Trade preferences have played an important role in the commercial relations between developing and developed countries since UNCTAD called for them in the mid-1960s. However they violate one of the fundamental principles of the GATT, that of non-discrimination on the basis of MFN treatment, and it took GATT some time to come to grips with the problem. Invoking the ‘development factor’, it finally legitimized trade preferences for developing countries through adoption of the “Enabling Clause”. Yet, the role of trade preferences in the GATT system constantly changes. Special preferential schemes for limited groups of developing countries, such as the EU’s preferences for ACP countries under the Lomé Convention, were tacitly tolerated for many years, but more recently it was made clear that such regimes are inconsistent with the requirement to provide non-reciprocal preferences to all developing countries without discrimination. This is one of the reasons why trade preferences are currently in a state of flux. The deeper preferences that used to be provided to selected groups of developing countries in the past may in the future be extended to all least-developed countries, and possibly also to other vulnerable developing countries, and may end up with the provision of completely duty-free access to (some) developed countries. The non-reciprocal preferences for other sub-groups of developing countries, on the other hand, are likely to be transformed into reciprocal free-trade arrangements between the developed and developing countries concerned, adding to the in any case growing coverage of regional trading arrangements in the modern world of international trading relations.
The remaining ‘traditional’ generalized preferences for developing countries consequently face a somewhat uncertain future. Moreover, with the progressive overall liberalization of trade, which since the Uruguay Round also comprises agricultural trade, it becomes increasingly less clear what role remains for trade preferences. In addition, the benefits of such preferences may occasionally have been exaggerated in the past, and the costs involved may not always have been fully appreciated. In these circumstances one may well suggest that trade preferences have seen their heyday, at least as a general element of commercial relations between developed and developing countries.
This is not to say that trade preferences should no longer continue to figure in international trade negotiations. Zero-duty access for the least-developed and other vulnerable countries is a policy that is certainly worth pursuing. In agriculture, where tariffs are often still extremely high, this policy can have a useful function until such time as further reductions have brought tariffs down to negligible levels. It should, however, be noted that such zero-duty preferences can accelerate the movement towards lower overall levels of protection in agriculture, by undermining the sustainability of the protective regimes currently maintained in many developed countries. That is a welcome feature from an overall perspective of trade liberalization, but zero-duty access can render the preferences useless because it tends to help bring MFN tariffs down more rapidly.
However, in the final analysis, overall trade liberalization is in the interest of all countries, including the developing countries presently enjoying trade preferences. While there may be short-run losses because of preference erosion, there are long-run benefits in the form of improved market access for all products. This is also why the most desirable form of compensation for preference erosion probably is a further reduction of tariffs on products of special export interest to the developing countries concerned. On the other hand, where specific deep preferences on agricultural products for selected groups of developing countries have essentially put those countries into the same position as domestic producers of the products in the developed countries, as under the sugar protocol of the Lomé Convention, cash compensation is an option worth considering, along the lines often offered to farmers in developed countries. It may well be preferable to go for such compensation, rather than fight a losing battle against liberalization of the importing markets
Even though the heyday of trade preferences may be over, more
research should be done on the effects of such preferences as long as they
continue to play some role. Surprisingly little is known about their actual
effects. Some limited research has been done on the overall size of preference
margins, and a few studies have looked into the effects on trade flows. However,
much more needs to be done. Also, very little is known about the concrete
effects that given trade preferences for given products have had in individual
developing countries, a matter on which case studies could throw much more
light. The results of such research as is so far available do not constitute a
sufficiently firm basis for putting forward relevant proposals regarding the
future role of trade preferences in the multilateral trading system.
