Achieving Sustainable Development for All: Trade Preferences: Is Preference Erosion Really an Issue for Developing Countries?

One of the main issues in the current WTO Round is the problem of preference erosion. In fact, lower tariffs, caused by a Doha Round Agreement, mean that the products from developing countries, particularly those benefiting from preferences that go beyond the Generalized System of Preferences (SGP), will lose part of their competitive advantage.

A debate took place among scholars and International Organizations to assess if the preference erosion will have important impacts. It seems that a quite large number of developing countries, notably Least Developed Countries (LDC), will incur in significant losses caused by Preference Erosion.

The easiest solution will be to avoid liberalization in those products that are important in preferences as tropical products. However, we need to remember that an important number of developing countries export these products outside favorable preferences (the SGP is worse than schemes for LDC or ACP countries). We can find a solution to this issue only by acknowledging the importance of co-development. Neither interests form favorable preferences recipient nor do interests form developing countries exporters predominate.

Before trying to find a solution, we need to better understand advantages and limits of preferences.

The main positive point of preferences is to improve the competitiveness of products from poorest developing countries through more favorable tariffs. Preferences allowed a number of countries to export products (as sugar and bananas) where they were not competitive at the international level. Of course, for favorable preference recipient the end of preferences or the decrease of preference margins will have a significant impact.
Nevertheless, preferences have more negative than positive impacts. I will resume it in the following points:

Preferences are unilateral concessions by developed countries. This is highly problematic. In fact, developed countries can use it to pressure preference recipient (notably this is what happen at the WTO, cf. Jawara and Kwa, 2004). Furthermore, often when these preferences are really utilized by developing countries they are suspended and/or restricted. I heard, for example, that Switzerland suspended and after restricted its SGP on refined sugar because developing countries (as Guatemala) started to take advantage of the preferences. It is easy to give a quota and duty free access to LDC countries that have not the productive capabilities to profit of these preferences (also because usually Rules of Origin are very strict) is less easy to give real favorable preferences to countries that have these capabilities.
In more than forty years, preferences did not succeed to improve and diversify trade exports form poorest developing countries. In fact, preferences push recipient countries to continue to focus on a small number of commodities to export where they have a favorable market access. Preferences did not help these countries to diversify and to climbing the value chain (through industrialization and advanced services development). This system keeps alive the colonization trading system. The issue is that as we underlined in a previous post these elements are crucial to improve the positive impacts of trade on development.
One of the most important preference schemes is disappearing. In fact, preferences between EU and ACP countries will become Free Trade Agreements called EPAs. That pose a number of problems that I will maybe analyze in another post.

If we take into consideration all these negative impacts of preferences and the interests of developing countries exporters, the solution seems to me quite clear:

We need to find a way to give up to preferences avoiding losses for recipient countries and helping them to develop both their productive capabilities and an effective use of trade in their development strategy.

I guess you will say: “That’s right but how we can achieve this?” In fact, this is the very difficult question. I think that the following measures should be implemented

Progressive liberalization of tropical products in 10 years. Every year tariffs should be decreased by the same amount. This will give enough time for adaptation of these sectors in preference recipient countries without causing too much damage to other developing countries. This is an option included in the WTO draft on agriculture (February 2008).
Implementing Aid for Trade with additional resources and by ensuring ownership by recipient countries. We are still far from this objective. This kind of aid should match with the trade strategy for development of recipient countries. This will be a key element for LDCs.
This in the most important point and it is not fully taken into account in the WTO draft. In order to give to recipient countries, notably the non-LDC developing countries, the possibility to implement an effective development strategy, these countries should have enough policy space to protect and support their advanced services and industrial sector. Only with these tools, they can diversify and develop their economy. Furthermore, developed countries should improve their chances to develop both sectors. They should give them temporary preferential margins (10-15 years) for recipient countries high value added exports notably by eliminating tariff escalation and by incite them to export transformed products instead of commodities. In order to avoid the creation of another useless preference schemes and help to improve the competitiveness of these sectors, developed countries should reduce progressively this preferential margin (same amount every year) after, say, 5 years. With these preferences these countries can built a “modern” economic sector that progressively will become competitive in the global markets.

In conclusion, the measures that I proposed will allow these countries to implement an effective development strategy without undermining trade opportunities for exporters. What is needed it a real commitment by developed countries to really help preference recipient countries to improve their development level.

The first two measures seem to me feasible. The problem is with the third one that requires a change of mindset by trade negotiators particularly form developed countries.

Of course, this it is only a proposition. I guess there is other innovative thinking on this issue. If you have one or if you simply want to give a critic assessment on this post simply write a comment.

References

Jawara F. and Kwa A., Behind the Scenes at the WTO. The Real World of International Trade Negotiations. The Lessons of Cancun, London and New York, Zed Books.

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