U.S. Blasts Russian`Import Substitution' in WTO Review

The International Trade Practice Center on Bloomberg Law® provides in one comprehensive, time-saving resource.

By Len Bracken

Sept. 30 — The Russian move to replace imports with domestically produced goods, a strategy known as import substitution, was at the top of the list of concerns flagged Sept. 30 by a senior U.S. trade official.

Betsy Hafner, deputy assistant U.S. trade representative for Russia and Eurasia, said at a hearing on Russia’s compliance with World Trade Organization rules that the U.S. and other countries were concerned about Moscow’s use of this strategy, as well as intellectual property rights standards at odds with WTO rules.

“As reflected in the recent WTO trade policy review of Russia, other members share U.S. concerns about Russia’s continued commitment to the core principles of the WTO,” Hafner said at the hearing of the Trade Policy Staff Committee.

The EU said in a Sept. 28 press release on the WTO review that Moscow should abandon import substitution measures aimed at “hindering foreign operators’ access to the Russian market, via restrictions on imports, public purchases or investments in so-called strategic sectors.”

Domestic-Only Subsidies

Randi Levinas, executive vice president of the U.S.-Russia Business Council and the sole witness at the hearing, said that Russian subsidies for domestic construction and agricultural equipment producers have adversely affected U.S. manufacturers.

She also noted concerns about a new data storage equipment law and draft laws requiring domestic sourcing of telecommunications equipment. The Ministry of Economic Development, she said, had itself questioned whether high Russian tariffs on telecommunications equipment were WTO-consistent.

Hafner said the administration would “use the tools of the WTO to ensure Russia fulfills its obligations,” indicating that the U.S. might also bring WTO dispute settlement cases on those issues, although to date Washington has not brought any cases against Moscow.

Levinas noted several areas where the Eurasian Economic Commission has improved trade relations, such as the reopening in August of the Eurasian market for U.S. combine harvesters, which are manufactured by U.S. companies such as Deere & Co. and Navistar International Corp.

She said Russia and the Eurasian Economic Commission have worked with industry to simplify customs procedures and facilitate trade. In some cases, U.S. manufacturers in Russia are now able to bring inputs into the country under duty suspensions, she said.

Medvedev Defends Strategy

Russian Prime Minister Dmitry Medvedev Sept. 22 said in an article he wrote that was published in the journal Economic Issues that contemporary Russian import substitution “is not designed primarily to oust imported goods” and is not based “on currency manipulation or administrative props for Russian companies.”

Medvedev said the goal was to promote the growth of Russian companies in the global market. He cited the formation of joint ventures with foreign automakers that led to a 22.5 percent decline in auto imports in 2015.

Levinas said there were a range of policies and rules linked with import substitution in the agriculture sector. She noted preferences given to domestic pork, dairy and sugar producers in state and municipal contracts. Government procurement is important because the state's dominance in the economy has doubled since 2005, she said, playing major roles in not just oil and gas, but also in transportation, banking, machinery manufacturing and medical technology.

Western countries introduced travel bans and financial sanctions against Russia following its 2014 annexation of Crimea, and Moscow introduced counter-sanctions that targeted agricultural imports from the west. A trade analyst has told Bloomberg BNA that meat, poultry and dairy are three sectors Russian officials have sought to support since 2012, contending that they are doing so in accordance with WTO rules.

The EU, which is a larger trading partner with Russia than the U.S., has initiated a WTO dispute settlement case concerning Moscow’s ban on the import of EU pigs and pork.

Intellectual Property Rights

Levinas said that her group, which represents U.S. companies doing business in Russia and Russian companies doing business in the U.S., continues to have intellectual property rights concerns, particularly in the pharmaceutical industry, such as patent rights and compulsory licensing.

Amy Holman, director of the Office of Multilateral Trade at the State Department, asked Levinas whether Russia’s intellectual property rights protections for pharmaceutical drugs met its WTO commitments.

Levinas said the so-called “four-three rule” whereby small molecule drugs have four years of clinical test data protection before generics can use the data and three years for biologic drugs falls short of Russia’s six-year WTO commitment.

This rule gives generic manufacturers the option of producing lower-cost versions before six years is up, Levinas said. U.S. brand-name manufacturers argue that they need more time with exclusive rights to market a drug in order to recoup their investments. Levinas said Russia should have sufficient data protection as this would also support innovative Russian companies rather than producers of generics.

The testimony and other material gathered by the Trade Staff Policy Committee will be used to assist USTR in drafting its report to Congress on Russia's WTO compliance, which is due in December.

To contact the reporter on this story: Len Bracken at lbracken@bna.com

To contact the editor responsible for this story: Jerome Ashton at jashton@bna.com

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Trade Practice Center on Bloomberg Law