Export Import Troubles Between Russia and the European Union

If you’ve been following the European economic fiasco over the last few years, you might have heard of the case where Russia is instituting a “recycling fee” which amounts to a tariff on cars imported from the EU. They’re of course not applying that to all cars which violates global trade rules under the WTO, which Russia is a member of.
There are larger problems with a move like this related to labor and employment. The EU is setup under the principles of freedom of movement and freedom of labor–which means that anyone can go anywhere, do anything and work anywhere. Where products are imported and exported has a direct effect on labor.

The question becomes should the EU take Russia to court, even among its current and ongoing double dip recession.

The EU has a strong case against Russia if it decides to file this case. In fact, this seems to be one of the simplest legal cases to argue. Though it is not completely clear whether the EU should pursue a formal dispute in the WTO court, I would recommend that they should eventually do so.

The move to institute an environmental fee only for imported vehicles violates WTO rules regarding fair treatment and discrimination of foreign entities, which stipulate that at the time of membership no government should discriminate (after tariffs) between domestic companies and foreign market entrants. Since Russia is not instituting a tariff, and Russia is a member of the WTO, they are in violation of this rule (Russia is not subjecting its domestic auto companies to the same standards). The reason that it is for “environmental” reasons is moot, since environmental protections should be applied equally to all market players—foreign and domestic. Moreover, this “fee” does not seem to be a “standard” to be met for safety or other national goals. But, effectively it is a form of taxation to provide a comparative advantage to domestic companies. The key here is that it is discriminatory toward foreign companies. After all, if the Russian government seeks to mitigate the real and environmental cost of recycling vehicles, it should do so evenly—all cars should be recycled and all automakers should pay a fee.

On the economic, political and social side of the argument, it is probably safe to assume that this form of protectionism is to show domestic players, such as the Russian auto industry, the populace as a whole, and the political bureaucracy, that the Russian government has their best interest at heart. Moreover, they would like to show that they will not allow foreign companies to compete on even terms with domestic producers, all in the disguise of protecting the environment—a nonsensical approach.

On the other side of the issue, the EU wants to provide access to the Russian markets, according to WTO rules, to its vast auto industry—a point that should not be ignored; and this protectionist measure would increase the cost of every vehicle exported into Russia, thereby reducing their ability to compete. Russian diplomats insist that no action will be taken on this measure until ‘[Russia] receives an official complaint from the EU….if pronounced unlawful the [restriction] will be lifted’ reports a semi-official Russian news agency.

Let us assume that no country would like to dispute clearly undisputable rules for the sake of disputing them, however, so a closer analysis may be in order to understand Russia’s behavior. This analysis will assume that Russia knows the measure is illegal under WTO rules and has chosen to implement it deliberately.

The EU has always provided, as its primary method of protectionism, the use of high standards, as the tool to disfavor foreign market entrants. If Russia needed or wanted to issue some protective measures as a tool to incentivize the EU from general and subtle protectionist measures, perhaps a standard might be in order. The challenge for Russia is that its automakers will likely not be able to meet new standards without considerable costs—assuming that EU standards continue and will continue to be higher than Russian automakers’ standards—a reasonable assumption. Thus, this move could be used as a threatening measure to loosen import standard for Russian exporters.

One piece of evidence to support this hypothesis is that “about 70 discriminatory measures regarding commodities from Russia are still in effect in WTO countries,” reports The Voice of Russia. Further evidence of this theory is evident in the perceived importance the Russian government has placed on Autos by (previously) issuing a tariff of 25% or more on imported vehicles, where other areas of industry (with the exception of sugar, tobacco, and spirits) have had tariff rates of between 5% and 20%.

Perhaps, Russia seeks to argue that because EU standards have the effect of discrimination towards Russian exporters that this measure should be seen as a “standard” and not a tax, levy, or tariff to reciprocate. In other words, if you’ll place a standard on us, we’ll place what looks like a standard on you would be the argument. Painting it as a measure to protect the environment assists in that effort. After all, environmental protections and standards are commonly issued under WTO trade rules and are legal.

Of course, this case will likely not be won in a legal environment in a WTO court by the Russians, but it can be seen as a signal to warn off the EU and other developed economy countries that protectionism through setting standards is not something Russia is willing to negotiate in the long-term. The only challenge in this tactic is that Russian industries, still recovering from communism and a government loan default are likely not positioned to meet standards that are higher than EU standards, thus, this rudimentary method of sending a signal may not be effective.

Taking this hypothesis further, one might then ask, if legally, the EU can dispute this move and win it in court, what would they lose in the long run? Russia has spent the better part of the last decade negotiating its entrance into the WTO. Partly, their reason for joining the WTO was to remove the “stigma of being the only developed economy not bound by global trade practices”. The EU has been pressuring Russia to join the WTO to force them to play by a set of standardized global trade rules, but in the end all these rules tend to follow the globally accepted principle of sovereignty—the right of every nation to decide its own fate without outside interference. Thus, ultimately, even with WTO rules, all rules effectively become voluntary.

If we assume that in the end all rules have the aggregated effect of being voluntary, then does the EU risk a trade war with Russia, or at the least, aggregated complication from insisting to play by the rules, and not opting to negotiate compromises instead? Clearly it’s important for Russia to protect its auto industry, but perhaps it’s more important that they have access to markets that they previously did not have access to due to entry barriers in the form of (unreachable) standards—the EU’s main method of exercising protectionist measures.

More importantly, could filing a WTO complaint and winning the battle allow Russia to make arguments that eventually cause the standards protectionist measures to be deemed illegal by WTO members—a body that functions largely on precedence in case judgments? Could the EU win the battle but lose the War?

These are questions that are worthy of consideration, and they could be part of the explanation on why the EU has yet to file a complaint again Russia at the WTO—a major trading partner.

Perhaps a wise course of action is to continue some form of negotiations and to reach some agreement that allows the environmental levy to lifted while trading something for it—equal access to certain markets or some exemption from certain standards perhaps. In the end however, the EU may have no choice to but to take the case to the WTO, win it, and trigger some response elsewhere from the Russians.

For now, all roads seem to lead to the WTO court.