KAZAKHSTAN AND ITS ENTRY INTO THE WORLD TRADE ORGANIZATION
Aigul Kosherbaeva, Head, World Market Research Center, Economic Research Institute, Ministry of the Economy of the Republic of Kazakhstan
Iekaterina Andriushina, Science researcher, World Market Research Center, Economic Research Institute, Ministry of the Economy of the Republic of Kazakhstan
Gulnaz Aldibekova, Science researcher, World Market Research Center, Economic Research Institute, Ministry of the Economy of the Republic of Kazakhstan
After launching a program of market reforms and integration into the world economic system, Kazakhstan cannot sidestep the organizational forms of international cooperation. There is no doubt that in order to provide itself with surefire protection from the possible levying of discriminating customs fees and excise tax by other states, ensure unrestricted transit of its goods through the territory of foreign countries, and strengthen stability, predictability and openness in its foreign trade, the republic must join the World Trade Organization (WTO).
At present, this international structure is the main tool for carrying out globalization and liberalization of world trade, and the economic transactions associated with it, as well as for achieving multilateral settlement of corresponding legal relations among its 144 full-fledged member states which, after China joined them, embrace almost all of world trade. Moreover, the WTO is planning to extend the scope of its control to the international movement of capital, environmental protection, state purchase markets, and so on. In this way, the WTO is transforming ever dynamically into a global economic structure for regulating all processes relating to the international exchange of goods, capital, services, and manpower.
An analysis of the membership conditions for new states (between 1996 and 2001) shows that the later a particular candidate joins the WTO, the more it is required to open up its domestic market. When the World Trade Organization first appeared (1995), the countries entering it had to assume obligations not only under the General Agreement on Tariffs and Trade (GATT), the structure on the basis of which the WTO was created, but also under the General Agreement on Trade in Services (GATS), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), and several other multilateral trade agreements.1
The fourth conference of the WTO member states held on 9-13 November, 2001 in Doha (Qatar) launched a new round of negotiations on further liberalization of world trade. Whereas the previous round, which was completed at the end of 1994, led to the creation of the WTO itself, the new round comprises negotiations on changes in the WTO agreements (and there are currently about 550 of them). In particular, there are plans to review questions relating to the elimination of tariff and non-tariff barriers for industrial commodities, to further liberalization of the service market, regulation of investment activity and competition, simplification of customs procedures, transparency in state purchases, clarification of anti-dumping regulations and electronic trade, as well as to labor standards, the dispute settlement procedure, regional trade agreements, the problem of access by the population of developing countries to expensive patented medication, and so on. In this way, a delay in Kazakhstan’s membership will complicate the coordination of membership conditions due to the changes which may be made during the current negotiations.
In addition, a strategically important step is the republic’s entry into the WTO along with Russia, Kazakhstan’s main trade partner, which could become a member of this organization as early as this year.2 Although the Russian side is experiencing certain difficulties, particularly with respect to the access of Russian commodities to foreign markets and the removal of anti-dumping procedures in exchange for opening (as quickly as possible) certain segments of its domestic market.
At present, other countries of the post-Soviet space are actively entering the WTO. In 1998, Kyrgyzstan joined it, and since the end of 1999, Latvia, Estonia, Georgia, and Moldova have followed suit. The EurAsEC member states, of which Kazakhstan is one, must coordinate among themselves the deadlines and procedure for their entry into the WTO. Failure to observe this condition could have a negative effect on the Eurasian Economic Community. It is presumed that no problems will arise if these states enter the World Trade Organization with their domestic markets completely open, as Kyrgyzstan did. In this case, the membership process will only take a few months. The problem is that negotiations on entry into this structure mean reaching a compromise not only between the “candidate” country and the organization itself, but also a compromise among all of its main participants.
As a rule, after reaching framework agreements, the country conducts negotiations with each of its major trade partners and tries to come to terms on specifics issues. For example, in negotiations with its trade partners, Russia is trying to resolve such questions (as we mentioned above) as access of its commodities to foreign markets and removal of various anti-dumping procedures in exchange for opening up certain segments of its market as quickly as possible. As a rule, such questions can only be coordinated on the basis of compromise. If such compromises can be reached, the actual membership process progresses rather quickly.
During the past few years, Kazakhstan has been stepping up negotiations. Four meetings of the working group and three rounds of bilateral meetings have already been held. Several developed countries, including the U.S., Japan, Switzerland, Canada, and Australia, consider our republic’s proposals unsatisfactory and have given their comments and suggestions. As a result, in April 2001, the republic sent updated proposals to the WTO Secretariat, and is improving and bringing its legislation into harmony with the WTO’s principles. Altogether, nine new laws have been adopted and amendments made to five existing laws. At present, preparations are being made for the next round of bilateral negotiations with 12 WTO countries.
As U.N. Secretary General Kofi Annan said at the conference in Doha, Kazakhstan has a real chance of becoming a member of the World Trade Organization in the near future.
Kazakhstan’s entry into the WTO will bring about a change in the conditions for formulating and implementing the country’s foreign trade policy in keeping with the requirements of this organization. Today, the main conditions are as follows: reaching balanced mutual concessions in trading goods and services; bringing economic legislation into harmony with the organization’s norms; making amendments and addenda (including denunciation) to international multilateral and bilateral agreements on economic trade cooperation with foreign countries; and adopting the necessary institutional, judicial, and administrative measures.
At present, disputes are erupting about whether countries gain or lose more from being members of the organization (see Table 1). On the one hand, entry into it will ensure Kazakhstan most favorable conditions in trade with other WTO members and equal treatment in the event of trade disputes and their settlement. Its membership will also lead to cancellation of discriminating tariffs during the transit of Kazakhstani shipments through states which belong to this structure. On the other hand, the liberalization of imports will cause an influx of cheaper commodities due to the impossibility of erecting trade barriers and introducing additional measures to restrict access to the domestic goods and services markets. In addition, the state will have limited opportunity to support domestic goods manufacturers. This will have a negative effect on the competitiveness of the production of national entrepreneurs, who are only just beginning to make headway, and lead to a deterioration in the trade balance.
However, it should be noted that in the short and medium term, Kazakhstan’s entry into the WTO is important primarily from the standpoint of investments rather than of trade (most of the country’s export consists of raw material). The republic’s membership will help to attract investments in raw material processing and in the development of contemporary processing industries. In this way, the balance of revenue and spending will not be identical for the export and import branches of the national economy.
This gives rise to an important condition—entering the WTO as a developing country. Agreements within the WTO contain a number of references to a particular and differentiated approach to such countries. Some of them relate to the obligations of developed countries with respect to ensuring access to their markets, or to carrying out WTO agreements in some other way, under conditions which are favorable to developing countries. But not one of these obligations has a judicial execution mechanism, since they are either voluntary, or set forth in vague terms, such as “to exert maximum efforts.”3
Kazakhstan’s Gains and Losses from Entering the WTO
|Intensification of integration into the world economy
||An increase in competition due to maximum liberalization of foreign trade conditions. Entry without taking into account the interests of the processing branches of industry and agriculture could lead to a significant cutback in production, an increase in unemployment, and a reduction in the revenue part of the budget
|Receiving most favorable conditions in trading goods and services with the WTO member states
||Restricted freedom of the state in using certain efficient measures for regulating foreign economic activity, as well as possibilities to support domestic goods manufacturers
|Fair settlement of trade disputes
||Restricted use of technical barriers in trade and additional measures to prevent access to goods and service markets
|Cancellation of discriminating tariffs during the transit of Kazakhstani shipments
||A reduction in assignations to the state budget due to a significant reduction in import fees
|Foreign trade and customs conditions brought into harmony with the WTO’s norms will be significantly simplified
||In the medium term, there will be a deterioration in the payment balance due to significant fluctuations in prices for raw material
|Standards for the production of goods and the rendering of services will be brought into harmony with international practice
|The reduction in import fees will be compensated by their successful collection, a significant percentage of imports will be brought out of the shadows
|Imported products will become more accessible to consumers, and producers will have the opportunity to buy foreign equipment and accessories
|In the future, the country will be able to have an influence on forming world trade relations keeping in mind its national interests
Membership in the WTO is more advantageous for those countries which export ready-made products with a high degree of processing and import raw material. The WTO is helping such countries to open up new sales markets and gain access to cheaper natural resources. Therefore, the leading developed countries, which are the main importers of Kazakhstani raw material, will naturally gain from the opening of Kazakhstan’s market. Whereas for our country, with the current breakdown in its economy, joining under the conditions of an open market may lead to more minuses than pluses.
The experience of the organization’s member countries shows that fulfilling obligations to the WTO does not always ensure importers free access to the market. In order to protect a state’s domestic market, various loopholes in the WTO’s system of requirements are used (tariff quoting, choice of tariff lines, and so on). According to Deputy Minister of Economic Development and Trade M. Medvedkov,4 entry into the WTO should be viewed as a commercial transaction and, during negotiations, the most favorable trade conditions “gained” for the republic.
The status of developing country will allow Kazakhstan to keep import customs tariffs, license imports, and other restrictions in force (for three years from the day it joins the organization with possible extension of the negotiation time), as well as create conditions for protecting “young” industrial branches, thus ensuring an equal payment balance, and so on. In addition, by entering the WTO with this status, Kazakhstan could be granted special conditions in tariffs and trade similar to the obligations of this type of state.
The problem is that in our republic, as in Russia, there are too many vulnerable industries and their level of development is still insufficient for normal competition. The authors of this article believe that Kazakhstan should bring its economy into harmony with international standards gradually, which would give our main vulnerable industries time at the transition and adaptation stage (no less than five years) to open up their markets. Our companies need this time to capitalize their revenue, mobilize investment resources, and so on.
On the one hand, export companies are interested in Kazakhstan joining the WTO, since this will simplify the access to foreign markets. And on the other hand, the access of foreign companies to Kazakhstan’s markets is also advantageous to domestic exporters, since they will have greater opportunity to buy efficient and reliable imported equipment.
In principle, within the WTO rules and provisions, each country has a certain amount of freedom to determine how restricted or liberal trading conditions will be. This will mostly depend on the development of Kazakhstan’s foreign trade.
The dynamics of the republic’s foreign trade turnover shows the high dependency of the foreign economic complex on the overall world situation (see Fig. 1).
Foreign Trade Dynamics of the Republic of Kazakhstan in 1995-2001 (as % of the previous year)
Source: data from the Republic of Kazakhstan Statistics Agency.
The world financial crisis of 1997-1998 mostly affected Kazakhstan’s leading trade partners (Russia and the Southeast Asian countries) and caused a significant reduction in its foreign trade turnover, primarily at the expense of exports, which led to a negative balance in the amount of $800 million. Later, due to an improvement in the world situation in 1999-2000, the rise in prices on Kazakhstan’s main export commodities (oil, ferrous and non-ferrous metal), bumper grain harvests, and devaluation of the Tenge (the country’s currency), the situation in the republic’s foreign economic complex took a significant turn for the better. According to customs statistics, the increase in exports over imports in 2000 ensured a positive trade balance of $2,765,600, and the percentage of foreign trade turnover amounted to almost 90% of the republic’s GDP, while the percentage of exports reached half of the GDP.
But in 2001, due to a drop in the development rates of the world economy, the situation in the country’s foreign economic complex deteriorated again. The decrease in foreign demand for raw material and the drop in prices for oil and metal led to a cutback in customs export of 5.4% compared with 2000. In so doing, high import growth rates were retained (125.9% of the level of the previous year) caused by an increase in investment, consumer and production demand. The increase in average import prices along with negative dynamics in the prices of export production led to a deterioration in trade conditions. Compared with the previous year, the trade balance decreased more than three-fold.
The trade structure of Kazakhstani export (compared with import) is characterized by a low added value. In so doing, imports are mainly products with a high level of technological processing, which in turn predetermines their high cost for Kazakhstani consumers.
The republic mainly exports oil, ferrous metal (copper, zinc, lead), chromium and its alloys, rolled ferrous metal, oil refining and chemical industry production, grain, cotton, wool, raw leather, and other commodities of the agroindustrial complex, and imports gas, electricity, equipment, and consumer goods. It should be noted that 35% of imports are brought in by representatives of unorganized trade. Kazakhstan’s main trade partners are Russia, the countries of the European Union and Southeast Asia, and China. In so doing, a trend is observed toward cutting back foreign economic relations with the CIS countries and expanding trade with the rest of the world.
Kazakhstan’s high dependency on the situation on the world market means that changes must be made in the structure of the country’s foreign trade, its target areas, and its interrelations with other states in this sphere. In this respect, one of the most important questions with respect to forming the republic’s foreign trade policy is its entry into the WTO. It should be noted that Kazakhstan will gain the most from entering this organization only when its close neighbors, Russia and China, also become members.
Chinese and Russian Influence on Kazakhstan’s Foreign Trade After They Enter the WTO
China’s entry into the WTO will bring about a significant improvement in the quality of Chinese export, in particular due to the ever wider use of state-of-the-art technology, materials, and accessories delivered to the PRC from developed countries. As a result, Astana’s positive trade balance with Beijing will most likely significantly decrease despite the forecasted increase in exports from our republic to China.
In the short term, that is, until Kazakhstan joins the WTO, China’s membership in this organization will have an insignificant effect on the economic situation in our country, since tariffs with respect to the PRC will not change.
But after Kazakhstan joins the WTO, the situation could change since our market will be flooded with cheap Chinese commodities due to the lowering of trade barriers. Since domestic production is mainly aimed at raw materials, and the quality of ready-made products is still not competitive, there could be a significant increase in the import of goods from the food and light industries, which might undermine newly restored domestic production. What is more, the import of household and consumer goods will probably increase.
Goods turnover between Astana and Beijing is constantly growing. For example, in 1999, customs import from China amounted to $81.4 million and in 2001 to $169.2 million, i.e. it increased by 207.8%. Raw material, semi-finished and other production, as well as investment commodities mainly come from China, whereby the percentage of the latter is increasing. Whereas in 1999, their import amounted to $20 million, in 2001 it had already reached $86.7 million (an increase of 433.7%).5
The same trend is also observed with respect to Russia, but here the main percentage in the import structure is occupied by raw material, semi-finished and other production. For example, compared with 1999, in 2001 their import increase by 232.7% and the import of investment commodities by 238.8%.
Since for Kazakhstan, Russia is a vast raw material and sales market, there is great dependence on transit through its territory, and Astana is also competing with Moscow with respect to many commodities. In this respect, our republic must come to terms with the Russian Federation on simultaneous entry into the WTO.
Cooperation is developing with our northern neighbor in the export of Kazakhstani oil, in particular, an oil pipeline is being built from the Tengiz field to Novorossiisk, and measures are being taken to ensure the export of our oil to the European markets via the existing system of Russian oil pipelines. Cooperation in the fuel and energy complex is of immense importance. For example, approximately 2/3 of the coal produced in the Ekibastuz Basin comes to the Russian market. We will note that at one time, Ural power stations were built counting precisely on the consumption of Ekibastuz coal. As part of a debt settlement agreement, Kazakhstan transferred the “Severniy” coal seam and part of the “Bogatyr” coal seam of this basin to RAO “Unified Energy System of Russia”. Later, an integrated Ural fuel and energy company must be developed which includes producing coal in Kazakhstan and manufacturing electric power in Russia.
An important aspect of Kazakhstan-Russian economic relations is border cooperation, in which both Russian and Kazakhstani enterprises are interested. For Russia, the role of border regions is particularly significant since the country occupies first place in the world both in terms of length of state borders (60,933 km) and in terms of the number of countries it shares borders with (16). After the collapse of the Soviet Union, the length of the Russian border essentially did not change, but numerous new border countries appeared: eight CIS states. Whereas before 1991, 10 Russian republics, territories and provinces could be classified as border regions, at present there are 45 (out of 89), on the territory of which live 47.4 million people (32.6% of the country’s population).6
The Vulnerable Branches of Industry Must Be Protected
Kazakhstan’s entry into the WTO means that the republic must assume several obligations which will lead to a change in conditions for formulating and implementing the country’s foreign trade policy in keeping with this organization’s requirements.
It is also necessary to emphasize that joining the WTO entails a compromise which will be reached during the negotiations. It is achieved as a set of mutual concessions, whereby frequently on the basis of tough conditions.
It should be noted that the WTO does not prohibit protectionism. It permits customs fees to be raised, many types of non-tariff restrictions to be applied, quoting and licensing to be used, as well as certain branches of the economy to be subsidized.
Taking into account the instability of the republic’s economy and the reduction in the cost of importing products after the domestic market has been opened upon entering the WTO, western companies will try to reinforce their foothold in Kazakhstan to the detriment of domestic manufacturers. What is more, at this particular stage, the processing branches of industry and agriculture are the most vulnerable. Entry into the WTO without taking into account their interests could lead to a significant cutback in production, an increase in unemployment, and a reduction in the revenue part of the budget.
When drawing up conditions for joining this organization, the republic must try to attain the right to open its domestic market gradually, taking into account protection of the most vulnerable branches of industry. As the experience of other countries shows, the transition period for tariff concessions could last for as long as 15 years (Bulgaria).
When determining the maximum permissible limits for reducing import customs fee rates, a differential approach should be used, with the greatest reduction applying to less vulnerable groups in which the import volume is insignificant. But in terms of the most vulnerable commodities, import customs fee rates should be left as high as possible. In terms of these particular commodities, it is expedient to retain the right to set the initial level of import customs fee rates which is sufficient for protecting the production of these commodities.
The adoption of laws equivalent to the WTO norms will make it possible to make use of a new arsenal of economic trade tools necessary for protecting the domestic market. A reduction in tariff protection measures could be compensated for by using technical trade barriers (standardization, certification, sanitary and phytosanitary measures). These protective measures should be applied to the production of the food industry. In particular, certification should be introduced for mineral water, juice, and alcoholic beverages, and inspections of sanitary supervision and standardization services stepped up. In addition, in order to protect the domestic market, compensation and anti-dumping fees must be widely applied.
Kazakhstan’s participation in politically and economically important integration processes within the EurAsEC and CIS obligate it to bring tariff regulation into harmony within these unions. Kazakhstan’s obligations to the WTO with respect to tariff liberalization must be based on its own plans for economic transformations. At the present time, approximately 70% of customs fees have been agreed upon within the EurAsEC.
With respect to preparing the republic for entry into the WTO, priorities have been precisely defined in tariff policy which guarantee efficient foreign economic activity. Maximum rates are being established for ready-made commodities, medium ones for accessories, and minimum ones for raw material and socially significant commodities which are not produced in the country.
During the past five years, the government has undertaken several measures to change customs and tariff policy. Thirty-five, 40, 50 and 100% customs fees have been cancelled, although 100% combined custom fees rates have been retained on two types of alcohol. For example, since 1997, customs fees on 19 types of ferrous metal pipes have been lowered from 20% to 0%, and on two types to 5%, due to the start of construction of the Tengiz-Novorossiisk pipeline (it is also called the Caspian Pipeline Consortium (CPC)), and the assimilation of new oil and gas fields. As a result of these measures, the import of ferrous metal pipes in 2000 compared with 1996 rose in physical terms by 89.1%, and in monetary terms by 53.2%, and the prices for this group of commodities dropped from 960 to 778 USD per ton.
In 2000 compared with 1995, imports in nominal terms increased by 28.3% (according to customs statistics, in 2001 they increased compared with the same 1995 by 67.2%).
As a result of the Russian crisis of 1998, an influx of cheap imports began, particularly of consumer goods, so to protect the domestic manufacturer a ban was introduced on imports from Russia at the beginning of 1999, and 200% fees on the import of production from Uzbekistan and Kyrgyzstan were established. But the measures adopted did not have much effect, since domestic commodities proved to be non-competitive. In addition, contraband import has increased. After the government removed the ban on importing products from these countries (Kyrgyzstan since September, and Uzbekistan since December 1999), imports from these republics have tended to rise.
Based on an analysis of the state of the domestic market and a study of the reasons for the aggravation in the financial-economic situation, the drop in production volumes of industrial enterprises of the republic, and the deterioration in the structure and state of the foreign trade balance, the government introduced protective fees on several types of commodities. These measures proved beneficial, but not for all groups of commodities. The thing is that most enterprises are still using outmoded technology and engineering production techniques, which significantly lowers the competitiveness of domestic goods both on the home and foreign markets.
On the whole, the conclusion can be drawn that the measures being taken, including the structural changes in customs and tariff policy, are aimed, first, at preparing the republic for joining the WTO, second, at unifying customs tariffs within the EurAsEC, and third, at increasing production and raising the competitiveness of domestic goods.
This has given rise to a complicated but very necessary task, in which all the current and future members of the WTO, including Kazakhstan, are interested: finding (to the extent possible) the optimal balance between free trade, on the one hand, and its necessary restriction, on the other. In so doing, this balance should take maximum account of the special features and interests of the individual states, including the very specific situation in the countries which did not begin developing an open market economy until relatively recently.
1 See: Bernard V. Hoekman and Michel M. Kostecki, The Political Economy of the World Trading System: The WTO and Beyond, Oxford University Press, 2001.
2 See: M. Medvedkov, “Prisoedinenie k VTO—odna iz vazhneishikh zadach ekonomicheskoi politiki,” Information bulletin “Rossia na puti k VTO,” No. 1, September 2001, pp. 1-3.
3 For more detail, see: “Russian Trade Policy and WTO Accession,” in: Materials of the Seminar Organized by the World Bank Institute and the Russian Foreign Trade Academy, Moscow, 26-30 June, 2000.
4 M. Medvedkov, “VTO: voiti i ne proigrat’,” Ekonomika i zhizn, 2 January, 2001, pp. 2-3.
5 See: Doklad Agentstva Respubliki Kazakhstan po statistike “Sotsial’no-ekonomicheskoe razvitie Respubliki Kazakhstan,” 1995-2001 (Report of the Republic of Kazakhstan Statistics Agency “Socioeconomic Development of the Republic of Kazakhstan,” 1995-2001).
6 See: A.E. Kalinin, L.F. Boltenkova, V.A. Matveev, Prigranichnoe sotrudnichestvo Orenburgskoi oblasti Rossiiskoi Federatsii i sopredelnykh oblastei Respubliki Kazakhstan: opyt, problemy i perspectivy [http://ieie.nsc.ru/~tacis/report_kalinin.htm].