As in most aspects of life, trade preferences have not only benefits, but also costs. While most of the benefits take the form of direct economic advantages, the costs tend to be more disguised, and in part come only in the longer term. However, they are nevertheless real and have to be weighed against the benefits. Moreover, the benefits of preferences may decline over time, while the costs may remain constant, or can even increase.
Industrial tariffs in developed countries have come down considerably over the years, greatly reducing the importance of trade preferences as an instrument to overcome cost disadvantages of countries that are still at an early stage of industrial development. Moreover, the benefits of trade preferences were largely concentrated on a small number of strongly export-oriented developing countries. In addition, as the various GSP schemes are unilaterally determined by the developed countries, those countries can and do attach strings to their schemes, such as the adoption of given labour standards, cooperation in drug control, and other policy conditions.[21] Some observers argue that tariff preferences are now scarcely relevant. It has been noted that “trade preferences are fading away as part of multilateral trade liberalization, but they remain as part of development folklore” (Robertson, 1999, p. 59). Quite apart from the economic effects of trade preferences, many commentators argue that insistence on non-reciprocity may not be in the long-run interest of developing countries as it tends to undermine their influence in the multilateral trade regime.
On the other hand, in contrast to industrial products, tariffs on many agricultural products are still extremely high in the developed countries, not least on products of particular export interest to developing countries. There are consequently still potential economic benefits from preferential access to developed countries’ agricultural markets. However, the same projectionist sentiments that lead developed countries to erect the high trade barriers also prevent them from granting generous preferences for agricultural imports from developing countries. As a result, agricultural products do not figure prominently in the GSP schemes of most industrialized countries. In particular, temperate zone agricultural products have been largely excluded from preferential treatment, or receive such treatment only within tight quotas. For tropical products, on the other hand, developed countries’ MFN tariffs are in any case zero or relatively low, and preferences are accordingly not of much help.
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. Though the appropriate response to this question may differ from case to case, overall the MFN route should be considered carefully. GSP schemes will probably continue to be determine unilaterally, extended on a ‘voluntary’ basis by the developed countries concerned, and differentiating among the importing countries. Negotiating better agricultural preferences in these schemes is bound to come up directly against the agricultural lobbies in the preference-giving countries, who can always argue that their own country should not do what other developed countries have failed to do. In WTO negotiations on MFN tariff reductions, on the other hand, all countries are in the same boat, and developing country exporters can join forces with agricultural exporters from developed countries, as in the Cairns Group. Tariff reductions are therefore more likely to be achieved in multilateral WTO negotiations, than in bilateral negotiations on GSP schemes.
The international trading regime for agricultural products is in fact gradually moving towards a situation of lower tariffs. It will take a long time to reach relatively free trade in this area. But if the Millennium Round should agree on another 36 percent reduction of agricultural tariffs (from their pre-UR level), then only 28 percent of the original tariffs will be left after the next implementation period, and one more round of WTO negotiations with the same result could suffice to eliminate many agricultural tariffs altogether. It may well be that the process of bringing down agricultural tariffs takes considerably longer. However, the direction of change is relatively certain, and it is towards lower MFN tariffs. In this process, agricultural preferences are bound to lose their value increasingly, just as most industrial preferences have lost their value already. Hence, efforts to improve agricultural preferences should be seen as investing limited negotiating capital in a business that will not be very profitable in the long run.
Moreover, making use of any significant new agricultural preferences that could be obtained in the short run requires adjustments in domestic production and market structures in the exporting countries concerned, and these adjustments may well turn out to have been in sub-optimal directions in the long run when preference margins evaporate because of MFN tariff reductions. This will be the case where the long-run world market price is below the price that can be earned, through preferential exports, in the short run on highly protected markets of industrialized countries (see above, Section 3). From this perspective the more promising approach may well be to seek larger MFN tariff reductions in the next round of WTO negotiations on agriculture. This is not at all to say that existing agricultural preferences under GSP schemes should be eliminated. However, major efforts to improve them may involve more costs than benefits.
At a completely different level, preferences cause costs resulting from their technical implementation. In particular, the granting of preferences necessitates rules of origin, to make sure that only, or primarily, domestic production in the beneficiary countries benefits. Typically, rules of origin are rather complex, and the texts specifying them are usually much longer than the texts setting out the trade preferences as such. In the beneficiary countries, all sorts of administrative efforts have to be made to comply with the rules of origin and to satisfy the preference-giving countries. Depending on the size of the preference margin, the costs of implementing the rules of origin may actually be larger than the value of the preference. In practice, it therefore sometimes happens that preferences remain unused because meeting the rules of origin is simply too burdensome.
Preferences also involve costs that are borne by countries other than the beneficiaries. For the importing countries granting preferences, there are direct economic costs in the form of tariff revenue forgone. From an overall economic perspective, these fiscal costs may well be smaller than the benefits (to domestic consumers) resulting from larger import volumes and lower domestic prices. However, that is so only if the preferences concerned result mainly in trade creation rather than trade diversion. On the other hand, where trade diversion results, costs are borne also by those other exporting countries that would have supplied the goods which now come from the beneficiary countries. Trade diversion may well be justified, on the grounds of positive effects for economic development in the beneficiary countries, if the losing countries are industrialised exporters. However, the losing countries may also be developing economies that have graduated out of the GSP, or those not belonging to the special group of developing countries benefiting from limited preferential regimes. In these cases it is more difficult to disregard such costs in the form of trade diversion.
Finally, there are political economy costs of preferences in the sense that the countries receiving preferences become secondary beneficiaries of MFN protection in the importing countries. Beneficiary countries strongly interested in a given set of tariff preferences may lose interest in pushing for MFN tariff reductions, or may even actively oppose liberalization of given policy regimes in the importing countries. For example, the ACP countries benefiting from EU preferences for sugar and bananas have no interest in seeing EU liberalize its sugar and banana regimes. If it comes to discussing reform of these regimes, the beneficiary countries are likely to request compensation, just as EU farmers request compensation in such cases. To the extent that such compensation is considered in the form of cash payments, the budgetary expenditure involved may be an obstacle to policy reform. For example, in its October 2000 proposal for (extremely modest) modifications of the EU sugar regime, the European Commission used the argument of an expected income loss of 250 million Euros in the ACP countries concerned to explain why a price cut of (a hypothetical) 25 percent for EU sugar could not be envisaged (European Commission, 2000b).
In sum, trade preferences not only provide benefits, but 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 should be carefully assessed 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 potentially lead the production structure in the beneficiary countries in a direction 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.
