Automotive battle revs up between Russia and the EU

Automotive battle revs up between Russia and the EU

The European Union (EU) is pressing the World Trade Organization (WTO) to take action in the first official complaint against Russia since the country joined the WTO in August 2012.

Back in July, the EU held formal consultations with Russia to address the country’s vehicle recycling fees it imposes on automotive imports. This fee was introduced on September 1, 2012, only one week after Russia joined the WTO and lowered import tariffs on automobiles in line with its WTO accession obligations. On October 10, the EU took the next formal step and requested the establishment of a dispute settlement panel to rule on the fee’s legality.

Russia argues that this fee is necessary to cover the cost of vehicle recycling. The EU argues that this is a protectionist measure aimed at shielding Russian car manufacturers from the global market, and claims that car exports to Russia have dropped by 7 percent this year because of the vehicle recycling fee.

Clashes over opening up Russia’s automobile market were a major sticking point during the country’s 18-year WTO accession period.

Russian New Car Sales

Source: J.D. Power and Associates

Russia’s automotive market has grown as personal income and car ownership have increased in recent years. Some forecasters predict that in spite of the current slump, Russia’s market will overtake Germany’s to become the largest automobile market in Europe by 2020.

Russia has encouraged foreign companies to bring their technology and production methods within the country’s borders to boost development and modernization of the domestic industry. The vehicle recycling fee could be another way to boost domestic output and foreign partnerships, while restricting imports from competitors, namely the EU, Japan and the United States.

Using the dispute settlement panel to find a solution for car exporters struggling with Russia’s vehicle recycling fee will be the first test for the WTO in controlling the huge emerging market’s trade policies in the international system.

The WTO’s dispute settlement panel is the multilateral organization’s hallmark mechanism to maintain a level playing field in the global trade system. It can legally enforce international trade law and require countries to either change their trade policies or risk sanctions from other members.

Recourse through this enforcement mechanism was one of the key talking points for advocates of Russia joining the WTO. In the United States, for example, the Coalition for U.S.-Russia Trade was organized to lobby Congress to establish normalized trade relations with Russia during the WTO accession period, citing the rules-based settlement process as a way for U.S. companies to legally fight back against perceived protectionist measures by Russia.

The EU is now taking action, and Russia’s other major car exporters have also taken notice of these increased fees. Japan lodged the same complaint days after the EU, though it has yet to ask the WTO to formally act on the issue. The United States is treading more carefully. It has in essence agreed to be a third-party observer to the talks, stating that is closely watching for any negative effects of the automobile recycling fee, though it has not announced any definitive legal action.

Politically, the formal EU complaint is the latest battle in the escalating EU-Russia fight, which has focused on Eastern European countries – mainly Ukraine, Lithuania and Moldova – as they negotiate closer trade alliances with the EU while Russian increases pressure to strengthen its Customs Union with Belarus and Kazakhstan.

Speed Bump - Recycling Fee

Source: Wall Street Journal Online

Belarus and Kazakhstan are not affected by the vehicle recycling fee because they are members of the Customs Union and their production facilities have been granted an exception.

How the dispute settlement panel decides on this issue will be significant regarding both the political front and future trade policies.

The rising number of regional trade agreements has complicated the effectiveness and authority of the WTO. Is the EU correct in its argument that treating Customs Union members differently undermines the WTO’s principle that all members must treat their partners fairly? Or does the regional Customs Union trade bloc supersede WTO requirements?

And how will the decision affect Russia’s attempts to transform its automotive industry into one dominated by local production instead of foreign imports, much like its emerging market powerhouse partners, Brazil and China?

Formally resolving trade disputes can take years, so it is likely this issue will not be resolved anytime soon. Under WTO law, Russia has one opportunity to object to the establishment of a panel to investigate this issue, which it will probably do when the Dispute Settlement Body meets at the end of October. This would delay the start of the investigation until the next meeting in November.

November is also the date for the EU-Eastern Partnership Summit held in Vilnius, Lithuania. This is where Ukraine is widely expected to formally sign trade agreements with the EU. Relations between Russia and the EU have been rapidly deteriorating, and this automotive battle is only the latest. With its potential to significantly affect EU-Russia business and political relations, as well as its broader trade implications, it is one to watch closely.

Categories: Economics, International

About Author