Whatever one may conclude from the more conceptual discussion in the preceding section, in practical terms trade preferences are granted to developing countries because they demand better access to developed countries’ markets, and because developed countries believe that this is a particularly useful way of providing poorer countries with better opportunities for economic growth. On this basis, in the developing countries the expected benefits of trade preferences are ‘hard’ economic advantages such as better access to developed country markets, increased export volumes and prices, improved economic welfare, more jobs, and more rapid economic growth. In addition, there can be ‘soft’ (but nevertheless important) advantages such as better familiarity with sophisticated markets in developed countries, growing awareness of the need to improve qualities, a more outward-oriented attitude of the economy, and new business alliances.
While all these benefits may exist in reality, unfortunately they are very hard to identify and measure empirically. The major reason is that it is very difficult to tell which particular development was actually caused by trade preferences and would not otherwise have occurred. The observed growth rate of exports to developed countries granting trade preferences is not a reliable indicator as it is not clear how exports would have behaved in their absence. A somewhat better impression might be gained by comparing the growth of developing country exports to developed countries granting preferences with the growth of exports to developed countries not granting preferences, as was done e.g. by Weston, Cable and Hewitt (1980). However, it cannot be taken for granted that exports to preference-giving countries would have, in the absence of preferences, evolved in the same way as exports that actually went to developed countries not granting preferences.
This fundamental problem of the lack of a with-and-without comparison is probably the major reason why only relatively few empirical studies appear to have looked into the benefits of trade preferences. 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. Given the fine commodity detail of most preferential schemes, and the difficulties of estimating elasticities at that level of disaggregation, it is a major task to construct such quantitative models. However, there are a few studies that have used such models to estimate the effects of preferences for developing countries on the volume and value of trade flows, though in most cases these studies have looked at relatively broad categories of products. One such study (Baldwin, 1984) found that the increase of developing country exports due to preferential treatment under various schemes analysed in these studies was of an order of magnitude of 25 percent.
One other rough quantitative indicator of (potential) benefits derived from trade preferences, that can be estimated without making any assumptions on elasticities, is the size of preference margins. Conceptually this indicator is relatively straightforward, though there are several limitations to its economic interpretation, as will be shown below. Under certain (rarely prevailing) conditions the preference margin is equal to the static welfare gain that the preference-receiving exporting country can derive from a trade preference. Empirical calculation of the preference margin can be done without major difficulty, though it requires much time-consuming data processing.[14] Fundamentally, the preference margin per unit of product exported to a given importing country is the difference between the MFN tariff and the preferential tariff for that product, both of which being expressed as specific tariffs.[15] The total value of the preference margin for a given product is that margin multiplied by the quantity exported to the importing country granting the preference.[16] Of course, total values of preference margins can then also be aggregated across products. To normalise across countries and products, preference margins can be expressed as a percentage of the value of exports of the products concerned.
Yamazaki (1996) has estimated preference margins for agricultural exports from developing countries resulting from various preferential schemes operated by EU, the United States and Japan. The study finds that the aggregate preference margin for all preference-giving countries covered, all beneficiary countries and all agricultural products was US$1,853 million in 1992, equivalent to 12 percent of the total value of preferential trade. 73 percent of that margin was provided by EU, while Japan and the United States shared the remainder about equally. As far as exporting regions are concerned, Africa received slightly more than one third of that aggregate margin, South America nearly one fourth, and the Far East, Central America and the Caribbean each about one sixth. With regard to products, it turned out that 46 percent of the preference margin provided by EU came from sugar, though sugar accounted for no more than 10 percent of all exports to EU covered in the analysis. The study also estimated the loss in preference margins resulting from the MFN tariff reductions agreed in the Uruguay Round, under the assumption of no improvement in the preferential schemes. It was found that the preference margin would decrease by US$632 million, or one third. The Far East was expected to lose the largest share of its pre-Uruguay Round preference margin, i.e. 63 percent, while Africa was found to lose 25 percent. For several small countries it was found that their total preference margin was eliminated, as post-Uruguay Round MFN tariffs were reduced to the preferential tariffs existing in 1992.
The preference margin for agricultural exports from the ACP countries to EU was estimated in an FAO study by Sharma (1997). For 1996, i.e. with MFN tariffs at the beginning of the post-Uruguay Round period, the aggregate preference margin for all ACP countries and all agricultural products was estimated at 710 million ECU (US$840 million), about 14 percent of the value of trade covered. 52 percent of that preference margin resulted from sugar, followed by 21 percent from beef. The study expected the aggregate preference margin to fall by 16 percent by the year 2000, due to the tariff reductions during the Uruguay Round implementation period. In this analysis, the preference margin for two Protocol products, sugar and bananas, accounting for 60 percent of the aggregate in 1996, was assumed to remain unaffected by the Uruguay Round tariff reductions.
Estimates of preference margins for selected agricultural exports from the African ACP countries (AACP) to EU were provided in a study for UNCTAD by Tangermann and Josling (1999). Some of the results of that study are reproduced here in Tables 1 - 3. For the aggregate of the selected agricultural products covered in the study, the total preference margin for AACP was estimated to be around 630 million ECU, based on 1997 trade data and 1999 tariffs. The share of the preference margin in the value of exports differed greatly from product to product. It was highest where specified ACP countries had received specific preferences for given quantities of beef and sugar, laid down in Protocols attached to the Lomé Convention.[17] For beef it was estimated that the preference margin under the Protocol amounted to as much as 75 percent of the export value. On the other hand, in the cereals sector the preference margin enjoyed by AACP was estimated to be no more than 0.5 percent.
Table 1: Preference Margins for Selected Groups of Agricultural Products Exported from AACP to EU under Lomé Provisions, (1999 EU Tariffs)
| Product group |
Number of tariff
lines covered |
Value of preference
margin in 1997 |
|
| Million ECU |
% of value of AACP exports to EU of products concerned |
||
| Fish |
373 (204) |
156.8 |
13.3 |
| Tobacco |
21 (19) |
68.0 |
14.2 |
| Fresh fruit and vegetables |
135 (57) |
22.7 |
7.3 |
| Processed fruit and vegetables |
393 (119) |
20.6 |
20.5 |
| Cereals |
23 (7) |
0.0 |
0.5 |
| Dairy products |
162 (3) |
1.3 |
28.3 |
| Total of above products |
1 107 (409) |
265.0 |
12.4 |
Source: Tangermann and Josling (1999), p. 47 (Table II.4).Table 2: Preference Margins for Beef and Sugar Exported from AACP to EU under Lomé Provisions, (1999 EU Tariffs)
| Product |
Value of preference
margin in 1997 |
|
| Million ECU |
% of value of AACP
exports to EU of products concerned |
|
| Beef - general Lomé preferences |
17.0 |
13.7 |
| Beef - Protocol preferences |
87.1 |
75.2 |
| Beef - total preferences |
104.1 |
43.2 |
| Sugar - general Lomé preferences |
1.0 |
4.8 |
| Sugar - Protocol preferences |
256.5 |
56.7 |
| Sugar - total preferences |
257.6 |
55.6 |
| Total of above preferences |
361.7 |
52.7 |
Source: Tangermann and Josling (1999), p. 50 (Table II.5).Table 3: Preference Margins for Protocol Beef and Sugar Exported from Individual AACP Countries to EU under Lomé Provisions, (1999 EU Tariffs)
| Product and country |
Value of preference
margin in 1997 |
|
| Million ECU |
% of value of total
agr. exports to EU of country concerned |
|
| Protocol Beef |
|
|
| Botswana |
38.4 |
88.5 |
| Kenya |
0 |
0 |
| Madagascar |
2.3 |
1.2 |
| Namibia |
21.9 |
13.0 |
| Swaziland |
1.1 |
0.8 |
| Zimbabwe |
23.4 |
5.5 |
| Protocol Sugar |
|
|
| Congo |
4.1 |
28.0 |
| Kenya |
0 |
0 |
| Madagascar |
5.4 |
2.7 |
| Malawi |
11.0 |
5.3 |
| Mauritius |
168.8 |
46.6 |
| Swaziland |
63.3 |
48.9 |
| Tanzania |
4.0 |
2.9 |
| Uganda |
0 |
0 |
Source: Tangermann and Josling (1999), p. 51 (Table II.6).In the same study, preference margins were also calculated for MFN tariffs that would result if it should be agreed in the next round of WTO negotiations on agriculture that all tariffs have to be brought down to 28 percent of their pre-Uruguay Round base level.[18] The results of that calculation are reproduced here in Table 4. In aggregate across the products covered in the study, this hypothetical tariff reduction would reduce the preference margin by more than half.
Table 4: Preference Margins for Selected Groups of Agricultural Products Exported from AACP to EU under Lomé Provisions, Hypothetical EU Tariffs after the Next WTO Round
| Product group |
Value of preference
margin in 1997 |
||
| Million ECU |
% of value of AACP
exports to EU of product concerned |
% decrease in preference
margin relative to 1999 levels |
|
| Fish |
75.0 |
6.3 |
52.1 |
| Tobacco |
24.5 |
5.1 |
64.0 |
| Fresh fruit and vegetables |
8.9 |
2.9 |
60.6 |
| Processed fruit and vegetables |
6.2 |
6.2 |
61.9 |
| Cereals |
0.0 |
0.5 |
10.9 |
| Dairy products |
0.4 |
8.0 |
71.7 |
| Total of above products |
115.1 |
5.4 |
56.6 |
Source: Tangermann and Josling (1999), p. 52 (Table II.7).Of course, such estimates of preference margins can also be repeated for alternative sets of (assumed) preferential tariffs. For example, in the Tangermann/Josling study it was analysed how AACP would fare if the Lomé preferences were to be replaced by EU’s GSP scheme.[19] The result is reproduced here in Table 5. It was found that for the African ACP countries that are LDCs, the aggregate preference margin under GSP would be only 7 percent less than under the Lomé preferences, while the other African ACP countries would lose around 85 percent of the preference margin if they had to rely on GSP treatment rather than Lomé preferences. In a more recent update of that study, Tangermann (2000) also estimated the changes in preference margins brought about by moving from the Lomé Convention to the Cotonou Agreement in the year 2000 and preference margins that will result from the new set of (zero duty) preferences for LDCs established by EU under the “Everything but Arms” (EBA) regime.
Table 5: Exports in 1997 of Selected Groups of Agricultural Products from African ACP countries to EU: Comparison of Preference Margins under the Lomé Convention and under the GSP (1999 EU tariffs)
| Product group |
Least Developed
AACP Countries |
Other AACP Countries |
||
| Value of preference
margin(million ECU) |
||||
| Lomé preferences |
GSP preferences |
Lomé preferences |
GSP preferences |
|
| Fish |
41.7 |
41.7 |
115.1 |
14.9 |
| Tobacco |
29.7 |
29.7 |
38.4 |
10.3 |
| Fresh fruit and vegetables |
3.8 |
3.9 |
18.8 |
4.0 |
| Processed fruit and vegetables |
0.7 |
0.5 |
19.8 |
2.2 |
| Cereals |
0.0 |
0.0 |
0.0 |
0 |
| Dairy products |
1.3 |
0.0 |
0.0 |
0 |
| Beef - general Lomé preferences |
6.0 |
2.0 |
11.1 |
0 |
| Sugar products - general Lomé
preferences |
0.5 |
0.0 |
0.5 |
0 |
| Total of above products |
83.7 |
77.8 |
203.7 |
31.4 |
Source: Tangermann and Josling (1999), p. 56 (Table II.9).Such estimates of preference margins are relatively easily done, and they may also have some intuitive appeal. However, their results should be interpreted with much caution. In particular, the actual welfare effects of trade preferences for the recipient countries may deviate significantly from such mechanically calculated preference margins, and usually they will be far smaller. For the same reason the actual economic effects of MFN tariff reductions for preference-receiving countries may be considerably smaller than the erosion of preference margins estimated in this mechanical way. Some of the major factors causing differences between estimated preference margins and ‘true’ economic effects will be discussed below in Section 8, in the context of asking whether there is a case for compensation when preference margins are eroded.
Note: in this table, 0.0 denotes a positive value less than 0.1, while 0 denotes a zero value.
The actual welfare effects for the recipient countries also depend on how any benefits from trade preferences are distributed among the various groups of market participants. In particular, are the benefits likely to accrue to economic agents in the exporting developing country, or to agents in the importing developed country? The answer to this question depends partly on the competitive structure of the market concerned, and partly on how the trade preference is administered. The relationship between market structure and distribution of gains resulting from trade preferences is complex and cannot be discussed here in detail. However, intuition suggests that the greater the extent to which the potential benefit resulting from a trade preference ends up in the hands of the preference-giving country (i) the more concentrated that trade is, and (ii) the closer supply from the exporting developing countries is to a situation of full competition. In any case, with monopsonistic structures and behaviour in the import trade in the importing developed countries, some part of the preference margin will end up in the hands of agents in the importing country, rather than in the exporting countries.
A similar situation is often created by government policy if the preference is constrained by a tariff rate quota (TRQ). Where that quota is binding, a quota rent results, which can be as high as the preference margin. Where quotas bind, licences for preferential imports must be issued in order to assure that imports at the preferential rate do not exceed the TRQ. Economic theory and practical experience show that in such cases the quota rent, i.e. the preference margin, flows to the holder of the licence. For most TRQs, and in particular where the preferential quota is not allocated to specified individual exporting countries, governments of the importing countries tend to allocate licences only to trading companies registered in their territory. In other words, where tariff preferences are constrained by TRQs that are not specifically allocated to individual exporting countries, there is a strong tendency for the preference margin to end up not in the exporting countries but in the importing country.[20]
As suggested above, any static economic welfare benefits estimated in quantitative studies, e.g. through assessing preference margins, can at best reflect one element of the various potential positive effects of trade preferences. Many other benefits, in particular the dynamic advantages and the ‘soft’ benefits referred to above, largely escape quantification on the basis of aggregate data. Detailed case studies are necessary to assess the specific benefits that individual beneficiary countries have derived from tariff preferences. In the absence of such studies it is also difficult to say how the overall benefits differ between different groups of developing countries, and to make any general statements on the question of which categories of developing countries most ‘deserve’ tariff preferences. However, a few hypotheses are intuitively appealing.
First, if trade preferences are seen as one type of economic assistance that rich countries can provide to poor ones, then it appears logical to suggest that preferential treatment should be provided on a larger and more generous scale to potential beneficiary countries with a relatively low level of economic development. Political economy considerations would point in the same direction. For the preference-granting country, the political ‘cost’ of providing preferences results from the resistance of domestic producers of competing products, while the political ‘benefit’ stems from the readiness of tax payers to help people in poorer countries. The poorer the potential beneficiary country, the lower will the ‘cost’ element tend to be, because the threat of competition is probably felt less strongly when the potential beneficiary countries are at a relatively low level of development. Likewise the ‘benefit’ is high in the case of poorer potential recipients as the need for assistance is then felt particularly strongly. At the same time, the dynamic and ‘soft’ advantages of trade preferences are greater for a country at a relatively low level of economic development.
Second, it can be argued that trade preferences are more important when exports play a relatively larger role in economic development of a given recipient country. In this context, the size of recipient countries is also relevant. It is a well established fact that trade is the more important, as a percentage of GDP and as a source of welfare improvement, the smaller the country concerned. Trade theory suggests, and empirical observations confirm, that in large countries the ratio of trade to GDP tends to be lower than in small countries because they exhibit a wider variety of products with different comparative advantages inside their own territories, and because they can make better use of economies to scale on their domestic market. In a sense, large countries conduct ‘trade’ between regions, and between companies, in their own territories, while small countries need to trade with the rest of the world in order to exploit comparative advantages and economies of scale. On the basis of these considerations, trade preferences are particularly important for small developing countries. Similarly, they 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.
In sum, 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 economies of the exporting countries. In the absence of comprehensive analyses of benefits in individual beneficiary countries, the basis is relatively weak for judging which groups of developing countries most ‘deserve’ preferences. However, there are good intuitive grounds for arguing that trade preferences are particularly important for the poorest countries and other vulnerable developing countries, such as small, island and land-locked countries.
