As Russia Joins Trade Bloc, Cold War Law Hampers U.S.

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The Fourth of July is traditionally a day of fireworks in the United States, but this year, there could be different sparks flying on July 4th as the Russian parliament, or Duma, votes to ratify accession to the World Trade Organization (WTO).

At a glance, Russia joining the Geneva-headquartered body, which describes itself as a "forum for governments to negotiate trade agreements ... a place for them to settle trade disputes" and the overseer of a system of trade rules, looks like good news for Americans. After all, it would open a market of more than 138 million consumers to U.S. goods and services, and bring the last major economy in the Group of 20 into the fold of the global trade body.

Russia will officially become a WTO member 30 days after it notifies the trade organization of the results of the Duma vote, which is widely expected to be in favor of joining. Once it becomes a member, Russia will have to comply with the conditions that have been laboriously hammered out over the two decades it took for the country to join the WTO, such as tariff cuts on imports including cars, electrical machinery and other manufactured goods. Many of those goods are produced by U.S. companies that are champing at the bit to gain access to Russian consumers.

According to the Bipartisan Policy Center, U.S. exports to Russia could double in five years to $20 billion when Russia joins the WTO — but only if a Cold War-era law called the Jackson-Vanik Amendment is repealed.

Jackson-Vanik, as those who deal with it call it, was set up in 1974 to pressure the then Soviet Union to allow its citizens, and specifically Jews, to emigrate freely. Jackson-Vanik has been hailed by former Soviet dissident Natan Sharansky, who spent eight years in a Soviet gulag from the late 1970s until the mid-1980s, as a cornerstone of successful U.S. policies to pressure the Soviets to respect human rights. Sharansky, who left the USSR on his release from a Soviet jail in 1986 and moved to Israel, where he has served in the Knesset, also says that the fall of the Soviet Union has led to Western governments letting down their guard against rights abuses by Moscow. Repealing Jackson-Vanik would be another step away from keeping pressure on Moscow to respect human rights.

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Photo: WTO / Studio Casagrande
From left, Chairman S.H. Jóhannesson of Iceland, World Trade Organization (WTO) Director-General Pascal Lamy, and Maxim Medvedkov, Russia's chief WTO negotiator, attend a meeting on Russia's WTO accession, which brings the last major economy in the G-20 into the fold of the global trade body.

But proponents of a repeal of Jackson-Vanik argue that Jews and others have been allowed to freely leave Russia and other former Soviet states since the Soviet Union crumbled in 1991; that Russia is now a market economy; and that the United States has waived the application of Jackson-Vanik every year since 1994. In other words, the law is outdated.

It also leaves a sour taste in the mouths of Russians, who see Jackson-Vanik "as an anachronism that equates them to the Soviets," former U.S. Ambassador to Moscow Thomas Pickering told The Washington Diplomat.

"It has a high emotional impact on the Russians. They don't care about the practical effect of the law," Pickering said, echoing a call by many top U.S. officials to repeal Jackson-Vanik.

Among them is current U.S. Ambassador to Moscow Michael McFaul, who said at an event on Capitol Hill in March that "there is no upside to holding onto Jackson-Vanik right now."

U.S. Trade Representative Ron Kirk was quoted in an Associated Press story in June as saying: "Once Russia becomes a member of the World Trade Organization, we need to make sure that American businesses have the full advantages of that, and, therefore, it's necessary for us to lift Jackson-Vanik."

Even Russian opposition leaders have called for an end to Jackson-Vanik, saying it merely plays into the hands of recently re-elected Russian President Vladimir Putin.

"Jackson-Vanik is ... a very useful tool for Mr. Putin's anti-American propaganda machine," said a statement released by key leaders of protests that brought tens of thousands of Russians into the streets of Moscow to call for "honest elections" after a fraud-marred parliamentary vote in December. "It helps him to depict the United States as hostile to Russia, using outdated Cold War tools to undermine Russia's international competitiveness."

The Russian opposition leaders also warned that, without a repeal of Jackson-Vanik, U.S. businesses would be left out in the cold, facing higher tariffs than other countries doing business with Russia when WTO membership takes effect.

WTO rules stipulate that members of the organization must grant each other permanent normal trade relations, referred to by its acronym, PNTR. If Jackson-Vanik is in force when Russia becomes a member, the United States will be in violation of those rules and Moscow has the right to deny U.S. exporters the market-opening benefits of WTO accession, while extending them to other companies around the world.

That notion has particularly alarmed America's auto industry, which has been clamoring for access to Russia's growing car-buying middle class.

"There's an expectation that Russia will become the world's sixth-largest car market by 2020. It's currently number 10," U.S. Commerce Deputy Undersecretary Michelle O'Neill told Reuters in April. "It's going to be the largest car market in Europe within the next three years."

McKinsey & Company consultants predict that the passenger car market in Russia will grow by 3 percent a year and return to pre-global economic crisis levels of more than 2.7 million units sold by 2014. Foreign carmakers are expected to benefit the most from the buoyant Russian carmaker, with Russian brands only making up a quarter of the market in 2011, McKinsey said in a report.

"The Russian passenger-car market ... will be increasingly important — it is on the road to being one of the largest on the continent," McKinsey said.

"There is a real appetite for American cars in Russia, especially Moscow," said Christopher Boian, an American journalist who works at RIA Novosti. "But it is still a far cry from what I suspect it's going to become again after full WTO accession. A lot of American cars are really good value for money — and everyone here knows it!"

As the call to ditch Jackson-Vanik grows louder, some are insisting that a new law be put in its place to continue to press Russia on human rights. Not doing so would send a message that trade trumps human rights.

The law they have proposed, the Magnitsky Act — named after Russian anti-corruption lawyer Sergei Magnitsky, who died in prison in 2009 — would not use trade as a stick. Instead, it would use targeted sanctions against individuals suspected of human rights violations, including involvement in Magnitsky's death, naming and shaming them, freezing their U.S. assets, and barring them from obtaining visas to come to the United States.

Magnitsky was arrested in 2008 after he accused Russian officials of involvement in a scheme to defraud the government of hundreds of millions of dollars. He died a year later in prison. He was 37.

"The good news is that the Magnitsky Act doesn't threaten trade sanctions, because that's against the WTO rules and Russia could just turn around and say they won't give U.S. companies the same concessions as they're giving everyone else," Pickering said.

"The bad news is, this would add a negative quotient to relations with Russia" at a time when the United States is trying to convince Moscow to bring pressure on the Syrian regime to end violence in the country and press Iran to be more transparent with its nuclear program, added Pickering, who was ambassador to Moscow from 1993 to 1996.

"The Russians are very unhappy with Magnitsky because they see it as interference in their internal affairs," he said.

The proposed law passed a House of Representatives panel in June and was marked up by the House Foreign Affairs Committee. The Republican chair of the committee, Ileana Ros-Lehtinen of Florida, and her Democratic minority counterpart, Howard Berman of California, both said they would like the Magnitsky law to be linked to a repeal of Jackson-Vanik.

Several influential senators, including Senate Foreign Relations Committee chair John Kerry (D-Mass.), have also backed the idea of passing the Magnitsky Act as a tradeoff for ending Jackson-Vanik, although Kerry's committee delayed consideration of the act in February and, as of press time, has yet to reschedule a markup on the bill.

In the meantime, the bill must also move through other committees, such as finance, because of its overlapping jurisdiction. Senate Finance Committee Chairman Max Baucus (D-Mont.) recently announced his support for legislation granting normal trade relations with Russia, but pairing it with the Magnitsky Act. According to a report in the Hill, he wrote a letter to Sens. John McCain (R-Ariz.), Ben Cardin (D-Md.), Roger Wicker (R-Miss.) and Joe Lieberman (I-Conn.) saying he will "ensure that these two important pieces of legislation can be linked together, reported out of the committee and voted on by the full Senate as soon as possible this year, probably by the August recess."

The Obama administration, however, is publicly against the move and has been working with the Magnitsky sponsors to tweak portions of the bill.

Secretary of State Hillary Clinton, in a June Wall Street Journal op-ed, argued that the repeal of Jackson-Vanik doesn't mean the U.S. would stop pressing Russia on its human rights record. In fact, she said, "Extending permanent normal trading relations isn't a gift to Russia. It is a smart, strategic investment in one of the fastest growing markets for U.S. goods and services. It's also an investment in the more open and prosperous Russia that we want to see develop."

"As the demonstrations across Russia over the past six months make clear, the country's middle class is demanding a more transparent and accountable government, a more modern political system, and a diversified economy. We should support these Russian efforts," Clinton wrote.

"When Russia joins the WTO, it will be required — for the first time ever — to establish predictable tariff rates, ensure transparency in the publication and enactment of laws, and adhere to an enforceable mechanism for resolving disputes. If we extend permanent normal trading relations to Russia, we'll be able to use the WTO's tools to hold it accountable for meeting these obligations," she said.

The current row is just the latest bump in the long, rocky road that Russia has traveled to gain WTO membership. Georgia objected to Russia joining the trade bloc after the two countries fought a short war in 2008, but lifted its objection last year when a trade deal was reached between the two countries. Previous obstacles to WTO accession included disputes with the United States and Europe on issues including wood import quotas and agricultural exports, as well as bans on meat imports imposed by Russia amid health scares.

The Heritage Foundation, a conservative think tank, said in a report released in May: "The U.S. should grant Russia permanent normal trade relations status, but only after updating its tools for protecting human rights in Russia."

The Center for American Progress, a progressive think tank, warns that the U.S. economy "will take the hit" if Jackson-Vanik remains in force, "since most of the rest of the world will gain preferable access to the Russian market when Moscow joins the 153-nation World Trade Organization." However, the center also backs the idea of replacing the human rights aspect of Jackson-Vanik with the Magnitsky Act.

But like his predecessor Pickering, Ambassador McFaul is against swapping one law for the other. McFaul was quoted by the Moscow Times as telling students at the New Economic School in the Russian capital that the United States already has "enhanced powers to review" immigration cases and "this issue has been resolved."

Pickering said he expects the Magnitsky Act to pass Congress. Russian officials, meanwhile, have warned that Moscow will not sit idly by if it does.

Bloomberg News quoted Russian Ambassador to Washington Sergey Kislyak as telling journalists in April that there would be "a significant reaction" from Moscow "if anything of the type is adopted." He was referring to the Magnitsky Act, which he said would "undermine" the ability of Russia to work with the United States "on a number of issues."

Arguing in favor of a repeal of Jackson-Vanik is the fact that it dates from a different time, and if it remains on the books, Russia could refuse to accord lower, post-WTO-accession tariffs to U.S. companies. If the Cold War-era law is repealed and "replaced" by the Magnitsky Act, Russia would be annoyed but would not be able to bar U.S. companies from benefiting from lower tariffs. In fact, doing so would put Russia in violation of WTO rules.


About the Author

K.D. Tack-Czasu is a contributing writer for The Washington Diplomat.

Last Edited on June 28, 2012