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Russia and the World Trade Organization.

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Introduction

2.RUSSIA AND THE WORLD TRADE ORGANIZATION Myth 1. WTO membership means complete exposure of the economy to global competition, leading to the displacement of domestic industry followed by mass unemployment. This myth rests on a number of assumptions: ??Current tariffs protect Russia's industry against competition. ??WTO membership will lead to a drastic reduction in this tariff barrier. ??WTO membership means that the government will lose the key instruments it uses to protect local industry. ??Opening the economy as required by WTO membership amounts to a death sentence for domestic industry. The truth is more complex: ??Current tariff rates are low, some 7-15 percent at the two-digit industry level, too low to be very effective by international standards. Moreover, customs administration functions so poorly that only about half the tariffs are collected. ??Joining the WTO will not necessarily lead to a reduction in tariffs. Tariff rates will be decided during accession negotiations, and some tariffs may even be raised. Because the rates are likely to be fixed once the accession agreement is signed, government and industry must think carefully about the levels of future tariffs. ??The government will not lose its ability to protect domestic producers. Members of the WTO are permitted to implement temporary defensive measures. Also, keeping the real exchange rate low can help protect domestic producers. ??Although it is true that exposure to international competition may be detrimental in the short run to some sectors of the Russian economy, such as the food and machine building industries, the long-term consequences of not joining and not restructuring are even more harmful. Myth 2. ...read more.

Middle

True, WTO membership provides foreign producers with tools to resolve conflicts with Russian authorities, so that in cases of discrimination, Russian exports will be subject to fines and levies in global markets. However, WTO membership does not preclude the pressuring of domestic businesses by the Russian authorities, which could continue. Administrative reform is thus a must. If the government does not reform itself, Russian business may lose rather than benefit from WTO membership. Myth 6. Regional free trade agreements are becoming more important than the WTO. Membership in the WTO will not offer Russia any special advantages, and may even weaken its position if the Customs Union with the Commonwealth of Independent States is abandoned. If Russia joins the WTO, it will be able to acquire all the advantages of that organization. As for the Customs Union, all of its functions may be preserved through bilateral agreements or the establishment of a formal regional free trade association. Myth 7. Because of Russia's geographic position, WTO membership will not improve the investment climate in any significant way. David Ricardo long ago refuted the old argument of the irrationality of trade in the context of high production costs for all products by demonstrating that comparative advantage is more important than absolute advantage. True, a colder climate increases transaction costs. But cold is not a decisive factor in the current development of the Russian economy. In growth regressions, the geographic variable loses its significance when bureaucratic corruption, an index of economic openness, and the quality of laws are controlled for. ...read more.

Conclusion

Capital gains need to be made tax free, at least temporarily. Reform of the judicial system would curb bureaucratic corruption and strengthen protection of property rights. Information mobility: Russia needs to take advantage of new information technologies. Greater access to the World Wide Web will improve information mobility and aid the transfer of capital and labor to more productive economic sectors. Although the Internet is a public infrastructure good (like a highway system), the private sector should share the cost of its financing. In sum, without greater mobility, Russia risks becoming trapped in a vicious (closed) cycle of survival without modernization, with moderate growth, at best, during years of high oil prices and stagnation or even depression during years of low prices for natural resources. With greater mobility-horizontal, vertical, and information mobility of capital and labor into the most promising sectors-Russia can be successful in the global economy. Investing in the more progressive areas of the economy helps improves the quality of education and contributes to higher mobility of the factors of production. The quality of human capital remains Russia's biggest comparative advantage. Human capital will be the driving force for investment in new sectors of the economy if Russia joins the WTO. If Russia waits too long, however, the potential of this factor could be wasted, and the chance to break the vicious cycle missed. Thus the sooner Russia joins the WTO, the easier it will be to adjust to the new realities of the world economy. WTO membership means more than lower tariffs. It also implies deep structural changes in the economy as a whole. Such structural reforms are essential for Russia to benefit from WTO accession. ...read more.

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