Russia, Ukraine and trade sanctions. What role for Australia?Mar 17, 2022
To have maximum effect, measures taken to address the widely condemned actions of President Putin in Ukraine should be coordinated with the support of the largest number of countries possible. One key question is how trade penalties can best be applied to achieve this goal. In addressing this question Australia has a key role to play.
After harrowing WTO negotiations over 19 years, Russia eventually acceded to the WTO in 2012. If the current objective is to penalise Russia through trade measures for its actions in Ukraine, one obvious avenue would be to expel it from the World Trade Organisation (WTO). While there have been penalties applied to specific products by individual countries, expelling Russia from the WTO would withdraw all trade privileges gained through the protracted accession process.
There is no specific provision in the WTO agreements permitting a member to be expelled. To do so would require a renegotiation of WTO rules with two-thirds of the 164 member states agreeing to the textual change and a three-fourths majority agreeing to expel the identified country. This could be attempted, but it would be time consuming with an uncertain outcome.
There is another way forward well within the framework of international law. Rather than fragmented sanctions for specific products by individual countries, legally applied penalties for all imports imported into an individual country is an option.
While Russia acquired many rights and obligations when joining the WTO, the right to “most favoured nation” (MFN) treatment is possibly the most important. MFN treatment means Russian exports of goods and services must receive treatment for trade with WTO members no less favourable than that provided to any other country. If MFN treatment is withdrawn, the WTO member concerned could legally impose restrictions on all its trade with Russia.
Is there a legal basis?
The suspension of Russia’s MFN privilege at the WTO has clear legal base. Article XXI of GATT (incorporated into WTO law) states that “Nothing in this Agreement shall be construed to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests taken in time of war or other emergency in international relations”.
This exception to MFN treatment, was virtually never used prior to President Trump’s invocation for steel imports into the United States. The Russian war on Ukraine certainly fits within the meaning of this exception. With President Putin flagging nuclear war this engages the security concerns of all countries, Australia included.
This possible course of action has not gone unnoticed. On the grounds of “essential security interests”, President Trudeau of Canada has imposed 35 % tariffs across the board for all imports from Russia.
A Bill to remove MFN status for Russia will be voted on this week in the United States(US) Congress and the European Union (EU) is considering following suit by applying tariffs and import bans, export restraints and other trade restrictions to all trade with Russia in accordance with the WTO exceptions provision.
Will this affect Russia commercially?
Russia is a middle-sized player in the world economy. Despite its 144 million inhabitants its GDP is just 9 per cent greater than Australia. It is also commonly pointed out that Russia is not a major player in world trade, its share in world exports being just 1.9%. It ranks 16th in world merchandise exports and 26th in services exports. Another feature is that Russian exports are heavily concentrated: 59.2 % are petroleum products, coal, or base metals. Because of domestic needs, these are not the sort of imports that lend themselves to debilitating restrictions. 33.8 % of exports are destined for the EU, 14.6% for China and 6.9 % for the UK.
However, there are other relevant considerations. Russia cannot look for relief from discrimination in free trade agreements outside the aegis of the WTO. Its key preferential agreements are with the Commonwealth of Independent States: Armenia; Belarus; Kazakhstan; Kyrgyz Republic; Moldova, Tajikistan; and, until recently, Ukraine. These collectively account for just 15.3 % of Russian exports (with Ukraine included).
On another front, absent MFN treatment, loss of services exports for Russia due to discriminatory restrictions would be commercially significant. Two-way Russian services trade (principally transport and business services) is US$109 billion.
Further, Russia is heavily involved in many aspects of the ongoing work of the WTO and apart from increased trade barriers, it will surely face resistance in its everyday affairs. It is, for example, a member of both the Information Technology and Facilitation Agreements and is attempting to accede to Government Procurement Agreement. It has resorted to WTO dispute settlement procedures more frequently than Australia.
The Ukraine authorities wrote to the Chair of the WTO General Council on 2 March informing the Council that Ukraine would no longer apply WTO agreements in respect of Russia, calling for others to do the same.
Could his happen?
Some days ago, 141 of the 193 members of the United Nations voted in favour of a resolution condemning Russia’s invasion of Ukraine. All are members of the WTO. Resolutions of the UN General Assembly are not legally binding in international law. They can have weight, but they are symbolic and aspirational collective gestures. Although WTO law is a part of overall public international law, the WTO is not part of the United Nations.
What is clear, however, is that the more countries that take action to remove Russian benefits of WTO membership, the more effective collective action will be.
In this respect, a Bill was passed by the US Congress last week to “encourage other WTO members to suspend trade concessions to the Russian Federation; and consider further steps with the view to suspend the Russian Federation’s participation in the WTO”.
As President Biden remarked in his speech this weekend, revoking MFN “in unison with other nations that make up half of the global economy will be crushing blow to the Russian economy”. A “crushing blow” indeed.
What is clear is that to magnify the impact of the proposed actions by the U.S. and EU would be for other like-minded WTO members to take similar action. The application of sanctions is not new to Australia which currently imposes 21 separate sanctions regimes. Autonomous sanctions were first imposed on Russia in 2014, extended in 2015 and again in 2022 with an import prohibition of Russian oil, refined petroleum products, natural gas, coal and other energy products as to take effect on the 25th of April this year.
Australia should not only withdraw MFN treatment for Russia, but it should encourage its trading partners – particularly in the region – to do the same. Importantly, it would draw attention to the implications of what could be expected should similar issues arise one day with respect to China.
The exercise of such collective will by a sizable majority of WTO members would be a demonstration that not only the United States, EU and Canada are willing to stand with the courageous people of Ukraine in this global crisis. So, too, are many other countries that are equally appalled by the Russian invasion of a neighbouring country. This will give them all an opportunity to prove it.