World Trade Organization (WTO) has been established as GATT in 1947 with the purpose of reducing the tariffs on goods and services to boost the global economic output. The reason why GATT has been turn into World Trade Organization in 1995 is because GATT regulations especially in terms of services, intellectual property and other issues in GATT structure was not sufficient to solve to problems in these areas. Today WTO has 159 member nations and bring together the 97% of world trade but cannot pace with countries desires for further trade liberalizations, therefore, countries has been signing bilateral and regional trade agreements in order to reach their desired economic goals (Sergie and Kaplan, 2015).
There is a number of trade rounds, which has been organized to supplement or amend the changes into general legal principles of GATT such as Kennedy Round in mid-1960s, Tokyo Round in 1970s, and Uruguay Round in 1986 (Love, Patrick & Lattimore, 2009). In order to satisfy the requirements of further trade liberalization demands Doha process has started in 2001. However, Doha process is stalled for a long time to carry the liberalization of trade even further due to disagreements between developed and developing countries in general on various issues (Sergie and Kaplan, 2015). Many countries have decided to carry out their own initiatives to establish regional partnerships such as free trade agreements, customs union or economic union to move forward their regional trade with the purpose of increasing their economic output. European Union (EU) is a good example for regional economic integration initiatives established as European Coal and Steel Community (ECSC) in 1951, formed into Economic Community (EEC) in 1958, and become European Union in 1993 under the Maastricht treaty. The purpose of EU is to create a single market wherein 1968 common customs tariff has adopted in order to allow free movement of goods, capital, services and people between member states (Wilkinson and European Union, 2015).
There are also ambitious new examples such as Trans-Pacific Partnership (TPP) (which took a decade of negotiations in order to prepare the draft version completed in October 2015) including Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, Japan, the United States, and Vietnam which in total cover the 40% of the world trade aimed to lower the tariffs and promote economic growth (Alagoz, 2015). Another example is Eurasian Economic Union (EAEU) consist of CIS countries such as Russia, Kazakhstan, Belarus, Kyrgyzstan and Armenia with a total GDP of $2.41 trillion aiming enhance the economic integration among member countries (Eurasian Commission.org, 2015).
However, new additional trade agreements add layers and obligations to trade regulations of the countries’ create complex structures for global trade while numerous tariff lines need to be harmonized with each other and, essentially, with the WTO commitments of member countries. There is a number of questions raised regarding the functionality of WTO, potential success or failures of the regional trade agreements to liberalize the international commerce and probably more clearly defined question is whether regional trade agreements are a threat to WTO (Sergie and Kaplan, 2015).
If a WTO member has entered into any form of economic union they are obligated to stick with their WTO commitments in terms of average bound tariff lines. Article XXIV of the General Agreement on Tariffs and Trade indicates that purpose of the trade agreements should simplify the trade and not raise the trade barriers of constituent parties (wto.org, 2015). WTO members when entered into the organization agreed to follow regulations below:
- “Customs unions, free-trade areas, and interim agreements leading to the formation of a customs union or free-trade area, to be consistent with Article XXIV, must satisfy, inter alia, the provisions of paragraphs 5, 6, 7 and 8 of that Article”.
- “If, in fulfilling the requirements of subparagraph 5 (a), a contracting party proposes to increase any rate of duty inconsistently with the provisions of Article II, the procedure set forth in Article XXVIII shall apply. In providing for compensatory adjustment, due account shall be taken of the compensation already afforded by the reduction brought about in the corresponding duty of the other constituents of the union.”
If a WTO members enters into an economic union whose common external tariff is higher than its tariff commitments to WTO, other WTO members could ask compensatory adjustments from the economic union. In such case, parties need to agree on the conditions of compensation taking into account the constituent parts’ reduction in its various tariff lines (wto.org, 2015).
If we take the Eurasian Economic Union (EAEU) for instance, Russia, Kyrgyzstan, Kazakhstan and Armenia has independently negotiated their terms with WTO therefore agreed on different average tariff rate. Customs union members (now Eurasian Economic Union members) signed a Treaty on the Functioning of the Customs Union in the Framework of the Multilateral Trading System on May 2011, which entered into force in July 2012. Treaty indicates that it will integrate each member of the customs union WTO commitments into customs union regulations. Meaning in case of customs unions regulations in conflict with the WTO commitments of member countries the latter’s regulations overrule the customs union obligation of the member country (wto.org, 2015).
EAEU regulations indicates that their regulations are complying with WTO regulations;
- With effect from the date of accession of any of the Parties to the WTO, the provisions of the WTO Agreement, as defined in that Party’s Protocol of Accession to the WTO, including the commitments made as a condition of accession to the WTO … shall become a part of the legal system of the Customs Union.
- The Parties shall take steps to align the legal system of the Customs Union and the decisions made by its bodies with the WTO Agreement, as stipulated in the Protocol of Accession of each Party, including the commitments made by every Party as a condition for its accession to the WTO. Until such steps are taken, the provisions of the WTO Agreement … shall prevail over the corresponding international agreements made within the Customs Union and over any decisions made by its bodies.
Nevertheless, considering the legal framework harmonization between WTO and EAEU regulations, in practice picture looks little different concerning average tariff rate. Because EAEU common external tariff (CET) is largely oriented to Russia’s commitments to WTO which gradually decreasing to match its 2020 7.9% bound rate. In 2015, the CET of EAEU rate was 8.4% and will fall to 8.1% in 2016 (Tarr, 2015).
Table 1. WTO and EAEU average tariff rates
| Average Tariff Rates | |||
| WTO | EAEU | ||
| Current | By 2020 | ||
| Kazakhstan | 6.1% | 8.4% | 7.9% |
| Kyrgyzstan | 7.5% | 8.4% | 7.9% |
| Russia | 7.9% | 8.4% | 7.9% |
| Armenia | 8.5% | 8.4% | 7.9% |
The EAEU CET rate will not bother Armenia anymore since the EAEU CET rate in 2016 will be lowered to 8.1%, which is lower than its commitment to WTO. The problem lies down in Kazakhstan’s and Kyrgyzstan’s commitment rates which are 6.1% and 7.5% respectively, lower than even predicted 2020 CET rate which is 7.9% (Tarr, 2015). In order to comply with the EAEU CET rate, Kazakhstan and Kyrgyzstan need to increase their tariff rates meaning they will violate their commitments to WTO. According to WTO regulations, increasing tariffs allows other WTO members to ask compensatory adjustments which EAEU needs to pay (Popescu, 2014).Source: Tarr, 2015 and WTO statistical database.
The compensation could be covered by lowering the CET rate in a number of tariff lines to balance the market access to EAEU. However, more than 1.500 tariff lines are currently under the bound rate of Russia, which needs to be lowered even further for compensation measures (Tarr, 2015). On this point, Russia has agreed to cover the losses of the Kyrgyzstan and Armenia by providing subsidies for their losses occurred from the WTO members compensation claims and promised to invest in many key sectors in these countries (Pasquale, 2015).
These promises include for Kyrgyzstan to buy a major chain of petrol stations and supply fuel to the airport in the city of Osh and purchasing large sum of stakes of the main airport, build a hydroelectric power plant. As for Armenia promised to invest $500 million to upgrade Armenia’s railway network, helping to do certain modifications to Armenia’s outdated Metsamor nuclear power station and build a synthetic rubber plant (Pasquale, 2015). However, Russia’s current solution to the compensation problem doesn’t look like a long-term permanent solution where Russian economy currently could handle subsidizing the losses of small economies such as Kyrgyzstan but in future in case of further EAEU enlargement, this issue will create difficulties for Russia to compensate all the losses of other members due to higher CET tariffs of EAEU. Moreover, the closest such example is the case of Kazakhstan where its GDP is 20 times bigger than Armenia and almost 30 times bigger than Kyrgyzstan (Pasquale, 2015).
In the end, it is important to see how Russia will solve the compensation problem of Kazakhstan whether it will choose to compensate Kazakhstan’s losses too or regulate the CET rate according to Kazakhstan’s commitment to avoid compensatory adjustments. In such case, Russia tariff lines need to decrease the CET rate of EAEU, which will allow increase the competitiveness in its market and in other EAEU countries markets and reduce the protective measure, which leverages the domestic firms in many sectors.
References
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Eurasian Commission.org (2015). Eurasian Economic Integration: Facts and Figures. Eurasian Commission official website.
http://www.eurasiancommission.org/en/Documents/broshura26_ENGL_2014.pdf
European Union, (2015). The history of the European Union – 1968. European Union official website. http://europa.eu/about-eu/eu-history/1960-1969/1968/index_en.htm
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http://as.vanderbilt.edu/gped/documents/DavidTarrEurasianCustomsUnion–prospectsSept282015.pdf
United States Trade Representative, (2015). Report on Russia’s Implementation of the WTO Agreement. United States Trade Representative official website.
https://ustr.gov/sites/default/files/Russia-WTO-Implementation-Report%20FINAL-12-20-13.pdf
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Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.