Russia is expected to be one of the fastest-growing auto markets in the world in the next decade. But a new Russian government edict could have the effect of locking out exporters.
The decree issued last month is still being translated and interpreted by U.S. officials. But private sector lawyers who have seen it say it appears to run afoul of international trade rules.Based on a more general edict in February by President Boris Yeltsin, the new auto decree offers tax and tariff incentives to foreign investors who assemble autos inside the Russian Federation. But to qualify, 50 percent of the car's content must originate inside Russia. The preferences last from five to seven years.
The local content rule has the effect of discouraging imports of auto parts and probably is a violation of World Trade Organization rules, according to several trade lawyers.
Although Russia is not a member of the WTO, it is seeking to join. U.S. trade officials are pushing to end all such measures that discourage trade.
In the past the United States has protested such local content rules used to help spur development of a country's auto industry, such as the WTO judgment won against Indonesia's National Car Program.
U.S. officials aren't commenting on the Russian auto edict, but it could greatly complicate overall efforts to lower trade barriers in Russia for a sector of vital importance to the United States. Russian consumers bought roughly 1 million autos in 1997, and sales are projected to rise about 7 percent a year for at least a decade - doubling purchases to 2 million by 1998.
"It'll probably be the fastest-growing market in Europe," said Paul Tibbitts, a specialist on auto markets in Eastern Europe and the former Soviet Union. That goes for Western Europe, where sales growth could be only half that rate, but also East European countries like the Czech Republic and Poland.
Considering this, one of the more closely watched areas of the talks to admit Russia to the WTO has been how much the government will lower its barriers to auto trade to qualify for membership. Tariffs for most auto imports are about 30 percent, more than 10 times the level in developed countries and high enough to deter trade in any model that competes with Russian-made products.
One question for U.S. negotiators is whether the new auto decree is the first sign that Russia intends to fight to maintain broad barriers to auto trade. Other countries have used local content rules and tariff preferences simply to promote investment - that was essentially the strategy used for auto trade under the North American Free Trade Agreement.
U.S. auto companies are generally comfortable with the idea of investing in Russia to gain a piece of that country's market. But long-term barriers to trade will make competition more difficult.
When an established auto company first enters a market, it initially sources most of its parts from outside. As expertise and a parts industry develops in that country, local content tends to rise.
That's the first problem. The second is that the auto industry is moving rapidly toward global production, where different factories in different countries tend to specialize more, increasing the demand for trade.
Tibbitts said that while most auto companies assume that major assembly operations will be the price of admission to Russia, none will want to make all their vehicles there.
Just this month, Ford Motor Co. launched sales in Russia of its "Ka," a tiny subcompact that is the company's entry in the sweepstakes to make a cheap and simple "World Car" to sell in developing countries. For now, Ford will have to contend with that 30 percent tariff, since the Ka is only manufactured in Spain and Brazil.
The Big Three U.S. auto companies have taken note of the decree but aren't saying much so far.
"The details of the Russian auto policy are just now being published and we are reviewing to determine what the potential impact is in that country," said Steve Collins, vice president of international affairs for American Auto Manufacturers Association.