At first glance, the trade preferences within the TPP seem to threaten many important goods that Russia exports. However, an analysis of tariff protection in member countries and/or import duties shows that most Russian exports are safe.
President Barack Obama talks with Mexico’s President Enrique Pena Nieto as other leaders of the Trans-Pacific Partnership countries stand for a group photo in Manila, Philippines, Nov. 18, 2015, ahead of the start of the Asia-Pacific Economic Cooperation (APEC) summit. Photo: AP
In the near future, 12 Pacific Rim countries will ratify an agreement on the Trans-Pacific Partnership (TPP). This partnership will be one of the world’s largest economic integration projects, bringing together about 25 percent of the world’s exports, 30 percent of the world’s GDP and more than 800 million consumers.
The basis of the agreement is providing a wide range of preferences for mutual trade in goods and services. This includes the field of investments, capital flows, as well as other aspects of economic cooperation, beyond just the classical framework of the WTO.
Here two legitimate questions arise: How will the creation of the TPP affect Russia’s trade with the countries of this new partnership? Won’t Russian competitors “shove aside” Russian exports, after they receive preferential treatment in these markets?
Analysis shows, however, there are very few vulnerable positions among important Russian exports, including non-commodity exports.
How the TPP differs from other free trade agreements
The Trans-Pacific Partnership is not just an agreement involving another free trade area, of which several hundred already exist in the world. This agreement involves a deeper mutual integration, both in terms of coverage, and in the depth of mutual preferences. In short, the TPP is not just another free trade agreement (FTA).
The TPP is a so-called FTA++. In contrast to an FTA or FTA+ (which include tariffs and non-tariff regulations, investments and issues related to the movement of labor, financial services and technical regulations), the TPP implies deeper integration and a much wider range of issues that will be regulated.
Many are calling this agreement a new stage in the development of international trade. This evaluation seems fairly reasonable. After all, these accords will affect issues such as customs administration, trade promotion, trade agreements, special sanitary and phytosanitary measures, investments, services, financial and banking services, temporary entry of businessmen, telecommunications, and much more, including environmental issues, regulation of small and medium-sized businesses, all the way up to regulatory impact assessment and resolution of disputes.
In fact, the TPP will be a replica of the WTO, but on a different level – this partnership even provides for its own agency to resolve disputes, and the implementation of special protective measures within the group of countries.
It should be noted that this is not contrary to the rules of the WTO, but, of course, significantly changes the conditions of trade with all countries that remain outside the Partnership. The collection of such additional preferences creates a so-called “barrier of preferences” for all other participants in international trade, including Russia.
How Russian exports could fare under the TPP
Speaking about trade, Russia has extensive trade ties with many TPP countries. Russia supplies the TPP countries with many products, which are also available from major competitors located in countries that are members of this partnership. Naturally, these countries will now gain preferential treatment for internal trade within the partnership.
And for Russian exporters, trade preferences, in the form of reduced or zero import duties, play an important role. The reduction of customs import fees, even by only 2-3 percent, already gives an advantage to competitors in the market. In this situation, a “barrier of preferences” could lead to goods and services produced within the TPP becoming more cost competitive than Russian analogues, which will not be able to obtain similar conditions, since Russia is not a party to this agreement.
In analyzing the “barrier of preferences”, we primarily selected, for each member country of the TPP, from five to six largest – by volume (where imports from Russia occupy more than 5 percent of the total imports of that product into the country) and by share of these markets – positions of Russian exports (oil and petroleum products were excluded from this analysis), and revealed Russia's key competitors.
For example, in recent years, Russia has greatly increased deliveries of unprocessed aluminum alloys and raw unalloyed aluminum to Japan. The analysis shows that Russia now accounts for 24 percent and 20 percent, respectively, of Japan’s total imports of these goods. However, there are other suppliers of these products to the Japanese market, with shares from 2 percent to 27 percent. These are Canada, Australia, and New Zealand.
Then again, there is Singapore, to which Russia supplies 52 percent of all imported unalloyed and raw nickel, while 34 percent of the market in Singapore is held by Australia. In addition, in Singapore, we are competing with Malaysia for the supply of rods and profiles made from refined copper.
To the U.S., Russia has been exporting frozen crabs, accounting for 12 percent of all imports. A serious competitor here is Canada, which accounts for a 55 percent share of these imports. To the markets of Malaysia and New Zealand, we supply up to 35 percent of various fertilizers that these countries import. On these markets, substantial shares of certain types of mineral fertilizers are supplied by Australia, Canada, and Chile.
At first glance, the trade preferences within the TPP seem to threaten many important goods that Russia exports. However, an analysis of tariff protection in member countries and/or import duties showed that for most of the products that we supply to the TPP countries, the customs import fees are low, or have been reduced in some cases all the way to zero. In other words, in terms of price competition, when it comes to the export of these products, there exists no direct threat from the TPP.
In the same vein, Japan has no import duties on the already mentioned aluminum and its alloys. Singapore has no import duties on nickel or on refined copper rods. In New Zealand, customs duties are imposed on imports of ammonium nitrate and various other fertilizers. Australia imposes no import duties on frozen crabs (Russia's main competitor is Chile).
At the same time, for some important products that Russia exports, it is possible to identify risks after the creation of the TPP. In Japan, of the five most important products that Russia exports, an import fee of 1.2 percent is imposed only on softwood lumber (sawn or chipped). Russia's share in this market is 13 percent. The competitors, which within the framework of the TPP can have their import duties reduced to zero, are New Zealand (1 percent share of the market), Canada (34 percent) and Chile (5 percent).
In the U.S. market, out of five of Russia's major products, import duties are only imposed on frozen crab (3.8 percent). The main competitor in this market is Canada (55 percent of the market versus our 30 percent), and this country already pays no import duties, as the United States and Canada are part of the NAFTA free trade zone. Japan, New Zealand, Malaysia, and Vietnam also supply frozen crabs to the U.S., but their share in this market is less than 1 percent, and for now, it is difficult to say whether, upon the reduction of import duties, they would be able to substantially increase their supplies, which could then damage Russian exports.
One of the major items Russia exports to Australia is vodka. In this market, we hold a 6 percent share, while our main competitor from TPP countries – Canada – has an 8 percent share of the market. For Russia and Canada, the import duty is set at 5 percent. Russian exporters would very quickly feel the impact of a zero percent duty for Canada.
The TPP seems to pose a serious challenge, in terms of the struggle of Russian exports, on the Malaysian market. That country imposes high import duties on refined copper – 25 percent. Our share of this market is 18 percent and the main competitor here is Japan (with a market share of 6 percent). The same import fee is set not only for Japan, but also for Australia, Canada, and Chile. However, these do not deliver this product to Malaysia. If the reason for this is the high import duties, then when these are reduced to zero, some serious competitors could appear.
We also provide Malaysia with 30 percent of its imports of “other mineral and chemical fertilizers.” Import duties on these goods are 5 percent. This duty is also charged to all our competitors – Japan, Singapore, Canada, and Vietnam. For now, our main competitor in this market is Canada, with a 52 percent share, compared to our 30 percent share. Shares of other TPP countries still make up less than 1 percent.
However, even if some countries today are making smaller shipments than Russia, the reduction of customs duties for them is still likely to change the situation on the market, and displace our suppliers. Either they will have to reduce the prices of their products, thus reducing their margins, or they will lose in terms of lower sales volumes.
At the same time, as was shown by the analysis, only 10 products out of the several dozen Russian products that we selected for our study fall into the “risky” category, in terms of trade with TPP countries. And among these 10, there are those that TPP countries do not produce or supply to the market.
For example, in Chile, not one of the TPP countries supplies the certain types of rubber this country needs. No TPP countries deliver platinum and palladium to Canada. In almost every country, our exports find themselves in similar positions, and thus, we can safely say, they are safe from the influence of preferences within the TPP.
Of course, for all products, Russia has competitors from other countries. However, in relation to the TPP countries, they are on an equal footing with us. Thus, the creation of the TPP will not change anything, in terms of competition between these countries and Russia. It should also be noted that in the TPP countries several dozen bilateral free trade agreements are in operation already (42 agreements at the time of the signing of the TPP), under which conditions we are already selling to them. At the same time, the TPP will add to these agreements some significant links.
Moreover, under the terms of the agreement, import duties for member countries of the TPP will not be instantaneously dropped to zero. This will happen gradually, as part of a transition period, and will take several years to accomplish. For some products, these terms exceed 10 years.
How Russia should respond to the TPP
To minimize the damage to Russia resulting from the risks of intensified price competition, which the creation of the TPP would appear to entail, it is first of all necessary to continue with the policy of competitive import substitution of products that also have export potential.
For our manufacturers, the government should create the most favorable conditions when it comes to international trade, while the task of the manufacturers is to create products that are competitive domestically and in the international markets. It is necessary to take advantage of the potential offered by the markets of Southeast Asia, Africa, Latin and Central America.
Russia must continue to work on analyzing new opportunities and working on the conclusion of new preferential trade agreements. This will neutralize some of the existing and currently being established barriers of preferences.
The 25-year anniversary of the free trade zone within the CIS will be marked in 2016. In 2010, the Customs Union was formed, which evolved into the Eurasian Economic Union (EEU), which brings together more than 170 million people. This immediately yielded results. For example, Belarus increased its exports to Russia more than two-fold – from $6 billion to $15 billion, while Serbia, which has a free trade zone agreement with Russia, recently has increased its own supply of agricultural products to Russia by several hundred times.
Great prospects are also offered by the newly formed free trade area between the EEU and Vietnam. It is within the framework of this integrating association that Russia is carrying out negotiations on new agreements. The implementation of this agreement today will become a serious test of the competitiveness of our products in the Vietnamese market in the competition with the producers from TPP countries, in the conditions of existing preferential regimes.
There is also a need to deepen trade relations with China. Here on the agenda is the project to couple the EEU with the China’s Silk Road Economic Belt. This is not just a project to create a transport corridor from China to Europe. This means new opportunities for economic development in many regions, both in Russia and in the EEU countries, as well as in countries such as Pakistan and India. All this creates good prospects for Russian exports.
Much more important, in terms of development of integration processes, is not the reduction in customs duties, but the implementation of the TPP Agreement, which we have defined as an FTA++. Moreover, the decrease in non-tariff barriers to trade is becoming a determining factor in the success of any integration project, and in the success of any free trade zone agreement.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.