U.S. and Allies Will Strip Russia of Favored Trade Status

WASHINGTON — President Biden and other Western leaders moved on Friday to further isolate Russia from the global trading system, saying they would strip the country of normal trade relations and take other steps to sever its links to the world economy in response to President Vladimir V. Putin’s invasion of Ukraine.

The measures, which were announced jointly with the European Union and other Group of 7 countries, would allow countries to impose higher tariffs on Russian goods and would prevent Russia from borrowing funds from multilateral institutions like the International Monetary Fund and the World Bank.

Mr. Biden also moved to cut off additional avenues of trade between the United States and Russia, barring lucrative imports like seafood, vodka and certain diamonds, which the White House estimated would cost Russia more than $1 billion in export revenues per year.

The United States will also restrict exports to Russia and Belarus of luxury items like high-end watches, vehicles, alcohol, jewelry and apparel. The European Union announced its own set of bans, including barring imports of Russian iron and steel.

The restrictions add to a growing list of economic barriers that much of the developed world has put in place on Russia, whose economy is already suffering as a result. The ruble has lost nearly half its value over the past month, food prices are soaring and Russia is in danger of defaulting on its sovereign debt. Its stock market has remained closed since the war began.

Mr. Biden said on Friday that the moves “will be another crushing blow to the Russian economy.” He said Russia was “already suffering very badly” from the sanctions, adding that the West’s economic pressure was a reason the Russian stock market had not reopened.

“It’ll blow up” once it opens, Mr. Biden predicted.

The White House has been under pressure in recent days to respond to Russian attacks in Ukraine, including the shelling of hospitals, other buildings and civilian evacuation routes. The White House has warned that Russia may also use chemical weapons against Ukrainians, but it has repeatedly said that Mr. Biden will not send American troops into the fray.

Instead, the administration has focused on ratcheting up economic pressure. Earlier in the week, Mr. Biden banned imports of Russian oil, gas and coal and imposed restrictions on U.S. energy investments in Russia.

The move to strip Russia of its preferential trade status would allow some of its biggest trading partners to impose higher tariffs on Russian goods. The Group of 7 countries, which also include Canada, Britain, France, Germany, Italy and Japan, purchased about half of Russia’s exports in 2019.

Russia’s preferential trade status is conveyed by its membership in the World Trade Organization, whose rules require that all members grant each other “most favored nation” trading status in which goods can flow between countries at lower tariff rates.

Taking away that status — which the United States calls “permanent normal trade relations” — would most likely have a much larger impact for the European Union, which is Russia’s largest trading partner and a major importer of Russian fuel, minerals, wood, steel and fertilizer.

In the United States, the move would carry heavy symbolism, but it could have a limited economic impact compared with other sanctions that have already been imposed, according to trade experts.

Chad P. Bown, a senior fellow at the Peterson Institute for International Economics, said the measure would raise U.S. tariffs on Russian products to an average of about 32 percent from 3 percent.

“However, the trade impact on Russia of such a tariff hike would be small, as the United States is not a particularly sizable export destination for Russian products,” he said. Russia was the 20th-largest supplier of goods to the United States in 2019, sending mainly energy products and minerals.

And many of those goods would be subject to far lower tariffs — in some cases none at all — as a result of a decades-old trade law that would kick into place if the preferential trade status were revoked.

Each country will follow its own domestic process to make this change, the Biden administration said. The European Union has begun to pave the way for higher tariffs on Russian goods, but the bloc’s 27 member countries must agree on how to carry that out. Canada announced last week that it would withdraw most favored nation tariffs for both Russia and Belarus, a close Russian ally.

In the United States, the task falls to Congress, which had been pressuring the administration to consider such a move.

House Democrats proposed two weeks ago to strip Russia of its trading status and begin a process to expel the country from the World Trade Organization. This week, top Democratic and Republican lawmakers said they would include the measures in a bill to penalize Russia, but at the White House’s request, Democrats ultimately stripped out the provision to remove Russia’s special trading status. The bill passed the House on Wednesday but has yet to pass the Senate.

“It was taken out because the president wants to talk to our allies about that action, which I think is appropriate,” Representative Steny H. Hoyer, Democrat of Maryland and the majority leader, told reporters this week.

Speaker Nancy Pelosi said on Friday that the House would take up legislation next week to formalize the revocation of Russia’s trading status.

“It is our hope that it will receive a strong, bipartisan vote,” she said.

If approved, the measure would add to an array of harsh sanctions already announced by the United States and its allies. Western governments have reduced their energy trade with Russia, frozen the assets of Russian officials and oligarchs, and cut off the country from the dollar-denominated global financial system.

Governments have also banned exports of advanced technology and transactions with Russia’s central bank. On Friday, the Bank for International Settlements, which provides banking services to the world’s central banks, said it was no longer conducting transactions with Russia. And the Treasury Department placed new economic sanctions on three immediate family members of Mr. Putin’s spokesman, along with 12 members of the Russian Duma and the management board of VTB Bank, which has already been sanctioned.

The Treasury Department said it was specifically targeting a plane and a yacht of the Russian billionaire Viktor F. Vekselberg, which together are worth an estimated $180 million. Mr. Vekselberg is an ally of Mr. Putin, the department said.

The Russian government has fired back by announcing it would place its own restrictions on its exports, including of raw materials.

The White House said on Friday that Mr. Biden had spoken with President Volodymyr Zelensky of Ukraine and told him about the measures, saying they would put further pressure on Russia.

The economic impact of revoking Russia’s preferential trade status depends on how the measures are carried out, and particularly if they affect oil and gas sales to Europe.

In an analysis released on Friday, trade experts at the University of St. Gallen in Switzerland and the University of California, San Diego, found that if the Group of 7 countries imposed a 35 percent tariff on Russian products — as Canada has already done — Russia’s gross domestic product would shrink by 0.9 percent, a loss of over $13 billion.

The researchers also calculated that Europe’s actions would have a far more significant impact on the Russian economy than those of the United States.

In the United States, suspending Russia’s preferential trading status would cause U.S. tariffs to revert to rates set by the Smoot-Hawley Tariff Act of 1930. As a result, the tariffs applied to some of Russia’s most critical exports to the United States, like minerals and chemicals, would still be very low, according to research by Ed Gresser, the director for trade and global markets at the Progressive Policy Institute.

The 1930s tariffs were crafted to charge high levies on imports of manufactured goods and farm products but low rates on imports of raw materials — a design that would limit costs for U.S. factories, Mr. Gresser wrote in a blog post. Much of what Russia sends the United States is energy products and other minerals.

The U.S. tariff on palladium, for example, which is used in catalytic converters, would remain at 0 percent after the change, according to Mr. Gresser’s research. Tariffs on other significant exports from Russia, like king crab, uranium and urea, which is used in fertilizer, would also remain at 0 percent.

Tariffs would be somewhat higher for other products, like unwrought aluminum alloy, birch-faced plywood, bullets and certain steel products.

Energy imports from Russia — which accounted for about 60 percent of what the United States imported from the country last year — would face slightly higher tariffs. But Mr. Biden already announced this week that the United States would stop all shipments of Russian oil, gas and coal, a far more sweeping measure.

Mr. Gresser wrote that revoking Russia’s preferential trading status would impose some penalties, “but in most cases not very significant ones.”

“It may nonetheless be an appropriate symbolic and moral gesture, in particular if many W.T.O. members join in it,” he wrote. “But as a policy measure meant specifically to impose economic cost, the energy import ban is the one with practical real-world impact.”

Russia or another country, such as China, could challenge the decision to strip Russia of its trade status by bringing a case against the United States, the European Union or other countries at the World Trade Organization. But the global trade body offers large exceptions for actions taken to protect national security, and the United States and Europe could cite that rationale in their defense.

Reporting was contributed by Catie Edmondson, Katie Rogers, Alan Rappeport and Liz Alderman.