Indian Defence Review

In view of the economic sanctions imposed by NATO countries and other European Union (EU)countries on Russia for its invasion on Ukraine, Russia plans to quit the World Trade Organisation (WTO following the decision to remove its “most favoured nation” (MFN) status in response to its invasion of Ukraine. That decision by WTO led several countries to suspend Moscow’s trade preferences and impose tariffs in excess of what WTO rules typically allow.Russia may therefore,sever ties with prominent international bodies including the WTO and the World Health Organisation (WHO), saying they have “neglected all obligations toward our country.”

Pyotr Tolstoy, deputy speaker of Russia’s state assembly, or Duma, said membership of these bodies brings no benefit “but instead directly harms our country.” He said Moscow’s Foreign Ministry had sent a list of international organizations to the parliament (Federal Assembly) with orders to review it and break obligations or treaties that damage Russia.

The announcement comes two months after a pro-Kremlin minority party in the Duma drew up a bill calling for Russia to quit the WTO following a decision by a group of countries—including most European nations, Canada, Japan, and the United States—to suspend Moscow’s trade preferences consequent to its invasion of Ukraine. Hundreds of Western businesses, from Adidas, McDonald’s, and Pepsi to BP, Renault, British American Tobacco, and Starbucks, have pulled out of Russia to protest the war. Removal of Russia’s “most favoured nation” status means those countries can impose tariffs on Russia in excess of what WTO rules typically allow, in addition to allowing them to sanction Russian companies.

The MFN status is an economic position in which a country enjoys the best trade terms given by its trading partner(s). That means it receives the lowest tariffs, the fewest trade barriers, and the highest import quotas (or none at all).It is mandatory for all the member countries of the WTO to grant MFN status to each member country. As per MFN the countries cannot normally discriminate between their trading partners. Grant one a special favour (such as a lower customs duty rate for one of their products) and that has to be applied to all other WTO members. India had given the MFN status to Pakistan in 1996 after the establishment of WTO in 1995 but Pakistan has not given MFN status to India till today whereby Pakistan has violated the WTO rules. Therefore the trade between India and Pakistan has been curtailed resulting in extreme poverty in Pakistan.

However, some exceptions are allowed. For example, countries can set up a free trade agreement that applies only to goods traded between the two countries or within the group — discriminating against goods from outside. Or they can give developing countries special access to their markets. Or a country can raise barriers against products that are considered to be traded unfairly from specific countries. And in services, countries are allowed, in limited circumstances, to discriminate. But the agreements only permit these exceptions under strict conditions. In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or strong.

Politico reported that the idea of withdrawing “appears to be a U-turn from the government’s side,” noting that Russia’s WTO mission had written to the news organization in April “the government provides counter-arguments in support of our membership.”But Russian President Vladimir Putin said in April that “illegal” sanctions on Russian companies by Western trading partners had violated WTO rules and told his government to “prepare an updated strategy for our actions in the World Trade Organization” by June 1.It’s not the first time Russia has discussed leaving the WTO, which it joined in 2012 after 19 years of negotiations. Opponents view some WTO terms as unfavourable to Moscow and say they give the West a tool with which to punish the country.

James Bacchus, a professor of global affairs at the University of Central Florida and a former member of the WTO’s Appellate Body, wrote in March that Russia should be expelled from the WTO. Although there is no specific provision for such a move in the Marrakesh Agreement that established the WTO, “it is possible for two-thirds of the WTO’s 164 members to alter the rights and obligations of members and—if a member refuses to agree—for three fourths of the members to expel that member from the organization,” he wrote.Adding that this option is set out in Article X of the Agreement. It merely means that it is very difficult for the WTO to get a two third/three fourth majority for expelling a country and there are no veto powers as such.

WHO members have also pressed the Geneva-based health body—which usually avoids taking a stance on politics—to take action against Russia over the invasion, media, including the Daily Mail, have reported. On May 10, the WHO’s European Committee adopted a non-binding resolution condemning Russian attacks on Ukrainian health care facilities and the war’s impact on public health. The same resolution urged WHO chiefs to close their Moscow office for non-infectious diseases and relocate it to another country.

Implications

If Russia withdraws from the WTO it will have serious implications on dealing with 164 member countries of the WTO on trade issues and dispute settlement system because the WTO is a body designed to promote free trade through organising trade negotiations and act as an independent arbiter in settling trade disputes. To some extent the WTO has been successful in promoting greater free trade. Russia will also suffer further in its economic development because WTO is committed to economic development. For example, recent rounds have put pressure on developed countries to accelerate restrictions on imports from the least-developing countries.By encouraging free trade, Russian firms can specialise and produce a higher quality of goods in world market. This enables more economies of scale, which is important for industries with high fixed costs, such as cars and aeroplanes manufacture. In new trade theory, it is this specialisation and exploitation of economies of scale that is most important factor in improving economic welfare for Russia.