Thursday, September 20, 2012

Protectionism in Russia: The good the bad and the ugly



                Russia’s accession to the WTO will effectively be the final step to its introduction into the world markets. The reduction of tariffs and elimination of government subsidies will result in the extinction of certain sectors of Russia’s economy but the country will see an overall growth in its economy. In this post, I will use Ricardo’s law of comparative advantage to demonstrate why free trade is beneficial. Next, I will explain why many Russians are reasonably weary of the accession as well as the safeguards set in place to prove a smooth transition into free trade. I will conclude with an explanation of why protectionism and nationalization of economies is detrimental.
                It is fundamentally more efficient for a country to focus on its most productive industries. For example, it takes Russia the equivalent of 10 hours of labor to produce a steel beam and 15 hours to produce a car. Conversely, it takes Germany 15 hours to produce a steel beam and 10 hours to produce a vehicle. In this hypothetical Russia has a comparative advantage in steel production and Germany has the advantage in automotive manufacturing. Free trade and specialization will result in a net increase in the welfare of both nations. The gain occurs because free trade allows both nations to specialize a good and this will increase opportunities for consumption. Free trade allows a nation to consume and produce more than they would under autarky. The World Bank predicts that because of WTO accession Russia’s economy will grow at a rate of 11% annually in the long term and 3% in the medium term. This projected growth results from the improved quality and lower prices of services, which will lead to greater productivity and an increase in the competitiveness of Russian firms. The tariff reduction will also result in lower prices of goods for consumers. Another important factor for growth is improved market access for Russian exporters. Particularly for Russian firms producing steel, non-precious metals and chemical products.
                The principle argument against Russia’s WTO accession is that sectors such as machine building, light industries and agriculture will not be able to compete with foreign producers and will not have the protection of tariffs to uphold such industries. This will result in massive lay-offs in the manufacturing industries. Of particular concern is the automotive industry. Russia’s current tariffs on automobiles are at a staggering rate of 50%. Once these protections are removed manufactures such as AutoVAZ, GAZ and KAMAZ will not be able to compete. These are historically important industries in both America and Russia. Furthermore, it may become a defense risk since the infrastructure necessary to construct machines will deteriorate. These are valid concerns but a gradual reduction of tariffs provides a transition period. This will allow Russia time to specialize in certain vehicles and use foreign expertise to revitalize the industry. Renault and Daimler have already pledged to bring it’s know how to Russia. This will potentially transform the automotive sector into a world player by utilizing advanced technologies.
                The main reason that protectionism does not work is that government interference in economic matters is never the most efficient solution and often results in stagnation and corruption. There are two reasons for protecting an industry. First, to revitalize ailing domestic industries by giving it time to compete efficiently and adopt more efficient production processes.  This is also good for the gradual contraction of the ailing industry. Yet these industries do not need revitalization but rather need orderly termination. The consequence of such protection is complacency and inefficiency. Politicians are not good at picking winners; rather the market should determine the faith of such industries. Another reason for protection is to give an infant sector time to speed up in order to be competitive. Similar problems stem from such policies. Again, politicians are not in a position to pick which industries will succeed and because of political entanglements, such protections have a habit of becoming permanent. They being to depend on such protection and consequently corruption and interest groups will make it difficult to dispose of governmental support.  
                Russia’s accession to the WTO will create a more efficient and profitable economy. While some industries and individuals will suffer it is necessary that they adapt to the present situation. Those industries that can adapt and specialize will become profitable and thrive, while uncompetitive sectors will die out.  Russians should adopt an entrepreneurial outlook and realize the clear benefits of free trade. History and economics make it evident that government interference in the economy leads to inefficient results.  
Sources:
International Trade Law: Interdisciplinary Theory and Practice, 3rd edition. Raj Bahala
http://nstarikov.livejournal.com/702291.html
http://korobok12.livejournal.com/252959.html
http://www.businessweek.com/articles/2012-08-22/dont-get-too-excited-about-russias-wto-deal

2 comments:

  1. Nice post, however there may be a gap between WTO theories and reality. Your argument that Russians should concentrate on steel production while the Germans should focus on auto manufacturing makes perfect sense from a purely economic point of view. Unfortunately, this elegant theory will provide little consolation to the tens of thousands of Russian auto workers who could lose their jobs if such policies were strictly followed. Consider the situation with the US auto industry. Following WTO principles of free trade with minimal government subsidies, GM, Ford and other US auto companies should have gone into bankruptcy during the past couple of decades. US politicians, however, could never get elected with such ruthless policies, and agreed to bail them out. Politicians understand that employment considerations will trump global trade agreements every time.

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  2. Certainty free trade could potentially result in unemployment for many Russian factory workers. This is why Russia has been firm on gradually lowering tariffs. This will allow workers to be retrained in more productive fields. US politicians have to focus on the short term and this sort of thinking results in detrimental long term effects. It seems odd to uphold an ineffective industry when it hurts society as a whole. It would be more productive and less costly to simply retrain these workers.

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