C I N T R A F O R
Working Paper Abstract
Outlook for Russian Forest Product Trade with the People's Republic of China
Thomas Waggener, Charles Backman, Ekaterina Gataulina. 1996. (102 pp) WP58 $20.00
Both China and Russia are and have gone through unprecendented change as both of their societies adjuct away from the centrally planned approach and begin to adopt a mixed system incorporating facets characteristic of both private and public secotrs. However, while Russia's economy has collapsed following the demise of the centrally planned system, GDP falling nearly 40 percent between 1990 and 1994 (25 percent between 1990 and 1993), China's economy has grown with GDP rising by 55 percent (40 percent by 1993). While the acitivity of the forest sector in Russia has fallen more steeply to a level of only 45 percent that existed in 1990 (3 percent in 1993), being somewhat lower in Siberia and the Russian Far East, China's forest sector has expanded though it is facing constraints imposed by the forest resource (27 percent between 1990 and 1993).
Ongoing growth linked to evolution of the Chinese system will translate into higher demand for forest products than can be met in the short to medium term by domestic sources. The looming shortages present emergin opportunities for regions rich in forest resources which must seek export opportunities abroad. Nowhere does ths opportunity beckon more than in the relatively less developed forests of Siberia and the Far East.
By the year 2025 under a low growth assumption, China could face a deficit in industrial wood of some 200 million cubic meters annually, equal to slightly more than two times the domestic production of industrial roundwood in 1992. Outside of Siberia and the Russian Far East, very few regions have the ability to service this looming deficit. Furthermore, even the Russian region will seemingly be able to meet only up to one-half of the short fall and only under conditions which promote capital investment in the Russian forest sector and development of the forest resource which is available subject to development of the infrastructure.
While on the surface conditions seem to be emerging which whill favor increased trade activiteis between Russia and China in forest products beyond current levels of nearly one million cubic meters annually, much uncertaintly remains regarding the longer-term outcome of reform and restructuring in both countries. Future China trade in forest products with Russia will depend on many factors on both sides - many of which are political in nature or speculative regarding future course of conomic and market reforms. there is no doubt that in the near term China will experience increasing demand for all forest products and that the domestic supply will be insuffiecient to satisfy consumption at prevailing prices. Increased trade, including trade with Russia, is one of the serveral policy tools available to Cina to deal with this reality. Whether this will be selected as a major or significant element of overall timber strateies remains to be seen. Russia, the potential trading partner, will almost certainly seek new and expanded markets for timber from Eastern Russia (East Sibria and the Far East regions). The future status of economic reform and transition to markets will dictate outcomes with respect to Russian forests and potential for trade. International markets will grow in importance as traditional markets in European Russia and former Soviet Republics become increasingly economically inaccessible.
What is certain, however, that the People's Republic of Chna will increasinly play a major role in Asia and the Pacific Rim forestry, both as a producer and consumer market. Likewise, it is certain that Russia, particularly Sibria and the Far East, will impact the overall equation for forest products trade in the Pacific region, with important linkages to China. It it certain that China will need to compete with other Pacific Rim consumer countries in order to obtain timber. It is unlikely that Russia will offer substantial concessions in order to sell to China. Barter trade may persist (currently demonicated in Swiss francs) but will be more difficult given competition from hard currency buyers from the available timber from Russia. The willingness to pay international prices for specific species and quality of timber will largely determine the competitiveness of China. Japan, as the major log importer in the Pacific Rim, is increasingly seeking timber supplies worldwide, including from the Russian Far East, to offset declines from traditional sources including the West Coast of North America.
It is also certain that Russia will seek expanded international market outlets for timber and forest products. The level and mix of timber for export will in turn depend critically on development strategies for the forests in East Siberia and the Far East. The lack of capital for investment in new and modern capacity and technology will slow the development of competitive processing, largely indicating future trade will continue to emphasize unprocessed roundwood in the near term. The near term outlook for unprocessed roundwood exports from Russia is not materially affected by the import tariff structure imposed by china, though ther appear to be inconsistencies in how tariffs are applied to Russia.
China has historically had preferential tariff structures favoring the import of unprocessed timber with increasingly higher tariff rates for semi-processed and finished products, thus favoring domestic manufacture of the wood raw resource. Although 'special arrangements' can often prevail for trade with Russia, importers of Russian timber in the northeast of China complain that they must pay full duties on wood imported even under barter arrangements or from labor-export agreements. Government officials indicated that this could be 'resolved' in the case of trade with Russia, although no clear policy appears to exist dealing with such issues. China's future policies with regard to timber substitution and regulations to enforce limitations on timber in many end uses (including construction) will be important with regard to meeting pressures for incresed consumption as well as the future role of trade and import of timber from Russia or elsewhere.
The role of finance and credit arrangements will perhaps be most significant for China's importers. Russian enterprises have virtually no working capital and little possiblitiy of credit. In many cases, supplis must be paid for in advance, in some cases including timber. Productin is impossible without adequate credit or advance payment from buyers of timber products. Given the financial situation of many forest products enterprises within China, it is unlikely that advance payment for imported timber can be feasible any time soon. Greater roles for banking stitutions, including letters of credit and foreign exchange accounts will be reaquired if timber trade with Russia is to expand. Improved infrastructure, including rail, port and other transportation services for Russian trade remain critical,