, according to a report by Bloomberg Government.

Russia exported more than $400 billion in goods last year, mainly to the European Union, Ukraine, Turkey, China and Belarus, according to the WTO. Imports were valued at almost $249 billion. Trade in services such as transportation and travel was $114 billion.

‘Not Relevant’

“Congress and the administration know full well Jackson- Vanik has to go,” Joshua Meltzer, a fellow at the Brookings Institution in Washington specializing in global economy and development, said in an interview. “The issues that were around many, many years ago, they’re not relevant at all.”

An impediment to Russia joining the WTO was removed last month when Russia and Georgia agreed on how to handle trade along their disputed border.

“Russia’s membership in the WTO will lower tariffs, improve international access to Russia’s services markets, hold the Russian government accountable to a system of rules governing trade behavior, and provide the means to enforce those rules,” Obama said in a Nov. 10 statement.

That view isn’t universal in Congress, where some members, such as Smith, a New Jersey Republican, question whether Russia has done enough to warrant full trade benefits or sufficiently changed its ways since emerging as a nation after the collapse of the Soviet Union in 1991.

‘Foolish Talk’

“It’s moving in the wrong direction,” Smith said in an interview. “I’m looking for a trend. I don’t expect it to have arrived, but expect it to be on the right path.”

Smith said he’s undecided on repealing Jackson-Vanik and that the administration hasn’t prodded Russia enough toward democracy, religious freedom and free speech due to what Obama has called his “reset” in relations between the nations.

“There was foolish talk about ‘resetting,’” Smith, a member of the House Foreign Affairs Committee, said. “Reset what? What does it mean?”

The House Ways and Means Committee hasn’t scheduled action on repealing Jackson-Vanik, according to Jim Billimoria, the panel’s spokesman.

“I’m not ready to do anything on Jackson-Vanik,” Ros- Lehtinen, a Florida Republican who is chairman of the House Foreign Affairs Committee, said in a Nov. 16 interview. Once the U.S. normalizes relations with Russia, it would have little leverage to press for improvement in human rights or movement toward greater democracy, Ros-Lehtinen said.

Election Protests

Tens of thousands of people gathered in more than 30 Russian cities on Dec. 10 to protest fraud in parliamentary elections. The Organization for Security and Cooperation in Europe, the continent’s democracy watchdog, the U.S., Germany and the EU criticized violations during the Dec. 4 vote.

The leaders of the Judiciary committees in the U.S. House and Senate have “significant concerns” about whether Russia will respect U.S. intellectual-property rights, according to a Nov. 9 letter signed by the senior Democrats and Republicans on the panels.

With Jackson-Vanik still in place, Russia would have the discretion to keeps tariffs higher in trade with the U.S. than the WTO provides for other members, according to Howard Rosen, a fellow at the Peterson Institute. In addition, the U.S. wouldn’t benefit from the intellectual-property protection and adoption of food safety regulations, he said.

‘Move Forward’

“The question would be best posed to Russia,” Rosen said in an interview. “Would they be willing to move forward if it is not removed?”

Representatives at the Russian embassy in Washington didn’t return messages seeking comment.

Under the terms of its WTO agreement, Russia would gradually cut its average tariff ceiling with the U.S. for manufactured goods to 7.3 percent from 9.5 percent currently. Duties on farm products would drop to 10.8 percent from 13.2 percent. On average, the tariff cap on Russian goods would fall to 7.8 percent from 10 percent now, a 22 percent cut.

Tariffs on dairy products would fall to 14.9 percent from 19.8 percent, automobiles would be cut to 12 percent from 15.5 percent and tariffs on cereals would decline to 10 percent from 15.1 percent.

Beef, Pork, Poultry

Foreign beef, pork and poultry entering Russia’s market would face lower tariffs while higher duties would be applied to products exceeding quotas, under the WTO agreement. The longest period for implementation is eight years for poultry, followed by seven years for cars, helicopters and civil aircraft.

The U.S. Chamber of Commerce, the largest U.S. business association, will lobby lawmakers to repeal the trade barrier, according to Christopher Wenk, senior director for international policy for the Washington-based group.

“The business community will be talking about commercial benefits, the economic benefits of having Russia in the WTO,” Wenk said in an interview. “It’s only good to have them under the tent playing by the same rules as the WTO.”

Ultimately, fate of the Jackson-Vanik restrictions that were crafted by Senator Henry “Scoop” Jackson, a Washington Democrat, may depend on the stand taken by House Speaker John Boehner. In a speech on Oct. 25, before Russia reached agreement with its neighbor, the Ohio Republican expressed concern for Georgia’s “territorial integrity.” The two former Soviet states fought a five-day war in 2008.

Boehner also cited “significant outstanding commercial issues that must be addressed,” without elaboration. Michael Steel, a Boehner spokesman, didn’t respond to inquiries about the speaker’s intentions on Jackson-Vanik.

To contact the reporter on this story: William McQuillen in Washington at bmcquillen@bloomberg.net

To contact the editor responsible for this story: Larry Liebert at lliebert@bloomberg.net

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