Issues Briefs for
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Global Trade Liberalization and the Developing Countries -- An IMF Issues Brief
Joint Note on the Doha Development Agenda
Canada and the IMF
People's Republic of China and the IMF
Japan and the IMF
Cambodia and the IMF
Uruguay and the IMF
United States and the IMF
I. Trade and Aid
Integration into global markets offers the potential for more rapid economic growth, the creation of better-paid jobs, and poverty reduction. While opening markets will not do the trick on its own, development success over past decades has generally been associated with outward orientation. However, many of the poorer developing countries have found it difficult to take full advantage of the opportunities of the global market. Supply response has been weak for a variety of structural reasons, including weak institutional capacity, but also because policies are often not supportive. Industrial countries have maintained market access barriers and agricultural policies that penalize typical developing country products.
A coherent approach to development and trade calls for trade policies that create market opportunities for developing countries, and for development policies that enable them to respond to these opportunities. The key components of such an approach are:
I. Trade and Aid
Official development assistance (ODA) in recent years has totalled US$50-60 billion a year. Debt relief under the HIPC Initiative was US$1.4 billion in 2001. At the same time, trade-distorting policies have prevented the creation of incomes far in excess of these amounts. Estimates of the welfare gains from eliminating all barriers to merchandise trade are substantial, ranging from US$250 billion to US$680 billion annually, of which one-third would accrue to developing countries. These benefits would derive in part from the elimination of access barriers to industrial country markets, but also in good part from reform of the trade regimes of developing countries themselves. Determined opening of markets is a win-win proposition—both industrial and developing countries gain.
In some cases, the current trade policies of industrial countries directly neutralize the effectiveness of aid. The dumping of agricultural surpluses, in the form of non-emergency food aid or with the help of export subsidies, has damaged farm production in a number of developing countries, some of which had been carefully nurtured under assistance programs. In other cases, tariff peaks and escalation frustrate efforts by developing countries to diversify their exports. Greater coherence between aid and trade policies is therefore essential. In particular, reducing or eliminating biases against developing country products in industrial country import and agricultural regimes would make both aid—including debt relief—and trade more effective in promoting development.
II. Market Access Barriers
Typical developing country exports face higher barriers, both in the markets of industrial countries and in those of other developing countries, than industrial country products. Barriers take a variety of forms. Applied simple average tariffs for merchandise imports into industrial countries are approximately 3 percent; but for textiles and clothing, and agricultural products, which represent a relatively large share of developing country exports, average tariffs are 8 and 27 percent, respectively. Tariffs on imports into other developing countries are substantially higher, except for agriculture.
But average tariffs tell only part of the story. Tariff "peaks"1 within product groups, often exceeding 50 percent or, in agriculture, 100 percent, are concentrated in labor-intensive products of significant export interest to developing countries, and particularly Least Developed Countries (LDCs)2. In the United States and Canada, tariff peaks are concentrated in textiles and clothing, in the EU and Japan in agriculture and food products. Tariff "escalation"—in which tariffs on processed goods exceed those on primary products—can substantially reduce the returns to developing country entrepreneurs of engaging in activities with higher value-added.3 This hampers the diversification of exports, limits the accumulation of skills and capital, and thus helps to perpetuate dependence on a small number of unprocessed goods whose world demand grows little and whose prices are volatile. The tariff structure of developing country importers differs little in this regard from that of the "Quad" (Canada, EU, Japan, and the United States). For instance, Russian tariffs on textile products are 8 percent at the initial processing stages, but 18 percent on finished clothing, for Mercosur the respective tariffs are 12 and 22 percent, and for South Africa 2 and 20 percent.
Non-tariff measures increase further the barriers faced by developing country exporters, and reduce the transparency of market access conditions. Under the Uruguay Round multilateral trade agreements quotas have been significantly curtailed and converted into their tariff equivalents. But a complex web of bilateral quotas continues to affect trade in textiles and clothing under a transition regime set to end in 2005.4 Industrial countries have exploited the considerable leeway they have under this regime by backloading liberalization, and it is estimated that, by 2004, the 11 principal developing country exporters will still face quota restrictions on over 80 percent of their exports of these products. This has given rise to concerns that political resistance to liberalization could increase in the final phases of the transition period.
Protection has shown a tendency to reappear under new guises when its traditional avenues are blocked by multilateral agreements. The escape valves of choice have been "trade remedies", and in particular antidumping measures.5 Almost half of the 499 antidumping investigations initiated by industrial countries in 1995-2000 targeted developing countries, with another quarter targeting transition economies.6 Antidumping measures have also become increasingly popular with developing countries themselves, with one-third of measures directed at other developing countries. Technical, sanitary and phytosanitary standards are increasingly complex, are generally developed with little involvement by developing countries, and have strained the capacity of developing countries to meet them. Furthermore, there are concerns about the scope for the discriminatory use of these measures. Together, non-tariff measures can add considerably to uncertainty over market access—a market that appears accessible at the time of an export-oriented investment can close if the activity proves "too" successful.
Trade in services
Barriers to services trade remain substantial, both in industrial and developing countries. In general, industrial countries have undertaken more far-reaching commitments regarding access in their services sector than developing countries. Barriers in services trade vary in restrictiveness between sectors and modes of delivery, but are most restrictive for services that require the temporary cross-border movement of persons, an area of particular export interest to developing countries, and least in services such as telecoms and financial services in which the interests of industrial countries are strongest. At the same time, restrictive services regimes are partly responsible for inefficiencies in the trade-related infrastructure and correspondingly high transaction costs in developing countries.
Liberalization and inter-developing country effects
Most estimates of the potential gains from liberalizing access to industrial country markets point to significant benefits for developing countries. However, the benefits are likely to be spread unevenly—while developing countries would gain in the aggregate, this may not be true for each country and in every product category. In particular, a number of exporters, especially from poorer countries, enjoy de facto protection in third markets due to preference margins, and as a result of bilateral quotas under the Uruguay Round Agreement on Textiles and Clothing (ATC). As liberalization erodes these preferences, they may lose out to more competitive suppliers.
Perhaps the most significant development in this respect is China's recent accession to the WTO, which will allow it eventually to compete on equal terms with other developing countries.7 ATC quotas on textiles and clothing have been especially constraining for Chinese exporters; upon conversion of quotas into multilateral tariffs, they are expected to gain market share from other suppliers, including low-income countries. A reallocation of production could impose high adjustment costs, in view of the large share of textiles and clothing in the exports of many countries, and calls for early identification of problems and action to diversify exports and strengthen competitiveness. The backloading of effective liberalization under the ATC is unhelpful, as it turns what could have been a gradual adjustment process into a shock at the end of the transition period—for both importing and exporting countries.
An argument often used to allay concerns regarding market access for developing country products is that there are preferential schemes that are especially designed to help these countries sell their products in industrial country markets. There is evidence, however, that the margins under many of these schemes are smaller than they at first appear; and "sensitive products," which tend to be of most interest to developing countries, are often not covered. Fairly comprehensive preferences for LDCs have been granted under the EU's Everything but Arms (EBA) initiative, which allows duty-free and quota-free access for virtually all products, and under similar schemes by New Zealand, Norway, and Switzerland.8 Another prominent scheme is the United States' African Growth and Opportunity Act, under which 35 African LDCs and non-LDCs can export freely to the U.S. market, with certain restrictions for apparel and other "sensitive" products.
Adoption by all Quad countries of schemes that provide unrestricted market access for LDCs can have significant benefits without imposing undue costs on other suppliers, given the very small share of LDCs in world trade (around 0.5 percent). There is, however, a danger of complacency, with LDC preferences—which carry only limited political cost for industrial countries—coming to be seen as a substitute for broader liberalization. In fact, such preferences risk creating vested interests, with rich-country protectionists coalescing with the poorest countries to maintain market barriers aimed at the "middle," perceived by both as a competitive threat. Preferences should therefore be set firmly within a context of rapid multilateral liberalization, while providing LDCs with enough time and assistance to adjust.
III. Agricultural Support
Output and price supports
The agricultural sector in most OECD countries is heavily protected from international competition and receives substantial public sector support. Depending on their nature, subsidies can inflict significant damage on producers in other countries, as well as on domestic taxpayers and consumers. Despite reforms in recent years aimed at delinking subsidies from production, more than 70 percent of assistance to producers continues to be provided through market price supports and payments per unit of output, partly associated with export subsidies. Within industrial countries, this assistance is costly and regressive since much of the benefit accrues to large farms, and price supports hurt low-income consumers most, because they spend a larger share of household expenditure on food. In other countries, especially the poorer ones unable to compensate for losses through measures of their own, the over-production stimulated by these measures reduces prices and incomes from the affected products and subjects them to greater volatility.9
Levels of support and trends
Several indicators point to the extent of agricultural support in OECD countries. Total OECD support to agriculture, through border measures and budgetary transfers, amounted to US$327 billion or 1.3 percent of GDP in 2000.10 As a result, gross farm receipts were 52 percent higher than they would otherwise have been. There is, however, a wide distribution across countries and commodities. Support levels are very low in Australia and New Zealand, and far above the average in Iceland, Japan, Norway, Switzerland, and Korea. They are higher in the EU, with subsidies raising producer incomes by 62 percent on average in 2000, than in the United States (28 percent). Protection is greatest for rice, dairy products, coarse grains, wheat, and beef.
The Uruguay Round Agreement on Agriculture (URAA) extended multilateral disciplines to domestic agricultural support policies and direct export subsidies. It included commitments to reduce aggregate support measures for "amber box" policies—those deemed to have the largest effect on production and trade—by 20 percent over the 1995-2000 implementation period, compared with the base period of 1986-88. The URAA has contributed to a reduction in export subsidies but overall its benefits are judged to have been modest, because in most cases the ceilings of support under these commitments were well above actual levels, and because of the aggregate, nonproduct-specific nature of commitments—which allowed support of some products to increase substantially.
A recent trend, including under EU plans, is to link support payments to environmental goals and to stimulate rural development rather than farm production. Nevertheless, none of the plans proposes long-term reductions in support measures. The Japanese program has the goal of a higher food self-sufficiency level of 45 percent by 2010. In Canada and the United States, plans to delink production from support were undermined by emergency payments in response to falling prices that encouraged more, rather than less, production and further contributed to world market imbalances. Thus, U.S. soybean and cotton production rose despite (and partly causing) sharp falls in world prices.
Impact of liberalization—consumers versus producers
While developing country producers of the most protected crops lose incomes as a result of these policies, and GDP growth has suffered, consumers—often in urban centers—tend to benefit from lower prices. The most obvious case is food aid. For instance, in the 1980s, EU supplies of milk powder from surplus stocks assisted government school-milk and food support programs in Nicaragua, severely damaging domestic dairy farmers in the process. As a result, many net food importers among developing countries would suffer a net loss, in the short term, if industrial countries removed agricultural subsidies without lowering import restrictions to their markets.11 However, if import restrictions such as tariffs were removed as well, estimates show that most developing countries would gain significantly, particularly in the longer run as new profitable production opportunities would promote productivity-enhancing investments.12 These studies highlight the importance of a comprehensive approach to agricultural reform and of assistance to those adversely affected by reforms. But trade policies will rarely be the most appropriate instrument of assistance.
IV. Trade-Related Technical Assistance
Many of the benefits of global trade and its liberalization depend on the ability of developing country producers to respond to new opportunities for production and trade. But their entrepreneurial drive is often hampered by weaknesses in the institutional and market infrastructure for trade, and the concerns of developing country producers are not always reflected in international agreements, e.g. on standards. This results in high and variable transaction costs, which increase uncertainty and act implicitly as a tax on trade that can exceed the cost of market access barriers. For example, formal and informal payments related to the administration of exports reduce farm-gate prices of rice for Cambodian farmers by around 15 percent.13 In general, the greatest gains can be achieved in tackling customs procedures and related corruption, liberalizing port services and the organization of transport markets, and in strengthening institutional capacity to meet technical and sanitary standards. However, in many of these areas, developing countries, especially the poorest, require technical assistance to design solutions and build implementation capacity.
The Doha Ministerial Declaration recognizes these special concerns and commits the international community to substantially stepping up trade-related technical assistance. These commitments must now be followed through with funding and results. One initiative, in which the IMF participates together with five other agencies,14 is the Integrated Framework (IF). The IF represents a coordinated approach to identifying and prioritizing trade-related assistance needs in LDCs as well as projects for donor funding, and to mainstreaming action on trade in national poverty reduction and development strategies. Diagnostic studies in three pilot countries have been completed (Cambodia, Madagascar and Mauritania), and work is underway to extend the scheme to other LDCs over the coming years.
V. Trade In National Development And Poverty Reduction Strategies
Improved market access and technical assistance can make important contributions to the successful integration of developing countries into world trade. The third, and perhaps most basic, factor is a clear commitment by developing countries themselves to create appropriate policy and institutional conditions. In many low-income countries, policy and donor priorities are expected to converge around national poverty reduction strategies set out in PRSPs. A recent review of the PRSP process conducted by the IMF and the World Bank observed that there was significant scope for deepening the treatment of trade and related policies—the "first generation" of interim and full PRSPs having emphasized above all issues relating to the management and mobilization of public resources.
Where available, the diagnostic studies and recommendations under the Integrated Framework provide a basis for informed national discussion and could be linked explicitly to the participatory approach under the PRSP. But for countries outside the IF and PRSP frameworks as well, the Doha Development Agenda represents an opportunity to reassess the objectives and effectiveness of existing policies on trade. Analyses of the benefits of global market access liberalization consistently highlight that a large share of the gains would result from more open trade regimes in the developing countries themselves, many of which maintain policies that are biased against exports and agriculture (including the rural poor) and impede domestic competition through import restrictions. More often than not, existing policies are not the product of a consistent and reasoned approach to development and poverty reduction, but reflect vested interests and outdated ideologies.
A careful reassessment would also identify the impact of reforms on vulnerable groups and measures needed to mitigate it. And it would take account of possible revenue implications of trade liberalization, which can generally be addressed by reorienting and tightening tax systems.
VI. The Way Forward On Aid And Trade
Policies for trade and aid can be complementary tools for development, but have often lacked coherence. A coherent approach would require that trade policies create market opportunities for developing countries, and that development policies enable them to respond to these opportunities. The trade and development communities must work together more closely than they have in the past. This is the essence of the Doha Development Agenda of the WTO and is reflected in the draft communiqué of the Financing for Development Conference in Monterrey.
The agenda is certainly ambitious. A development-oriented trade policy would consist of broad-based and predictable improvements in market access for developing country exports, as well as liberalization by developing countries themselves. Priorities should be the elimination of tariff peaks and tariff escalation, which are particularly pernicious in their effects on poor countries. In agriculture determined efforts are required to phase out production- and price-based supports, and in particular export subsidies, and eliminate associated border restrictions. Rules regarding non-tariff barriers, in particular trade remedies, must be tight enough to prevent their use as substitute tools of protection. In order to make progress in these areas there is a need, in the industrial countries, to build awareness of the impact and cost of existing policies and to strengthen assistance to those adversely affected by liberalization. Trade liberalization is not an act of charity, but that insight is often lost.
A trade-oriented development policy would provide assistance in tackling transaction costs and institutional weaknesses obstructing trade, and in strengthening the ability of developing countries to recognize and defend their interests in multilateral negotiations. Capacity-building would be an important instrument of such an approach, and would call for significantly stepped-up funding for technical assistance. Finally, the agenda would require for developing countries themselves to commit to creating supportive conditions for trade and investment as part of their national development strategies. Autonomous liberalization should be promoted through formulas that allow countries to receive "credit" for market-opening measures without weakening their position in multilateral negotiations.
Hoekman, Bernard M., and Michel M. Kostecki, 2001, The Political Economy of the World Trading System: The WTO and Beyond (Oxford; New York: Oxford University Press).
Organization for Economic Cooperation and Development, 2001, Agricultural Policies in OECD Countries: Monitoring and Evaluation 2001 (Paris: OECD).
Staples, B. R., 1998, Trade Facilitation, Global Trade Negotiations Home Page, http://www1.worldbank.org/wbiep/trade/wto2000_BPs.html.
World Bank, 2001, Global Economic Prospects 2002 (Washington, D.C.: The World Bank).
World Trade Organization, 2001, Integrated Framework Diagnostic Trade Integration Study: Cambodia (Geneva: World Trade Organization).
1 Tariff peaks are defined as tariffs of 15 percent or higher.
2 The United Nations have classified 49 developing countries as LDCs.
3 Among major manufactured products, tariff escalation is most prevalent in textiles and clothing, leather and leather products, rubber products, wood, pulp, paper, furniture and metals.
4 Developing countries themselves continue to make use of restrictive licensing of imports.
5 Under certain conditions, trade remedies such as safeguards and antidumping are consistent with WTO agreements.
6 However, exports of LDCs have been little affected.
7 China's accession terms provide other WTO members with strengthened safeguards against Chinese exports for a transition period.
8 Under the EU scheme, certain restrictions will be kept on banana imports until 2006, and on sugar and rice imports until 2009.
9 If industrial country production is insulated from world market conditions through support measures, the full burden of adjustments to changes in supply and demand falls on other producers, thus causing greater swings in prices.
10 Data in this section from OECD, Agricultural Policies in OECD Countries: Monitoring and Evaluation, 2001.
11 This is the result of price increases for commodities of which developing countries are net importers, and possible decreases for those of which they are net exporters (as production patterns in industrial country farms change).
12 The reason is essentially that import restrictions limit export opportunities for foreign suppliers without subsidizing their consumers.
13 Integrated Framework Diagnostic Trade Integration Study: Cambodia, 2001
14 These include ITC, UNCTAD, UNDP, the World Bank and the WTO. Creation of the IF precedes the Doha Declaration.