The case against punishing Russia at the WTO

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Hello and welcome to Trade Secrets. We have very little happy news to report in these dark times. At least the rich-world democracies are trying almost everything they can to isolate President Vladimir Putin’s regime and cripple the invasion, short of anything like a no-fly zone that’s going to put them at actual war with Russia. Casting around the uninspiring landscape of global governance, the World Trade Organization naturally stands out as a beacon of symbolic salience. Thus Friday’s announcement that the G7 nations will remove most-favored nation (MFN) status from Russia at the WTO, denying its exporters the right to face the same general tariffs as other members. Today’s main piece looks at the potential downside to that decision, while Charted waters looks at the implications of the international food crisis created by the conflict.

As ever I’d love to hear your thoughts, questions and suggestions: the email address is alan.beattie@ft.com.

Doing Putin no favors

So, the most-favored nation thing. I hate to sound like some process-obsessed bore or a journalist captured by the institutions he covers – though I think few in Geneva would call me a mindless cheerleader for the WTO’s membership – but I’ve got some reservations about this. One, it will probably have little practical effect at the margin. Two, as a symbolic gesture it feels a bit redundant. Three, most importantly, it further reinforces the idea that multilateral economic institutions and rules are now entirely at the service of foreign and strategic policy, to their ultimate detriment.

First, on the practical point. If the G7 and EU want to stifle Russia’s economy and war machine (and they do), they have better, faster, more precise tools they can choose (and already have) out of a wide range of instruments, including sanctions on individuals and freezes on central bank assets. It’s not clear what marginal tariff increases the MFN decision will place on Russia. It’s worth noting that because of all the extra access on top of WTO rules given by preferential trade deals, of which Russia has none with any G7 country, most-favored nation status in practice is more like least-favored nation.

As the redoubtable Ed Gresser of the Progressive Policy Institute points out, the kind of stuff Russia sends abroad traditionally does not face many tariffs even for exports from countries outside the WTO. Russia exports hydrocarbons and minerals, which tend to enter at zero tariff, because few countries want to make basic commodity imports more expensive for their companies. There’s a reason Russia did not exactly race into the WTO – it joined in 2012 at the same time as Vanuatu after an accession process lasting nearly twenty years, a decade behind Georgia, Moldova and Armenia – which is that it did not have much to gain.

Second, the symbolic point. Yes, taking away Russia’s MFN would be a big gesture, signaling that you can not do what Putin’s doing and be treated as a normal country in any major international forum. Expelling Russia altogether would be even more dramatic, but that’s impossible. However, what is the marginal demonstrative value of removing Russia’s WTO benefits now? The rich-world countries have hit Putin’s regime with some of the broadest and deepest set of sanctions anyone can remember. He and his closest cronies can not travel; they’ve had their bank accounts frozen; yachts are being seized from marinas across Europe; the Russian central bank can not use its foreign exchange assets; Russian planes can not fly and Russian cargo boats can not dock; Russian companies can not export or import; foreign companies are fleeing Russia; Europe and the US are funneling arms to Russia’s enemy. Russia’s been banned from the football World Cup, the Paralympics and the Eurovision Song Contest. You can not get a McDonald’s Happy Meal or a Coke in Moscow. I think Putin’s probably got the message that people do not like him.

And so to what I think is the third and underconsidered issue – the potential damage caused to the WTO and multilateral trade regime. Legally, what the G7 are doing is probably fine. They can invoke Article XXI, which protects countries’ rights to take security measures “in time of war or other emergency in international relations”, which obviously fits the bill. The definition is also traditionally self-judging: countries decide their security needs for themselves. It’s been invoked during conflict before, including by the EU during the 1982 Falklands war between the UK and Argentina.

But this is a particularly unfortunate time to use it. Recent abuse of the exemption has endangered the integrity of the WTO. Former US President Donald Trump’s (and now President Joe Biden’s) invocation of national security for the very obviously protectionist purpose of imposing steel and aluminum tariffs, including on exports from foreign policy allies, has threatened to unravel the web of international law.

As I wrote the other week, in 2016 the Trump administration lined up on the side of Russia against Ukraine in a case about blocking transit across Russia. The US took this stance to defend countries’ rights to self-judge their security needs to help pave the way to its own steel and aluminum decision.

As uses of Article XXI go, the legal argument for invoking it against Moscow is very solid. But solid cases can create expectations and habits on which shakier cases rest. The WTO could probably do without being automatically treated as a tool of foreign policy right now, however morally justified this particular instance. This is a very good overview of the intersection of war and the WTO by the redoubtable Mona Paulsen at the London School of Economics.

In fact, the Russia MFN issue looks like a twist on the traditional problem with the WTO during the 1990s and 2000s. Back then, because the WTO was basically the only international institution by which the US allowed itself to be bound, it was continually being eyed up by bright sparks quixotically wanting it to fix tangentially related issues such as free speech.

The current situation feels more like rich-country governments, one of which (the US) has already undermined the WTO by crippling its dispute settlement system, feeling free to load the institution up with political baggage because it’s already basically on its knees. If the national security exemption becomes routine, there will not be a functioning WTO left to strike postures with at all.

So that’s the case against withdrawing MFN preferences. I certainly would not go to the wall for it; reasonable people can disagree on these things. But it’s not the self-evidently right course of action that it might appear.

Charted waters

The Ukrainian war has exposed the extent and importance of global trade, and how sanctions on Russia cut both ways.

Chart showing countries most dependent on Russian wheat exports

Russia and Ukraine supply almost a third of the world’s wheat exports. Ukraine is known as the “bread basket of Europe” and many countries in the Middle East and north Africa are also heavily reliant on it for wheat supplies. Moreover, prices have soared to record highs as Black Sea ports are at a virtual standstill amid the Russian assault.

This is of particular concern to Turkey, which relies on Russia for more than 60 per cent of its wheat imports, according to COMTRADE. Even before the Russian invasion of Ukraine, inflation in Turkey had hit a 20-year high of 54.4 per cent in February. The war in Ukraine will only exacerbate the problem of the rising cost of living, which will stoke civil unrest. (Jonathan Moules)

Matthew Yglesias at Bloomberg says the Ukraine war is accelerating a decline in world trade, and we’ll miss globalization when it’s gone.

The Russian invasion of Ukraine will have a massive impact on global food supply.

“Germany had outsourced its security to the United States, its energy needs to Russia and its export-led growth to China,” the Brookings Institution’s Constanze Stelzenmüller tells The Economist, summing up in 21 words what we’ve been trying to convey in hundreds .

Russia has authorized its companies to steal patents from any of dozens of countries it deems “unfriendly”.

Russia is warning it may pay external debtors in rubles, threatening the country’s first debt default since 1998.

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