Kazakhstan’s Rocky Road to the WTO

On July 27, 2015 President of the Republic of Kazakhstan Nursultan Nazarbayev and WTO Director General Roberto Azevedo signed a Protocol on Kazakhstan’s accession to the World Trade Organization. For Kazakhstan, this step is a logical outcome of two decades of negotiation and searching for a compromise between its own national interests and the need to participate in global institutions and processes, as well as compliance with the obligations arising from membership of the Customs Union (CU) and the Eurasian Economic Union (EEU). Officially, Kazakhstan will automatically become the 162nd full member of the WTO 30 days after the date the Protocol is ratified.

On July 27, 2015 President of the Republic of Kazakhstan Nursultan Nazarbayev and WTO Director General Roberto Azevedo signed a Protocol on Kazakhstan’s accession to the World Trade Organization. Technically, the negotiations were completed on June 10, and an Accession Package detailing Kazakhstan’s terms of WTO membership contained in the Report of the Working Party on accession was made public on June 22. During the negotiation process 29 bilateral agreements were signed on market access for goods and 15 agreements on market access for services. For Kazakhstan, this step is a logical outcome of two decades of negotiation and searching for a compromise between its own national interests and the need to participate in global institutions and processes, as well as compliance with the obligations arising from membership of the Customs Union (CU) and the Eurasian Economic Union (EEU). Officially, Kazakhstan will automatically become the 162nd full member of the WTO 30 days after the date the Protocol is ratified.

The importance of WTO membership for Kazakhstan

Speaking at the signing ceremony, the WTO Director General noted that Kazakhstan’s accession will have far-reaching economic consequences, systemic impact and will make an important contribution to the country’s socio-economic development. The main advantages for Kazakhstan will be an improved investment climate and job creation as the economy opens up. For the WTO, the accession of another Central Asian country signifies an important step towards the realization of the idea of universal membership.

Since reforms took hold in the post-Soviet space, Kazakhstan has been one of the fastest-growing economies. Over the past 25 years the Republic has not been involved in any serious political and economic conflicts, allowing it to maintain stability and sustainability in both its national economy and foreign economic cooperation. In contrast to the early 1990s, when Kazakhstan’s partners were former Soviet republics, today the country has trade and investment contacts with 185 countries worldwide. Kazakhstan’s turnover today exceeds $120 billion, and WTO members account for 90% of that sum.

The country has quite successfully implemented a number of ambitious institutional reforms and has established intensive international economic cooperation across its economy, paying due regard to its national interests. Effective implementation of reforms contributed to the creation of a new type of institutional environment, which combines stringent management with an open economy. As Kazakhstan’s president noted at the signing ceremony, the country's economic policy has long aimed at creating an open economy by removing barriers to regional integration and by promoting open collaboration.

Alongside, and largely due to, this active foreign economic cooperation, the country’s GDP has also grown. Since the mid-1990s, when the Republic of Kazakhstan applied to join the WTO, its GDP has increased by 18 times. The predominant share of Kazakhstan's GDP is created in the service sector, which accounts for 54 percent. Services in the finance, telecommunications, transportation and logistics sectors, are, in addition to energy, of primary importance for the country’s development. Most foreign investment is channeled to these sectors.

Maintaining such a high development rate requires increased cooperation and the constant search for new investment projects and new partners. The Republic of Kazakhstan’s WTO accession could significantly aid this process, as for many transition economies this has become a kind of “quality certificate” in regulating foreign economic relations.

Kazakhstan’s terms of accession to the WTO

Kazakhstan-2050 Strategy

The negotiation process on Kazakhstan's accession took place in line with the general pattern stipulated by the Marrakesh Agreement, and included issues of market access for goods, services, and capital, in addition to key systemic issues. The negotiations over market access for goods appeared to be the most delicate ones, as the country’s commitments in this respect had to be harmonized with similar obligations to the Customs Union. This chiefly involved import duties. As for export duties, Kazakhstan has bound duty rates for 370 tariff lines under Chapter 21 of the Foreign Economic Activity of the Customs Union’s Commodity Nomenclature, and has a zero duty rate for 55 items. As Kazakhstan harmonizes its export duty policies under the EEU, it will also have to comply with Russia’s commitments covering 556 items, 81.3% of which involve zero duty.

In terms of access to the services market, Kazakhstan’s specific commitments are recorded in 10 sectors and 116 subsectors, which is quite common for developing countries. The main restrictions relate to the telecommunications services sector, in which a 49% restriction on foreign ownership will continue for two and a half years (it does not apply to the benchmark company Kazakhtelecom). In the financial services sector (insurance and banking), foreign companies will be able to establish branches in five years’ time. It should be noted that Kazakhstan’s policy in relation to foreign service providers is more liberal than the Russia’s, as Russia’s banking sector maintains a ban on service provision by established branches, and only subsidiaries’ activity is allowed. As for the transport sector, there are certain obligations relating to freight and passenger traffic, while foreign tour operators will be admitted to the Kazakh tourist market in two years’ time.

Within four years of joining the WTO, Kazakhstan plans to launch negotiations on accession to the WTO Agreement on Government Procurement. For Russia, this term was originally defined as 5-7 years.

Correlating WTO and EEU commitments

In addition to cooperation in the global economy since the mid-1990s, Kazakhstan continues to actively participate in the CIS integration processes. Starting with the 1995 Agreement on the Customs Union between Russia, Belarus and Kazakhstan, Kazakhstan has repeatedly reaffirmed its commitment to finding an optimal integration path on a new footing. Subsequently, Kazakhstan has taken part in all integration projects, culminating in the creation of the Eurasian Economic Union on January 1, 2015. Although the Kazakh government has always taken a proactive stance on cooperation with its partners in the Customs Union and the EEU, Kazakhstan’s WTO accession marks a new and complex stage in EEU development. It is generally recognized that Kazakhstan's WTO accession is a big plus for the EEU and another step toward the latter’s consolidation as a full-fledged integration bloc.

Since the Customs Union’s legal framework was created on the basis of WTO norms and rules as well as the experience of other associations, many of its provisions were phrased accordingly – before Kazakhstan’s WTO accession. The Agreement on Functioning of the Customs Union within the Multilateral Trade System Framework that took into account Russia’s almost certain membership was signed in 2011 and became its main legal instrument. In the event of any conflict arising between integration legislation and multilateral rules, the Agreement provides for the supremacy of WTO commitments and for the Customs Union’s obligation to bring its norms into conformity with those of the WTO. Thus, the EEU has arguably already developed a mechanism to make adjustments if any conflict between the obligations of individual members should arise.

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Difficulties arise primarily in bringing Russia's commitments agreed before the establishment of the EEU, and formed the basis for the Common Customs Tariff into conformity. As of today, the average bound rate of duty of the EEU Common Customs Tariff is 9.4%, and under Russia’s commitments made to the WTO, is to be reduced to 7.7% by 2018. For Kazakhstan, the same indicator for all goods is 6.1%, while for agricultural products it is 7.6% and for remaining commodity items – 5.9%. There is an obvious discrepancy between the obligations of Kazakhstan and the agreed customs tariff of the EEU, which hampers foreign partners’ access to the Kazakh market. According to experts, the U.S. and EU sought to use Kazakhstan’s WTO accession to introduce lower tariffs than those in force in the Customs Union today, and to ensure a liberalization of market access. This substantially weakens the efficiency of efforts by Russian negotiators, who have managed to maintain protection for many domestic industries.

WTO rules provide for the possibility of a country increasing duties on accession to a customs union. In such cases, foreign partners have the right to demand a renegotiation of a number of tariff obligations under the rules and procedures set out in Article XXIV:6 of GATT 1994, in Article XXVIII of GATT 1994 and in the Understanding on the Interpretation of Article XXVIII of GATT 1994. The country that increases the bound duty rate, shall negotiate with three categories of WTO members: 1) countries that have priority negotiating rights (countries with which the original commitments were agreed upon); 2) countries that are interested suppliers; 3) other WTO members, whose interests are affected by these revisions. If Kazakhstan is forced to raise the bound rate of duties agreed with its WTO partners to the Customs Union level of tariff protection, WTO members and partners of Kazakhstan may demand compensatory adjustment as recompense for the deteriorating market access conditions.

As regards compensatory adjustment, its amount is determined in negotiations that are to be entered into in good faith to reach a mutually satisfactory resolution. These negotiations must take due account of the reduction of duties on the same tariff line made by other participants in the customs union upon its formation. Should such reductions not be sufficient to provide necessary compensatory adjustment, the customs union would have to offer compensation, which could take the form of a reduction in duties on other tariff lines. Where, despite these considerable efforts, agreement in negotiations on compensatory adjustment under Article XXVIII as elaborated by the Understanding on the Interpretation of Article XXVIII of GATT 1994 cannot be reached, the customs union shall, nevertheless, be free to modify or withdraw the concessions; affected members shall then be free to withdraw substantially equivalent concessions in accordance with Article XXVIII.

Kyrgyzstan applied a similar procedure on its accession to the EEU in 2015. The Kyrgyz government notified the WTO that it reserved the right to revise its commitments regarding customs duties in the three-year period beginning on January 1, 2015.

Analyzing these regulations, it is important to note that they were designed to regulate a somewhat different situation than the one arising in connection with Kazakhstan’s accession to the WTO. These rules imply the establishment or expansion of a customs union by WTO members. In the case of Kazakhstan, we are dealing with a situation in which the Customs Union took on commitments made by one party within the WTO framework. Kazakhstan, as a member of the Union, completed negotiations on market access for goods before the CU’s formation, but due to the fact that Russia joined the WTO before its CU partners, it was Russia’s commitments that formed the basis of the EEU legal system.

In addition, in 2012 the Eurasian Economic Commission (EEC) published Decision No. 55 On the Application by the Republic of Belarus and the Republic of Kazakhstan of Import Customs Duties that Differ from the Rates of the Customs Union Common Customs Tariff in Respect of Certain Categories of Goods. Thus, the EEC Council approved the List of goods and rates to which Belarus and Kazakhstan apply import customs duties that differ from the rates under the Customs Union Common Customs Tariff, and established that the import customs duties rates, approved in accordance with Paragraph 1 of this Decision, are valid for the Republic of Kazakhstan for six months. After this period expires, these rates’ period of validity is extended until Kazakhstan’s accession to the WTO. The customs duties, approved in line with this Decision for the Republic of Belarus, will remain in force until the country becomes a WTO full member.

Accordingly, all changes will be gradual. As Maksim Medvedkov, the Head of the Department for Trade Negotiations of the Ministry of Economic Development of Russia, noted, EEU countries will maintain the Common Customs Tariff for at least six and a half years after Kazakhstan’s accession to the WTO. During this period a compensatory adjustment will be negotiated on the basis of WTO rules, and until the negotiations are competed, Kazakhstan will apply the tariff protection rate agreed with the WTO. There are differences in the rates of tariff protection for about one third of the Common Customs Tariff items. Joint measures will be taken to avoid bypassing Russian barriers and violating Russia’s interests in terms of market access for goods and to protect its domestic market within the EEU. The existence of these risks explains Russian officials’ rather reserved response to the successful conclusion of the lengthy process of Kazakhstan’s WTO accession and the absence of comments on the matter from the Russian side. Specific risks arise for the domestic engineering industry, in particular for the production of agricultural machinery.

A lot of work remains to done within the EEU framework and the Customs Union as its core. The Common Customs Tariff may undergo changes due to the fact that the customs and tariff regulations will gradually adapt to the commitments made by the Republic of Kazakhstan, compliance with which is likely to entail decisions on changing the rates of the Common Customs Tariff.

Reasons for differences within the EEU and ways to resolve them

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The differences in the levels of tariff protection among EAEC countries including Russia and Kazakhstan are not the only areas of disagreement. In particular, reports have surfaced that the new integration bloc, which announced ambitious plans for the development and application of the EU experience in regional economic integration project implementation, is facing disputes on the application of trade regulation measures. So, in April 2015, Kazakhstan imposed a ban on the import and sale of certain products from Russia on sanitary and veterinary control grounds. Later, Russia proposed its EEU partners apply a joint resolution on the new trade regime for Ukrainian goods in bilateral trade with Ukraine on the basis of Annex 6 to the Agreement on Free Trade Zone in the CIS.

However, during the Eurasian Economic Commission Council meeting in June 2014 this proposal was turned down. Russia's partners explained their position by the fact that the real threat for the Customs Union posed by Ukraine’s Association Agreement with the EU had not been yet assessed quantitatively. All this testifies to the presence of differences that the media has already labeled a “trade war” among EEU members. It should be emphasized that while this reveals the existence of certain problems, it in no way suggests disintegration. The subject of internal debate is either products that compete in price and quality, or political measures. Since EEU economies are similar, the countries do not complement each other, but rather compete with each other and, therefore, seek protection by simple and straightforward measures. The development of integration processes and a clear stating of objectives of and strategies for integration could offer a way out of this situation. However, this is not enough for the EEU.

This situation is not unique. There are numerous examples in international affairs illustrating how member states of regional trade agreements and integration associations have taken similar measures. For example, the first 12 years of NAFTA’s existence (from 1995 to 2007) witnessed 83 trade disputes between the United States and Canada; as of August 2014 there have been more than 300 disputes among the three NAFTA parties. It is worth recalling another well-known precedent: in 2013, France submitted notice to the European Commission that it would take unilateral measures to block the free movement of goods if there was a threat of environmental pollution. On these grounds Paris imposed a ban on certain Mercedes-Benz models that did not use the new HFO-1234yf refrigerant that appeared to be the only coolant on the market complying with the EU regulation, which aims to steer the gradual transition to more environmentally safe refrigerants from January 2015. This trade dispute was settled within the EU framework.

Another example is as follows. Franco-German pharmaceutical corporation Aventis tried to enlist the support of Novartis to resist a hostile takeover by French company Sanofi-Synthélabo. However, representatives of the French government supported the deal between the two national companies without any “foreign” involvement. In the end, Sanofi-Synthélabo acquired Aventis.

Moreover, some studies in this area highlight the tendency for the establishment of free trade areas and trade blocs to prompt an increased number of trade disputes. The important point is that trade liberalization within the framework of regional associations should be comprehensive and, accordingly, affect sensitive sectors of the economy. Indeed, the initial stage of a regional union can face an increase in the number of trade disagreements among participants.

So, if a grouping cannot escape disputes among its members, how can these disputes be resolved? As a WTO member, can Kazakhstan use the right to appeal to the Dispute Settlement Body against the measures taken by Russia, and vice versa?

As a rule, members of integration blocs and regional trade agreements do not apply to the WTO to resolve internal disputes. There are three options in international practice for the resolution of trade disputes in regional groupings. The first is political and diplomatic and involves the states’ use of internal diplomatic resources to resolve disputes. The second involves a quasi-judicial model, engaging experts from third countries as arbitrators. The third is legal and provides for the presence of a regional grouping’s formal, clearly defined internal mechanism of dispute resolution.

The dispute settlement procedure is spelled out in all integration agreements. Different groupings apply different approaches to dispute resolution, depending on the time and experience of integration interaction, on the level of participants’ economic development, the regional peculiarities, the degree of integration, as well as on the number of members of the bloc. The quasi-judicial model, for example, is specific to NAFTA and Latin American Mercosur (Common Market of South America). The Caribbean Community (CARICOM) makes use of the legal model. The EU operates a clearly defined legal mechanism whereby the European Commission monitors all ongoing integration processes and resolves all disputes that arise.

Thus, the problem is not so much the existence of disputes per se, as the willingness to resolve them constructively on a legal basis. This requires significant political will and an established mechanism. The EEU makes good use of the most suitable model, i.e. the legal one. All issues related to the implementation of the Treaty on the Eurasian Economic Union and disputes within the association are resolved by the Court of the EEU. If the mechanism does not work or is not used, there is a threat of rising tensions in the region and of the weakening of the countries’ positions.

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Modern trade policy is influenced by a number of factors that must be taken into consideration when shaping the strategic direction of a nation’s economic development. The fact that the process of EEU countries’ integration into the world economy runs parallel to their profound restructuring of their own national economies and the search for optimal development models is a complicating factor for them. Of course, disagreements and problems are bound to emerge against this backdrop and the key to their resolution lies in a constructive approach to negotiations at all levels and a clear understanding of the overarching strategic goals and objectives.