The World Trade Organization (WTO) represents one of the largest international institutes regulating foreign trade activities in general and its trading sector in particular. The big authority and popularity of the WTO in world economic community are connected, first of all, with practical benefit from participation in activities of this international organization. This benefit is reached because the overwhelming majority of the member-countries of the WTO are provided for themselves and their partners with favorable conditions on creation of trade and other activities on huge areas.
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The introduction of Russia into the World Trade Organization means formal removal of barriers on the way of the Russian goods to the world markets with simultaneous counter opening of domestic market for foreign manufacturers. However, the economic breakthrough on the world markets is vital for the Russian economy.
It is supposed, on the one hand, that joining will promote improvement of market mechanisms, free competition of the goods and services in the Russian economy and, as consequence, will create necessary conditions for intensive growth of labor productivity. Thereby there will be an impulse in solving of many problems, like re-structuring of the industry and technological development.
At the same time, for a considerable part of the Russian enterprises and companies which are producing noncompetitive goods, the introduction of the country into the WTO means inevitability of a choice: either modernization of production lines or curbing of production. If the enterprise wants to survive in such conditions, it is obliged to learn how to produce competitive goods. Russian economy needs time, desire, ability to improve, and also, for a certain transition period, state measures of protection of home market and those manufacturers who aren’t prepared for such modernization.
That’s why, I will try to analyze the key benefits and disadvantages of the Russian participation in the WTO. We should find out, what problems Russian enterprises will face, what difficulties they should expect in case of Russia’s accession to the World Trade Organization, because this accession will have great impact not only within the Russian Federation, but also around the world.
WTO & RUSSIA: GOALS, BENEFITS, DISADVANTAGES.
THE MAIN GOALS, PRINCIPLES AND FUNCTIONS
OF THE WTO
I don`t want to review the history or structure of the WTO in this assignment, because we reviewed these aspects during the module and because I want to analyze key benefits and key disadvantages of the Russian accession to this organization. So, at first, I will review the main goals, principles and functions of the WTO as the main international economic organization. From my point of view, it is very important and vital to know these goals, principles and functions, because it is a basis for the understanding of the problem.
The main principle of the WTO is the desire of member countries to develop international trade and provide economic development through mutual liberalization of market access, predictable conditions for business activities in foreign markets and regulatory actions of governments to regulate foreign economic sphere. Consequently, I can identify the main goals of the WTO:
The growth of trade exchange of goods and services;
Reduction of tariff and non-tariff barriers in world trade (the use of tariff protection of the national markets, rather than quantitative restrictions or similar measures);
Activities on the basis of the “most favored” principle, i.e., trade without discrimination, which is reached by, on the one hand, MFN principle for export, import and transit operations and related customs duties and charges, and by “national treatment” principle, i.e., equal treatment of imported and domestic goods in respect of internal taxes and charges, as well as rules governing domestic trading;
Progressive reduction of customs tariffs during rounds of multilateral trade negotiations and their binding to legally formalize the agreed level;
Transparency of trade policies;
Resolving of trade disputes through consultations and negotiations, and in failing to resolve a dispute – through addressing disputes in specially created bodies, etc.
The most important functions of the WTO are the following: monitoring of implementation of agreements and arrangements; conducting of multilateral trade negotiations and consultations between the Members of WTO, resolving of trade disputes; monitoring of national trade policies of member countries, technical assistance for developing countries on matters relating to the competence of the WTO, cooperation with other international organizations, etc. (1)
According to the above-mentioned, I can define the following general advantages from WTO membership on the basis of existing functions and goals:
1. Creation of better access to world markets for goods and services on the basis of predictability and stability in development of trade relations with WTO member countries;
2. Access to the mechanism of the WTO for dispute settlement, which ensures the protection of national interests, if they are infringed by other members, and thus the elimination of discrimination;
3. Ability for implementation of current and strategic trade and economic interests through effective participation in international trade negotiations in the process of creation of new rules for international trade.
ACCESSION OF RUSSIA TO THE WTO
Since the early 1990’s after the collapse of the Soviet Union’s Russia have conducted significant changes and reforms in its economy. So, the next step of the Russian reforms should become inclusion of domestic goods and services in the process international trade on equal terms. Achieving of this goal can be reached by the accession of Russia to the World Trade Organization.
However, there are opinions concerning this step is very complex, because this process of Russian accession to the WTO has been lasting for 20 years (2) in the modern Russian history. But, the supporters of membership of Russia Federation in the WTO consider that such step will be an important stimulus for boost of economic development and for further strengthening of the reform process in the country. At the same time there is also other point of view, according to which, Russia should not tie its hands in the process of conduction of economic policy with any obligations under the WTO, at least, before reaching the stage of sustainable economic growth. But, speaking for or against the accession of Russia to the WTO, you must have a clear idea, whether or not you will have the positive balance between benefits and obligations of such membership.
World Trade Organization members are already 153 (3) countries of the world and in the coming years this number will increase. This means that virtually every state that want to create a modern, efficient economy and equal participation in world trade, aims to become a WTO member. Russia, in this sense is not an exception.
The most important reason, that prompted Russia to accede to the WTO, is its desire to become, finally, an equal trading partner in the global market. That, incredibly complicated and cumbersome system of bilateral agreements, which was created by the Soviet Union, is not always able to protect the economic interests of Russia in the current context of increased internationalization of economic ties and interdependence of national economies.
It is well-known, that participation in the WTO gives its member a lot of advantages. Receipt of these advantages is the main goal of accession to the WTO in the pragmatic sense. The specific goals for Russia within WTO are the following:
Getting the best in comparison with existing and non-discriminatory conditions for access of Russian products and services to foreign markets;
Access to an international mechanism for resolving trade disputes;
Creating a more favorable climate for foreign investment as a result of bringing the legal in accordance with WTO regulations;
Increasing of opportunities for Russian investors in the WTO member-countries, particularly, in the banking sector;
Creating conditions for improving the quality and competitiveness of domestic products as a result of the increased flow of foreign goods, services and investments to the Russian market;
Participation in the development of international trade rules in accordance with national interests;
Improving of the image of Russia in the world as a full participant in international trade.
However, taking into account these goals, our government should not forget that Russia’s WTO accession will be a first step to an active development of the domestic market by foreign companies. Many multinationals will come to the Russian market and enhance competition in all sectors of the economy, which will significantly increase marketing spending to maintain market position. In this regard, there will be a significant fall in profitability of domestic enterprises and obviously this fall will reduce their competitiveness. This applies particularly to food, pharmaceutical, chemical, automobile and aircraft manufacturing, consumer goods and electronics industry, insurance sector, financial services, small and medium businesses. We have many multinationals in Russia now, but the rules of the “game” will be different and it will be difficult to support these sectors of economy after accession to the WTO.
Experience of the Baltic and Eastern European (4) countries showed that the confluence of national and international markets is a loss of national control over whole sectors of the economy. A similar threat exists for Russia from WTO accession. Primarily it will affect on the agricultural sector. As we know the level of state supports for the agricultural sector, for example, in Canada, in the U.S. and in the EU (5) and is very significant. And under the terms of accession to the WTO, Russia must reduce state support of agricultural sector.
The similar situation will be in other branches of economy mainly because of decrease in the export duties which will facilitate access for import of goods to the domestic market.
Significantly, may be affected the financial services sector, because the WTO requires equal access of private capital to the markets in order to increase international competition in this area. (6) This will cause serious problems of survival, for example, for Russian banks and insurance companies. The opening of branches of foreign financial and insurance companies will give Russian citizens and companies the opportunity to use cheaper loans and better services. Today, therefore, domestic enterprises should prepare and strengthen their businesses to compete with international business and maintain control over national economies.
Let`s see on what Russian domestic companies and foreign companies today are based. Domestic companies’ strengths include:
1. Administrative resource. Russian domestic corporations (GazProm, RusAl, Nornikel, Lukoil, etc.) have huge administrative resource in the country.
2. Cheap labor. The level of wages in Russia is very low. So, in this aspect we can bet only China and third world countries.
3. Cheap energy resources. Such a rich resource base, no country in the world has.
4. Cheap scientific experts, who we inherited from the Soviet Union.
5. Soft environmental requirements.
The advantages of foreign companies:
Extensive management experience. European and American entrepreneurs have several hundred years of living under capitalism. They accumulate experience and then develop production and management technologies. In Russia, however, it is not a tradition of using ready-made management decisions, so most companies are creating their own management systems.
The application of modern production and management technologies. Excellence in productivity.
Usage of the latest technologies leads to the superiority of American companies over Russian in labor productivity.
The presence of longer and cheap financial resources.
The main reason of the superiority of the developed foreign companies is the use of modern production and management technologies. It is therefore necessary to consider the possibility of eliminating the backlog of domestic enterprises in this area. The introduction of modern production technologies requires large and additional investments. But the majority of Russian enterprises is opaque and inefficient, and therefore has little chance of obtaining investment funds, because they do not guarantee their repayment.(7) Therefore, it is necessary to make business enterprises transparent and more efficient to obtain investments for modernization of production. This can be achieved by implementing in the companies modern management techniques, which are less expensive and can provide positive economic effect than the production technologies, because these modern management technologies can provide a more rational use of financial and human resources. Therefore, Russian companies will be significantly closer to the performance of foreign companies and will improve their chances of success after coming to our market foreign enterprises by applying these modern management technologies in practice.
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After Russia’s accession to the WTO administrative resources will be depreciated, because international investors will put pressure on Russian Government and force it to ensure their safety, because today, government bodies are ineffective to protect the interests of investors. When the head of state wants to attract investment, he will be forced to fight corruption. This will entail devaluation of administrative resources, and businesses based on the administrative resource, will weaken. So, Russian companies will have to learn how to compete in such conditions.
The labor force will rise in price, because non-residents will be offered higher salaries and the best specialists will go to them. And Russian companies will be forced to pay more is less than competent professionals. In addition, the coming rise in prices of energy resources.(8) This is a condition of accession to the WTO. There is no money for science in Russia, because we have not learned how to earn it. That’s why foreign companies will offer funding for our science. Environmental requirements will be stickler because the legislation of the Russian Federation will be gradually brought into line with international standards. In other words, our strengths will be leveled and the advantages of foreign companies will be a critical success factor for new international Russian market. Foreign companies will move their production lines to Russia, they will bring the latest technologies and will use our cheap labor and energy resources. This will give them an opportunity to get a huge competitive advantage. And the presence of cheap financial resources will enable them to quickly expand their businesses.
Another advantage of Russia’s accession to WTO is an introduction to the Russian legislation stable, predictable rules of the “game” for economic operators, which are used by its members. The extension of these rules to Russia would not only improve its foreign investment attraction, but also make it more predictable and clear economic and legal environment for their own businesses. Companies engaged in global trade know that in any of the WTO member country, they can rely on common approaches for the use of tariffs and other instruments of foreign economic activity, which significantly increases the efficiency of the commercial solutions.
Nowadays, we significantly lag behind foreign companies in the development of management technologies and can not compete with them. But today, Russian companies have the time to apply the advances in the science of management, building management systems that allow them to catch up with foreign companies in terms of technology and after the accession to the WTO to compete with them in the sphere of management.
Nevertheless, it should be noted that there are obvious benefits of free trade for consumers like the benefit of lowering of living cost by reducing protectionist trade barriers. In more than 50 years of its existence WTO held many rounds of negotiations, and now trade barriers around the world are lower than they were ever in the history of modern trade.(9) Not only ready-made imported goods and services will be cheaper but also domestic products, which are used in the production of imported components, as a result of the barriers lowering. It is impossible to make a clear distinction between the effects of free trade on consumers, producers and the state. Thus, the lowering of trade barriers promotes the growth of trade, which leads to an increase in both public and personal income. Empirical evidence: as a result of Uruguay Round the revenue of new global system of commercial transactions grew from 109 to 510 billion dollars. The united market within the European Union also contributed to the increase of society’s income and wealth.
The increase of government revenue through the activities of successful exporters can redistribute received additional resources and help other companies facing foreign competition to increase productivity, expand production, improve their competitiveness or switch to new activities. This fact gives us hope, that Russia will get more benefits from WTO accession, than loses.
But, Russia is currently isolated from participation in the development of new international trade rules.(10) Our economic interests are not counted in this process. The result of trade rules development can be different, even threatening the strategic interests of the country (with respect to those new WTO issues such as trade and environment (environmental dumping), trade and social issues (social dumping), special rules for energy trade.
Russia’s participation in the WTO will help strengthening relations within the CIS on the basis of free trade agreements and, in some cases, the Customs Union.
It is often said that Russia’s losses from the accession will also be large enough. For example, critics point out that the WTO will significantly limit opportunities for Russia in carrying out foreign policy and the use of different management tools.
Indeed, we must consider the limited maneuverability in the implementation of our trade policy, however, such a restriction would not be substantially greater than it is now: Russia is a party to several hundred international bilateral and multilateral treaties, which – by virtue of provisions of the Constitution – take precedence over domestic law. In other words, we have been linked with the decision-making for a long time. Most of the standard WTO commitments (such as most-favored-importing, non-discrimination between domestic and imported goods) have long been a part of our legal system.
Other critics referred to the fact that Russia, following the accession will be forced to abandon the protection of the domestic market, which will lead in turn to the closing of key industries.
These assumptions are far from reality. WTO member has the right to protect the market against unfair competition, including the use of selective, point tools such as anti-dumping instrument. Russia will also have the possibility of their use after the accession. On the other hand, indeed, Russia in the accession process will have the commitment to restrict the ability to increase import tariffs or barriers for foreign services or suppliers.
There many benefits and disadvantages of the accession to the WTO, but it is vital for Russia to be the member of the WTO in order to protect its economic and political interests globally.
It is obvious that Russia will have equal treatment like other member-countries of the WTO. As a result Russia can use constantly decreasing tariffs, in order to expand to the foreign markets. The domestic production won’t be under discrimination measures. Russia can protect the commercial laws from wrongful actions of other countries under the aegis of procedure of dispute resolutions of the WTO. According to the Ministry of Foreign Economic Relations, Russia is on the second place in the world after China in terms of discrimination.
The introduction into the World Trade Organization will help to develop the mechanism of the admission of the foreign capital to the Russian financial sector of. The role of a stimulating and improving international competition for the Russian manufacturer will be raised. WTO membership will allow receiving customs privileges, will facilitate access to credits, will involve investors, reception of high technologies.
On the other hand, having entered the World Trade Organization, Russia substantially should liberalize, first, the foreign trade model, realizing principles of free trade with WTO member countries. It can negatively affect its own manufacture, undermining it and so low competitiveness. Russia becomes even more dependent on the import foodstuffs. Even between industrially developed countries there are contradictions concerning mutual deliveries of agricultural production. Without increase of import duties will force out import from the Russian food market very difficult.
Accession to WTO can lead to death of enough competitive iron and steel industry of Russia owing to decrease. The flow of cheap import will lead to closing of some manufactures and to unemployment increase.
I have analyzed key benefits and disadvantages of the Russian accession to the WTO in this assignment and from my point of view, Russia, as an important player in many world trade markets and strongly enough depend on world conjuncture can’t stand aside from the WTO. Russian must in the WTO to promote global economic development and wealth.