Trade Cases

Leibowitz on Trade: Tariffs on Russia Kick In, Globalization Takes Another Hit

Written by Lewis Leibowitz

President Biden on Friday signed two pieces of trade legislation that sailed through Congress: the “Ending Importation of Russian Oil Act” (HR 6968), which prohibits imports of oil, gas and other energy products from Russia, and “Suspending Normal Trade Relations with Russia and Belarus Act” (HR 7108), which imposes higher “Column 2” tariffs on imports from Russia and Belarus.

Both statutes had immediate effect as of Saturday. These two laws join several presidential proclamations and executive orders that sanction Russia and Belarus. Thanks to Michael Cowden for his informative article in SMU.

balanceNormally, trade bills altering the status of imported goods have a delayed effective date, to give traders a chance to adjust transactions and to avoid sudden surprises. These statutes are exceptions. The energy products bill took effect immediately, and the PNTR suspension bill took effect on Saturday – one day after the date of enactment. Anyone who has shipments en route from Russia and Belarus will have to pay higher tariffs on entries of all products that have not been banned from importation as of Saturday. They will also have to find foreign destinations for energy products from Russia effective last Friday, April 8.

These are unprecedented steps in many ways. The suspension of “normal trade relations” is rare. Only Cuba and North Korea have suffered a similar punishment. Not to say that Russia and Belarus don’t deserve this treatment. Those countries have violated what I thought were widely accepted standards of international behavior in place since 1945.

Iron and steel products (included in Chapters 72 and 73 of the Harmonized Tariff Schedules) accounted for 9% of total US imports from Russia in 2021. Aluminum accounted for another 2%. Precious metals, gems and jewelry accounted for about 10%. Energy products, which are now banned from importation, accounted for 58% of imports from Russia by value.

To give a sense of the proportion of trade affected by these new measures, total Russian exports in 2021 were about $460 billion worldwide. Of that, $29 billion (about 6%) went to the US. Russia’s largest market for exports was China ($112 billion, or four times the value of exports to the US). Assuming China keeps buying Russian energy and minerals, the effect on Russia will not be too great. However, if the European Union and Turkey join the embargo, the effect will be quite significant, because the US, Germany, the Netherlands and Turkey combined accounted for over one-third of Russia’s 2021 exports.

China alone accounted for more than one-fourth of Russia’s exports (about $125 billion in 2021), and the Chinese are likely to keep buying.

Another export item that will affect global commerce and welfare is food trade. Ukraine supplied a major portion of global wheat supplies in 2021. The planting season begins there in a month, and the chance for a strong harvest in Ukraine is about nil. Russia also accounts for a large share of the international wheat market. Sanctions will make a dent in that figure. Food prices will certainly go up this year.

I reported on the metal trade with Russia in an earlier column. Trade between Russia and the US is almost entirely in semifinished products (pig iron, slabs, billets, etc.). Belarus exports pipe products. The impact of the new Column 2 duties will not be significant to the US economy, but individual companies may have difficulties if they rely heavily on Russian imports of raw materials.

Some have asked whether these measures could be applied to others, and how long they are likely to last.

These trade-related measures, I still believe, are likely to be infrequent, so long as military adventures to impose one country’s will upon another are rare. In past crises, such as Iran, sanctions and negotiations have been tried, mostly without success. These trade-related sanctions on Russia and Belarus will not succeed in the near future. So, they will be retained for a long time. Russia’s war on Ukraine and its people has resulted in substantial civilian casualties and physical destruction on a vast scale. Until Russia withdraws from Ukraine and pays at least some of the cost of rebuilding, the sanctions are likely to remain.

The impact of these measures is likely to be significant over the long term. The war in Ukraine is now in its seventh week. It could go on much longer, perhaps for years. Ukraine beat back, at least for now, a Russian onslaught on Kyiv.

The armed forces and people of Ukraine have inspired the world; the poor performance of the Russian military, however, has been a surprise. But before we make a mistake, we must realize that a new Russian offensive is likely soon in the east and south of the country, aimed at wresting those regions away from Ukrainian control. The Russians may make advances, and will cause more destruction, in the east.

Thus, the war may escalate and NATO and the West increase their assistance to Ukraine in weapons and sanctions. More anti-Russian feelings will be expressed. Russia, for example, was suspended from the UN Human Rights Council last week by a vote of 93-24. Europe has just announced an import ban on Russian coal. Oil and gas are still flowing to Europe, but only because Western Europe is currently dependent on those supplies.

The status quo is not likely to continue indefinitely. If Russia decides to send energy to China and less of it to Europe, or if Europe decides to limit or eliminate reliance on Russia, the US and other energy-producing countries can be expected to increase supplies to Europe to make up for the loss of Russian supplies. Businesses that have relied on authoritarian countries for food and manufacturing supplies will shift to other suppliers that are more reliable.

If the war in Ukraine lasts several years, the world’s trade flows will change dramatically. In time, there will two hostile camps, with trade sanctions limiting economic relationships between them. The world will move further apart, raising the prospect of conflict. It is difficult to see things getting better any time soon.

China’s role will change too, as we are seeing two cities (Shanghai and Shenzhen) with a combined population of nearly 40 million people on sustained lockdown, further diminishing China’s reputation as a reliable supplier.

Production of grain and other food will shift to countries farther away from the world’s hot spots.

I see the Russian sanctions as first steps toward a different world than the one I grew up in.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz

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Lewis Leibowitz, SMU Contributor

Lewis Leibowitz

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