11 March 2022

Michael Gasiorek is Director of the UK Trade Policy Observatory and Professor of Economics at the University of Sussex Business School

President Biden announced today that the US, the EU, and the G7 countries (which includes the UK) will be suspending Russia’s Most Favoured Nation (MFN) status at the World Trade Organization (WTO). In this blog we look at what this actually means for the UK and what the potential trade implications are for the UK.

What does MFN suspension mean? A key principle of the WTO is that countries do not discriminate between each other – this is known as MFN treatment. This means, for example, that a WTO member country will levy the same tariff on the imports of a given good no matter who is exporting the good. There are some exceptions to the application of MFN treatment – notably if a subset of countries sign a free trade agreement amongst themselves. A second key principle of the WTO is that in joining the WTO countries agree to set the maximum MFN tariffs they would levy on each of their goods. In other words, countries agree to cap their maximum tariffs. These are known as the bound rates.

While there is no coordinated formal WTO response, the UK is not alone in suspending Russia’s MFN status. In so doing, together with the other countries the UK is giving itself the option (a) to treat Russia differently from other countries (b) the UK is no longer capped to levy its bound rates on Russia. Effectively this means that the UK can choose to levy tariffs and/or to restrict trade with Russia as much as it likes. Russia too has recently responded with banning exports on a range of goods inter alia to the UK, the US and the EU. There is also the issue, which we do not discuss here, as to whether it is envisaged that MFN suspension will also apply to services trade.

Suppose trade in goods between the UK and Russia completely stopped, how big might the implications be? For the UK and looking at trade in goods, Russia accounted for just over 2% of UK imports and 0.7% of UK exports in 2019 (we take 2019 so as to avoid any impacts of Covid on trade flows).[1] Similarly for Russia the UK accounts for around both 2% of imports and exports. Of UK imports from Russia around 40% are petroleum products and around 40% gold and precious metals and stones. UK exports are more mixed, though with over 15% constituting vehicles.

Overall, given the low levels of trade with Russia, the trade restrictions are unlikely to have much of an impact on the UK economy. While the overall impact may not be great it is possible that individual sectors may be affected because potentially a high share of their trade is with Russia, and prices for certain commodities may rise due to the concerted efforts by countries to isolate Russia economically – oil and gas are the key examples.

To think about those sectors that have a high share of trade with Russia, consider the table below. For each 6-digit product (of which there are more than 5000), we have calculated the share of UK imports coming from Russia. We then count for how many products is the dependence on Russia between 0 to 25% of imports, 25% to 50%, 50% to 75% or greater than 75%. What we see is that there are only 5 products in total for which Russia accounts for more than 50% of imports in those products: isobutene-isoprene rubber (85%); fertilisers containing nitrates and phosphates (77%); furskins (60%); Bromides (60%) and Beet-pulp (56%). There are 13 products where Russia accounts for between 25%-50% of imports.

2019	% Share   Ranges	No of 6-digit   items	Imports   Value ($ 1000)	Imports   Share
Imports	0-0.25	5105	13,155,451.93	94%
	0.25-0.5	13	784,601.39	6%
	0.5-0.75	3	32,365.28	0%
	0.75-1	2	12,154.24	0%

The following table undertakes the same sort of analysis but now looks at the importance of Russia for UK’s exports. Hence for each product we have calculated the share of UK exports going to Russia. Once again, we see that for the vast majority of UK exports (5108 products) the share of exports going to Russia is less than 25%, and there are only 13 products where the share is higher than this. The five highest shares are for: a category of man-made staple fibres (100%), Amino-napthols (73%), coarse animal hair (56%), a particular category of paper/paperboard (42%); conveyor belts reinforced with textile materials (38%).

2019	% share   Ranges	No of 6-dig   items	Exports   Value	Exports   Share
Exports	0-0.25	5108	3,121,610.14	98%
	0.25-0.5	12	79,448.27	2%
	0.5-0.75	2	204.86	0%
	0.75-1	1	3.59	0%

While the UK as an individual country is not an important trading partner for Russia, this does not mean that the UK should not introduce trade sanctions or they have little point. As discussed in our blog of the 27th January, NATO as a whole is an important trading partner for Russia (44% of Russian exports go to NATO and NATO accounts for 38% of Russian imports). A key, striking and important feature of the responses to Russia’s war on Ukraine has been the extent and depth of coordinated economic responses by NATO and EU countries and others. As part of that overall response, the UK actions do matter.

Footnotes

[1] The source of all the trade data in this blog is the UN Comtrade database.

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The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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