5 September 2013

Russia’s Auto Recycling Fee Leads to First WTO Dispute

Following the European Union’s first filing of a World Trade Organization (WTO) complaint against Russia on July 9, 2013, the United States announced that it would join the WTO case challenging Russia’s fees on imported vehicles. U.S. Trade Representative Michael Froman told a House committee on July 25, “there’s now a case being brought against them [Russia] on the auto recycling fee in the WTO and we’ll be joining that case.” Froman’s comments echo the concerns expressed by EU Trade Commissioner Karel De Gucht, who stated, “the fee is incompatible with the WTO’s most basic rule prohibiting discrimination against and among imports.”
In August 2012, nine days after becoming a member of the WTO, Russia introduced an “auto recycling fee” on imported vehicles. According to the Russian government, the levy is modeled as a 5-year “green tax” designed to cover the future cost of recycling scrapped cars and their parts. The fee ranges from 420 to 2,700 euros ($560-$3,600) for new cars and 2,600 to 17,200 euros ($3,500-$23,000) for used cars.

The fee only applies to automotive imports, not to domestically manufactured vehicles (or those produced in Belarus or Kazakhstan, Customs Union members).  This difference in treatment is the source of the EU’s discriminatory trade claim.
The EU first took issue with the Russian car tax upon its introduction in September 2012. Over the past year, the European Commission pursued “every diplomatic channel for almost one year to find a solution...but to no avail,” according to De Gucht. EU officials had given Russia until July 1 to remove the fee after the Russian Ministry of Economic Development said in February that it would support legislation to apply the fee to domestic car producers as well. This legislation was introduced in the State Duma, but it was not acted upon before the Duma adjourned for summer recess in July. (Vladimir Gutenev, First Deputy Chairman of the State Duma’s Industry Committee, has indicated the Duma will consider the bill in September-October and could enact the legislation by November.) Adopting this bill such that the fee is applied to both domestic and international producers would remedy the unequal treatment and presumably resolve the issue.
On the same day the EU complaint was filed, Russian ambassador to the EU Vladimir Chizhov told ITAR-TASS “I can assure you that Russia will take all efforts toward reaching [an] amicable settlement…without letting the matter come to sanctions.”  Chizhov also added that, “the Russian side agreed that the situation should be balanced. But the mechanism of recycling fees and their rates are fixed in Russian laws. Such amendments cannot be done over night.” Ekaterina Mayorova, deputy head of the department for trade negotiations at the Russian Ministry of Economic Development, also spoke in favor of using WTO channels as a way to mitigate the conflict by saying, “With regard to the EU decision, we’ll act within the WTO’s formal dispute settlement procedure.”
Russia’s hesitation in opening its automotive market was a point of contention throughout its 18-year WTO accession process. Ultimately, Russia agreed to reduce its tariffs on car imports from 30% to 25% upon accession and to 15% after a seven-year transition period. EU officials now claim, however, that the green tax is simply a masked import tariff designed to recapture the tariff concession and unfairly protect domestic producers.
According to WTO rules, the opposing sides have 60 days from the date of the complaint filing to come to an understanding (July 9-September 7). If an agreement is not reached in that period, the EU can request that a WTO dispute panel review the matter. In the event of an adverse panel decision, Russia could be forced to alter its trade rules or face serious trade sanctions. Given this threat, Russia has already held trade negotiations with the EU (July 29-30) and with Japan (August 13) in order to avoid WTO adjudication.
Most observers feel the impetus for the recycling fee is Russia’s desire to strengthen and expand its domestic car market. According to the Boston Consulting Group, Russia has the potential to become the world’s 5th largest auto market by 2020 (it currently ranks 7th). Other studies have also suggested that Russia could overtake Germany as the largest auto market in Europe as soon as 2014, and the Russian auto industry is expected to expand by 6% throughout this decade, reaching 4.4 million sales units by 2020. The increased fees on car imports are also designed to encourage foreign producers such as General Motors (who last August pledged to invest $1 billion in Russia over the next five years) to increase local manufacturing in Russia.
Both the EU and the US believe the measure is accomplishing its intended objectives and cite evidence of the negative trade impact. The US has reported to the WTO that over nine months from September 2012 through May 2013, the fee was levied on $1.25 billion worth of American exports, representing 10% of total U.S. exports to Russia. The EU, which also happens to be Russia’s largest trading partner, similarly claimed that $13.2 billion of its exports to Russia are affected, and that total exports have decreased by 7% since the fee was first implemented in September 2012.
Depending on whether an agreement is reached between Russia and the EU, this dispute could have more far-reaching international trade ramifications. For example, Japan, Turkey, Ukraine, and China have all demonstrated their interest in the trade row by requesting to observe the EU-Russia discussions prior to WTO adjudication. In June, the Office of the United States Trade Representative (USTR) also released the first of two reports to Congress concerning Russia’s execution of its WTO commitments in its first year of membership (the second report will be released in December).
Russia’s alleged violation of WTO rules so early on in its membership has caused some concern among several of the world’s most powerful economies as to its commitment to international trade norms and could result in a serious international response.