Comments by Ms Kathy-Ann Brown
Trade preferences for developing countries have been a feature of industrialised countries’ commercial policies for nearly 40 years. However, with overall trade liberalization, tariff preferences are gradually losing importance. In agriculture, on the other hand, they can still be potentially valuable because MFN tariffs are extremely high in many cases, though they are also in the process of being reduced. Yet, because of the “sensitive” nature of their agricultural policies, developed countries have usually been reluctant to provide deep preferences for agricultural products. At the same time, some special preferential regimes have provided significant tariff preferences for selected agricultural products, for constrained groups of developing countries. The EU’s preferences for sugar imports from selected ACP countries are a case in point. Hence the picture is very diverse when it comes to preferential treatment of agricultural exports from developing countries.
In this situation, one can ask a number of questions regarding the future of trade preferences in the ongoing round of WTO negotiations. Should developing countries strongly defend their trade preferences, and try to improve them? What are the benefits and costs of the preferences? How do trade preferences compare to other forms of assistance for economic development? Are developing countries going to lose a lot as agricultural trade is further liberalized and preference margins are eroded? If so, do they have a right to compensation and in what form? What role should trade preferences play in the next round of WTO negotiations on agriculture? The present paper attempts to provide some tentative responses to such questions. Moreover, with the decline in MFN tariffs, other measures affecting trade, such as standards, take on growing importance and the treatment of developing countries regarding such measures may also become more important in the future. This subject is, however, outside the scope of this paper although it merits further study.
Regarding the nature of preferential arrangements for developing countries, three major forms can be distinguished, i.e. the Generalized System of Preferences, special preferential regimes for groups of developing countries (such as Lomé/Cotonou or the Caribbean Basin Initiative), and regional free-trade areas between developed and developing countries. However, the last form, involving reciprocal preferences, does not belong to the category of trade preferences for developing countries in a strict sense.
When conceptualising trade preferences as an element of economic relations between developing and developed countries, the “trade rather than aid” perspective has some economic appeal. Trade preferences have the potential of helping developing countries to foster self-sustained economic development. They can substitute for, but probably also add to, economic transfers from developed to developing countries in the form of financial assistance. However, there are also drawbacks, the most obvious of which is resistance from producers in developed countries. Less obvious, but still relevant, is that the production structure in developing countries may change in a manner which is not sustainable when overall trade liberalization makes progress. In such cases, policies should be considered that would “capture” part of the rents from preferential schemes for use in programmes of benefit to farmers, rather than create production patterns that would be unsustainable at future world prices following further liberalization of trade. Finally, there is the possibility of a loss in world welfare resulting from trade diversion.
Trade preferences can have various benefits for the exporting countries concerned. Empirical quantitative estimates of the overall size of these benefits are difficult, and hence rarely found. However, a relatively easily calculated indicator of potential benefits is the preference margin. Available estimates of preference margins show that they can amount to significant shares of the value of exports from the developing countries concerned. However, preference margins are a rather unreliable measure of economic benefits. Welfare gains for the exporting countries concerned are usually much smaller than the preference margin. Moreover, under certain conditions the preference margin flows to agents in the importing country, rather than the exporting countries. In the absence of comprehensive analyses of preference benefits in individual beneficiary countries, the basis is relatively weak for judging which groups of developing countries “deserve” preferences most. However, there are good intuitive grounds to argue that trade preferences are particularly important for the poorest countries and other vulnerable developing countries, such as small, island and land-locked countries.
However, trade preferences can also involve costs. Improving and expanding preferences requires “negotiating capital”. With successive rounds of MFN tariff reductions, the value of preferences is bound to decline, and it is important to assess carefully how much “negotiating capital” should be invested in a business that may not be very profitable in the long run. Insistence on non-reciprocity of preferences can undermine the overall influence of developing countries in multilateral trade negotiations. Specific and deep preferences can result in a production structure in the beneficiary countries that is not sustainable when MFN tariffs come down. Preferences tend to result in trade diversion with consequent costs for other exporting countries. Finally, countries benefiting from preferences may lose interest in MFN tariff reductions, and this is a cost to the multilateral trade regime overall.
Regarding the status of trade preferences in the WTO, universal trade preferences for imports from all developing countries, as extended under the GSP, are consistent with the GATT under the Enabling Clause. The same holds for preferences granted to all least developed countries. However, developed countries are not legally committed to providing such preferences. They can, therefore, decide unilaterally on preference margins, and also withdraw preferences without violating GATT/WTO commitments. Specific trade preferences for limited groups of developing countries, such as those provided under the Lomé Convention or under the Caribbean Basin Economic Recovery Act, however, are not consistent with the GATT. Yet, WTO has in the past granted waivers that allowed the countries concerned to maintain these specific preferences.
When it comes to considering options for the future of trade preferences in WTO, a number of issues come to mind. Rather than working towards an expansion of “shallow” preferences for all developed countries under GSP regimes, an attractive alternative might be to aim at “deep” preferences for the least developed and other vulnerable countries. In this context, the Enabling Clause could be amended by including small and other vulnerable countries, in addition to the least developed countries, in the category of developing countries that can receive preferences deeper than those accorded under GSP. The functioning of the existing GSP schemes which should certainly be maintained, can be improved by: binding them in the WTO; removing conditionalities; setting preferential tariffs relative to MFN tariffs (rather than defining them in absolute terms); expanding tariff rate quotas (TRQs); simplifying rules of origin; and providing better preferences where MFN tariffs are subject to peaks and tariff escalation.
The issue of compensation for the erosion of preference margins is highly complex. It is not self-evident that all reductions of MFN tariffs for products where preferences exist actually result in an erosion of (economically meaningful) preference margins. There are cases where the erosion is (partly or wholly) outweighed by the favourable market effects of trade liberalization. Moreover, where preference erosion clearly results in an economic loss to the exporting countries concerned, there are arguments both for and against compensation. In addition, if the case for compensation is accepted, it is not unequivocally clear who should “pay” and who should “receive” compensation. Various forms of compensation can be considered, without any of them having a clear-cut priority. And finally, in many cases it will often be difficult to provide a reliable estimate of the economic effect of preference erosion, and hence of the extent of compensation that may be justified.
All this is not to say that (i) preference erosion is a non-issue, and that (ii) compensation for preference erosion should not feature in a multilateral round of trade negotiations. However, the issues discussed here should warn against suggesting simple solutions. In the end, compensation will be a matter of negotiation. As a rough guideline in discussing the subject, it may be useful to distinguish between two categories of preferences, i.e. GSP regimes, on the one hand, and specific deep preferences for limited groups of developing countries, on the other hand. Where GSP preferences are eroded as a result of multilateral negotiations on tariff cuts, the most natural way to negotiate on compensation may be to seek a structure of extra cuts of MFN tariffs that benefits developing country exporters. On the other hand, where very specific and deep preferences for individual countries and commodities are concerned, as under the EU sugar regime for the ACP countries, a relatively strong case can be made for cash compensation.
The analysis presented in this paper suggests a number of recommendations regarding the future of trade preferences in the current round of WTO negotiations on agriculture:
Representative of St Lucia to WTO[63]
Despite the apparent divergence in our aspirations, the paper by Mr Tangermann is both thought-provoking and critical, providing a favourable view overall while highlighting certain proposals which, in my view, offer positive solutions to be explored further:
The nature of major preferential arrangementsI note with interest that the Cotonou/Lomé arrangement and the CBI are the two most frequently cited preferential arrangements in the paper. There is only a fleeting allusion to the African Growth Act and an equally brief reference to other preferences, such as those concerning South America and the Far East. The rhetorical question which this elicits is why there is such an overwhelming emphasis on the Lomé/CBI preferences.
I raise this issue because developing countries, several of which are also beneficiaries of special preferential arrangements, often speak out against preferences for a so-called “limited group” of developing countries. This suggests that there is need for wider discussion on the benefits of preferences accorded to a broader cross-section of countries.
Conceptualising trade preferences as an element of economic relations between developing and developed countries
The first fundamental divergence noted is one of ideology and philosophy in terms of the economic advice presented. The model advocated is that of total liberalization which does not lend itself to any societal structure, national or global, unless there are sufficient safeguards in place for ensuring the survival of the most vulnerable sector of the community - a sector which will be forced to pay the highest price in terms of its survival. It may be timely to recall the notion that only the strong survive and to question whether this is the appropriate model for fashioning our multilateral trading system.
There is need for greater recognition that some developing countries are less disadvantaged than others. The difficulty lies in understanding why so self-evident a reality continues to be denied, quite apart from the situation of LDCs in the WTO rules-based system.
The paper also addresses the dangers of trade preferences where production patterns are not sustainable in the long run in the light of progressive liberalization and suggests that in such instances direct financial assistance may be preferable. The “trade rather than aid” element should not be marginalized. I note that Tangermann acknowledges this situation where beneficiaries skim off part of the preference margin and utilize the revenue for development purposes which are not directly related to the preferential export activity. On the issue of sustainability: the question arises as to whether this is an objective concept, or a more subjective one, which should include factors of vulnerability.
The paper does concede the possible utility of preferences in a development context and also notes that, in realistic terms, the substitution of trade preferences by financial assistance is not a straightforward process, in that certain political criteria are required which, in most instances, cannot be applied.
It should be noted that there is increasing concern as to whether a country such as my own benefits from a truly competitive advantage in producing anything. The issue is one of small size and the resultant inability to fill aircraft or boats (Compton, former Prime Minister of St. Lucia: “without bananas we have no boats and without boats no diversification”) as well as the additional hurdles imposed on our competitiveness.
The transformation of a banana farmer into an e-commerce magnet overnight is not within the realm of the possible; another example is diversification into the offshore sector, which admittedly serves to divert funds from our Caribbean neighbours who have set the precedent. The OECD’s guidelines concerning harmful tax practices have, however, certainly reduced our enthusiasm and our options in this regard.
In his discussion on the trade-distorting effects of preferences in favour of uncompetitive developing countries, Tangermann takes up the issue of their “welfare-enhancing” versus “welfare-reducing” effects. That issue is much discussed in the literature as regards trade in goods, but rarely (at least in the West) in relation to trade in services.
Tangermann also raises the issue of opposition from domestic producers where demand is infinitely elastic and the fall in prices derives from oversupply; and conversely, the issue of opposition from domestic consumers illustrates the upward movement in prices, the result of preferences accorded to so-called inefficient and/or vulnerable suppliers. Additionally, there is likely to be opposition from third countries whose exports are displaced.
Criticisms relative to non-reciprocal trade preferences apply equally to reciprocal preferential arrangements, as can best be illustrated by NAFTA and United States concerns over sugar imports from Mexico. We should consider the fact that the trade share of MERCOSUR - a preferential trading arrangement - exceeds that of the totality of ACP States (more than 70 countries) which benefit under the Cotonou Agreement. (Although the latter includes South Africa, that country does not benefit from the trade provisions of the Cotonou Agreement but is party to a free-trade agreement with the European Union.)
Significantly, GATT Article XXIV requires liberalization of “substantially all trade” (as Tangermann notes) as opposed to the rather more limited non-reciprocal trade preferences: reciprocal preferential arrangements are, arguably, far more likely, in consequence, to be trade-distorting. It is therefore regrettable that reciprocal trade regimes were not addressed in the study.
The benefits of trade preferences
The difficulty in empirically establishing and measuring the benefits of trade preferences is an issue which appears to cause a certain apprehensiveness to some. Tangermann suggests the hypothetical case of the absence of preferences. He raises the issue of a “with-and-without” comparison (i.e. comparing sales volumes to developed markets which accord the particular country no preferences to sales volumes in markets offering preferential access) as a crude indicator of the value of preferences. Applied to the Windward Islands, this comparison provides a marked contrast and could be termed a “zero-sum” game. Our economies are overwhelmingly dependent on bananas and we have zero sales in all markets other than the single market of EU, where we enjoy special preferential arrangements. The answer, in our case, is demonstrably clear. The increase in our exports deriving from the preferential arrangements we enjoy in the EU market is 100 percent, and not merely the 25 percent suggested by some studies, as noted by Tangermann.
We note that the apparently perplexing issue faced by statisticians with respect to the problem of putting a value on preferences from an empirical perspective still occupies centre stage: Tangermann elaborates on his statement that “It is only through the use of quantitative trade models based on assumptions regarding elasticities that actual trade flows under preferential treatment can be compared with the hypothetical trade structure that would have resulted had these trade preferences not been extended”.
However, on the basis of a simple common-sense versus econometrical analysis the reality is clearly deducible. The analyses of the benefits of trade preferences in the context of TRQs offer the conventional viewpoint that the quota rent, in fact, accrues to entities in the importing market as opposed to exporters in the beneficiary country. The argument is generally advanced by those opposed to preferences in contrast to the beneficiaries of preferences. While some of the preferential margin may remain with importers, preferences constitute an enabling measure without which exporters would be unable to access markets on viable terms. Tangermann implicitly recognizes this situation when he notes, for example, that quantitative studies assessing preferential margins are imprecise and reverts to certain hypotheses which are “intuitively appealing”.
He makes two statements of fact which are particularly telling:
- “trade is the more important, as a percentage of GDP and as a source of welfare improvement, the smaller the country concerned”; and
- “(preferences) are particularly important for ‘vulnerable’ developing countries such as island and land-locked countries, as export expansion is particularly important, but also often particularly difficult, for them.”
These are well established facts which need to be acknowledged and addressed in our multilateral rules-based system.
The costs of trade preferences
Tangermann cites Robertson to the effect that “ trade preferences are fading away as part of multilateral trade liberalization, but they remain as part of development folklore” and comments that “In these circumstances, a crucial question for developing countries is whether the “negotiating capital” they have is better used in WTO negotiations on further reductions of MFN tariffs in agriculture, or in attempts at deepening tariff preferences under GSP schemes, expanding their product coverage, and increasing TRQ volumes where preferences are constrained by quotas.”
His basic point appears to be that, quite apart from the economic effects of trade preferences, insistence on non-reciprocity may not be in the long-term interest of developing countries as it tends to undermine their influence in the multilateral trading system. One could well query what influence they have to begin with, in that the beneficiaries of special preferential arrangements are generally not the principal influential parties in the WTO negotiations - a fact underscored by the Understanding on the Interpretation of Article XXVIII of GATT 1994 which calls for “a redistribution of negotiating rights in favour of small and medium-sized exporting Members”.
Still, I do not contest Tangermann’s suggestion that beneficiaries may lose interest in tariff liberalization as a result of preferences, since the latter are important for the market access of vulnerable developing countries.
The status of trade preferences in WTO
The discussion on the status of trade preferences in relation to WTO rules is largely uncontroversial and factual in presentation. I would, however, expand the discussion on new economic partnership agreements (EPAs) to emphasize that alternative trading arrangements are contemplated for ACP States not desiring or unable to enter into EPAs. There are certain problems attendant on the negotiation of EPAs - or REPAs (Regional EPAs) as they are frequently referred to - not least of which is the treatment of LDCs within sub-regional integration units which might opt to negotiate such agreements with the EC. The LDCs will already have zero-duty access for all products except arms (the “EBA” initiative) and it is consequently difficult to establish the advantages to be gained for them from EPAs.
An additional issue is that Haiti, an ACP State, as well as a least developed country, is in the process of accession to CARICOM, comprising 14 member States. The population of Haiti exceeds the population of all CARICOM countries combined. It could thus well be asked whether CARICOM ought not to propose that an LDC designation be applied not only to individual countries but also, where appropriate, to customs unions.
The discussion on EPAs addresses the need to establish EU-ACP trading arrangements in line with WTO rules, particularly in view of the difficulty in securing waivers for non-reciprocal trading arrangements. The proliferation of regional free-trade arrangements is, nonetheless, a source of growing concern in WTO and there is some evidence that the Appellate Body may be inclined to scrutinize these arrangements more closely in the future (see, for example, Turkey - the restriction on imports of textile and clothing products, WT/DS34/AB/R,1999).
Options for the future of trade preferences in WTO
Tangermann proposes what could be termed “a peace deal” between developing countries, with the objective of maintaining solidarity. The proposals are quite progressive. The crucial question posed with respect to the choice between “shallow” preferences for all developing countries and “deep” preferences for LDCs and certain other vulnerable countries, the latter having “a more promising aim”, is interesting. An option proposed is that of amending the definition of LDCs in the Enabling Clause so as to classify the vulnerable developing countries, such as small island and land-locked countries, among the developing countries to which preferences deeper than those under the GSP can be granted. Tangermann “balances” this with the following proposals:
- Preferences under the GSP should be bound;
- Conditionalities attached to trade preferences (such as labour rights or environmental standards) should be removed where they are not in line with overall standards agreed multilaterally in WTO;
- Preferential tariffs set in absolute terms (ad valorem or specific) should be transformed into preferences defined in terms of preference margins, so as to guard against preference erosion as MFN tariffs are brought down; ideally, these preference margins would be bound in WTO;
- Increase TRQ volumes under GSP preferences;
- Consider the adoption of a “Swiss formula” approach to reduce tariff peaks in agriculture trade; and
- Address the issue of tariff escalation.
A point of some concern is the relative importance of tariff preferences in TRQs and in other primary areas for reform. I refer to the existence of tariff peaks in regard to certain agricultural products. As noted above (in my comments on the costs of trade preferences), beneficiaries of preferences are unlikely to support initiatives which will inevitably diminish the value of preferences and so kill the “goose that laid the golden egg”.
Conclusions
Tangermann concludes that “zero-duty access for the least developed and other vulnerable countries is a policy that is certainly worth pursuing”. I fully agree and congratulate him on a very thought-provoking paper which does not refrain from controversy in addressing the concerns of developing countries if they are to be integrated into the multilateral trading system.
