Trade preferences for developing countries have been a feature of industrialized 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 concessions for selected agricultural products, for limited 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? Do developing countries stand 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, 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 that 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 benefits 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 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 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 LDCs and other vulnerable countries. In this context, the Enabling Clause could be amended by including small and other vulnerable countries, in addition to the LDCs, in the category of developing countries that can receive preferences deeper than those accorded under the GSP. The functioning of the existing GSP schemes, which should certainly be maintained, can be improved by: binding the preferences in 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 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, 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:
