July 6, 2012    Volume 19, No. 11

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On Russia Free Trade Issue, Big Business Interests Run Against Domestic Manufacturers

By Richard A. McCormack

A group representing domestic manufacturing companies does not agree with almost all of the country's major manufacturing and business trade associations on whether the U.S. government should grant Russia with Permanent Normal Trade Relations (PNTR). The Coalition for a Prosperous America (CPA), which represents domestic producers, says allowing PNTR with Russia would be a grave mistake. But that sentiment is not shared by President Obama's Export Council, headed by Jim McNerney, CEO of Boeing. Nor is it shared by organizations representing large multinational companies, such as the U.S. Chamber of Commerce, the Business Roundtable, the Association of Equipment Suppliers, the U.S.-Russia Business Council (with members such as DuPont, KPMG, GE, GM, Google, J&J, Xerox and Oracle), the Coalition for U.S.-Russia Trade (with 160 members including Caterpillar, International Paper, Alcoa, Ford, JP Morgan and Microsoft), and the National Association of Manufacturers, among others.

NAM's vice president for international economic affairs Frank Vargo says that if Congress fails to act on the recently introduced Russia PNTR legislation "we will be left on the sidelines and our competitors will have an advantage in the $300 billion Russian import market." Vargo notes that President Obama's Export Council has estimated that U.S. exports to Russia "could double or triple over the next few years. But in order to realize these gains and create manufacturing jobs, Congress must act."

It is a specious argument, counters CPA, whose board voted unanimously on June 27 to oppose Russian PNTR. The reason: Russia is not a free-market economy, and the Russian government "has reasserted a dominant role in key industries," says the CPA board. "Further, Russia maintains the ability to manipulate its currency, subsidize its state-favored companies and increase its value-added taxes charged to imports from the U.S." None of these issues are raised by those in favor of PNTR for Russia.

Russia is already running huge trade surpluses with the United States. Through April of this year, the United States exported $3.5 billion worth of goods to Russia, but imported almost three times that amount, at $9 billion, for a U.S. trade deficit of $5.556 billion. Last year, the U.S. ran a trade deficit of $26.3 billion with Russia, with U.S. exports of $8.3 billion compared to imports of $34.6 billion.

"In 1999, the same proponents of PNTR for Russia argued for and pushed through a bill granting Permanent Normalized Trade Relations for China," says CPA. "The same export growth arguments were made while ignoring the potential import explosion. The import explosion that materialized was made possible by those same proponents outsourcing American jobs to China."

Subsequent massive U.S. trade deficits have crippled the American economy's ability to create jobs. Entire industries have disappeared and governments lost their tax base. "The problem has been caused by America's inability or unwillingness to neutralize foreign unfair trade practices, including state capitalism and its inherent barriers and subsidies," says CPA. "The U.S. cannot afford to continue making the same mistakes again and again."

But CPA is up against a pro-Russia business PR juggernaut. The Business Roundtable says on its Russia PNTR website that there is "a universe of support for Russian PNTR." At a Senate Finance Committee hearing, United States Trade Representative Ron Kirk said that PNTR would "expand jobs here at home." Without it, the United States will have "no leverage with Russia over areas of disagreement." He said that all of the trade treaties signed to date have "clearly contributed to economic recovery." Kirk noted that Russia is the world's seventh largest economy, "but is only our 20th largest trading partner -- with $42.9 billion in two-way trade in goods in 2011." Absent was mention that the "two-way trade" was skewed four-to-one in Russia's favor. He also crooned about how U.S. exports to Russia increased by almost 40 percent between 2010 and 2011 (by $2.3 billion, from $6 billion to $8.3 billion) but failed to mention that imports from Russia skyrocketed by three times that amount ($6.9 billion, from $25.7 billion to $34.6 billion).

Secretary of Agriculture Tom Vilsack was equally as effusive of PNTR with Russia, stating that U.S. agricultural exports to Russia were $1.4 billion, while agricultural imports from Russia were $25 million "This impressive performance by U.S. exporters has been accomplished in spite of Russia's imposition of non-science-based sanitary and phytosanitary measures and unjustified technical barriers to trade," said Vilsack. In directing his pitch to Montana Democratic Sen. Max Baucus, a fervent free trader from an agricultural state and chairman of the Senate Finance Committee, Vilsack said that "entrepreneurial Montanans have shipped more than $20 million in live cattle and bovine genetics to Russia in the past two years. Russia is an excellent market for cattle, genetics and USDA Choice and Prime cuts."

The U.S. State Department is also a proponent of Russia PNTR. Providing Russia with Most Favored Nation trade status "would give ballast to our overall relationship with Russia and strengthen the case of those who argue that greater cooperation with America is good for the Russian people," said Deputy Secretary of State William Burns. "Over time, extending PNTR can help Russians achieve their goal of building a modern, successful and prosperous nation." Burns did not mention that Russia supports Syrian President Assad and has warm relations with Iran.

Baucus is convinced that Russia's accession to the World Trade Organization "will mean thousands of jobs here in the United States, but only if we pass Russia Permanent Normal Trade relations legislation by August," he said. "If we do pass Russia PNTR, U.S. exports to Russia are projected to double within five years, and that means thousands of new jobs here at home. These new jobs come at no cost to us -- zero."

Sen. Orrin Hatch (R-Utah) was on board as well, but he is no fan of Russia. Russia remains ruled by the iron fist of Putin and there is continued "disregard for the rule of law, human rights and democracy," he said. Russia still occupies Georgia. It is seeking to undermine the U.S. missile defense system in Europe, and it recently conducted the largest joint war games ever to be held in the Middle East with Syria, Iran and China. Russia ranks 143rd out of 183 countries in the 2011 Transparency International Corruption Perception Index, just ahead of North Korea and Somalia, said Hatch. "It repeatedly fails to abide by its international commitments." It has not fulfilled commitments related to intellectual property and it has never ratified the U.S.-Bilateral Investment treaty "another example of their failure to deliver on their economic promises," Hatch noted, calling Russia "corrupt" and a "rogue regime."

"The Obama administration argues that the U.S. has no leverage over Russia by withholding PNTR. But they fail to acknowledge that it was the Obama administration that squandered America's leverage when the President decided to invite Russia to join the WTO to augment his failed reset policy," said Hatch. "With this leverage now gone, they argue that the myriad of economic problems we confront daily will be resolved through WTO litigation. We know from our experience with China in the WTO that this simply is not enough."

The business case for PNTR with Russia is not very strong, Hatch noted, "especially when considering that Russia already committed to provide MFN treatment to our exports under the terms of our 1992 Bilateral Trade Agreement." Obama, Hatch added, "expects Congress to turn a blind eye to the barrage of bad news that demonstrates on a daily basis the deteriorating political, economic and security relationship between the United States and Russia. Russia continues to see itself and act as a military, strategic and economic counterweight to the United States. They view every aspect of this relationship through this lens, including their membership in the WTO. An administration 'reset' policy [toward Russia] that ignores this reality and consciously seeks to separate these interrelated issues is naive, dangerous and doomed to failure. We should support the ability of American workers to try and take advantage of Russia's impending membership in the WTO, but in so doing, Russia must be held accountable for its policies."

The Russia PNTR legislation was introduced in the Senate by Sens. Max Baucus (D-Mont.), John Kerry (D-Mass.), John Thune (R-S.D.) and John McCain (R-Ariz.).

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