Latin America and the CaribbeanCACM26.0 24.4 14.4 15.4 21.7 13.7 15.01961Andean Group1.83.8 3.2 4.2 12.2 8.8 11.21988CARICOM4.25.3 6.3 8.1 12.1 14.6 13.41973MERCOSUR9.4 11.65.5 8.9 20.3 20.7 20.81991AfricaCEMAC4.81.6 1.9 2.3 2.2 1.2 1.3 1999(UDEAC)COMESAi)7.45.7 4.4 6.3 6.0 4.8 5.2 1994ECCAS9.81.4 1.7 1.4 1.5 0.9 1.1 1983iii)ECOWAS2.99.6 5.1 8.0 9.0 9.6 9.8 1975iii)ii)SADC4.20.4 1.4 3.1 10.6 11.9 10.9 1992iii)UEMOA6.29.9 8.7 12.1 10.3 13.0 13.52000Middle East and AsiaASEAN/22.4 17.4 18.6 19.0 24.6 23.0 22.41992AFTAGCC4.63.0 4.9 8.0 6.8 5.0 5.1 1981iii)SAARC3.24.8 4.5 3.2 4.4 4.3 4.9 1985ci)Prior to 2000, data unavailable for Namibia and Swaziland.ii)Prior to 2000, data unavailable for Botswana, Lesotho and Swaziland.iii)Year of foundation.Source: WTO (2003), 56.
However, not all trade among preferential trading takes placeat preferential rates. Most agreements exclude certain sensitivesectors or even agricultural trade altogether. Traders may choose to
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forgo preferential treatment because the costs of satisfying the requisite rules of origin might be higher than the advantage offered bythe preferential margin.112 Moreover, many applied MFN tariffs indeveloped countries are already zero. For these reasons, the estimates reported in Table 7 will overstate the impact of preferentialtrading arrangement as far as tariffs are concerned.The WTO in defending multilateralism sees no strong evidenceof trade creation due to RTAs.113 Its own data can, however, also beinterpreted differently (see Table 8). The share of intra-regionalexports as a percentage of regional bloc exports has been increasingsince 1970 in most of the major regional trade blocs. Over 60 percent of EU exports are to other EU-15 partners, a share which mayincrease by an additional 10 percentage points after enlargement by10 new Member States on May 1, 2004. Taking into account thatthe EU and EFTA have free trade arrangements via the Free TradeAgreements of 1973 one must also add EU-EFTA intra-trade whichaccounts for another five percentage points. That amounts to a shareof intra-EU-EFTA trade of around three quarters of their total trade.Over half of NAFTA exports are to other NAFTA partners.Whereas intra-regional export shares within the EU have remainednearly constant, the intra-NAFTA trade share has shown an upwardtrend well before NAFTA entered into force in 1994. Similar patterns can be identified for other major RTAs. MERCOSUR is anexception, where data show a sharp increase in intra-regional exportshares after the agreement entered into force in 1991.2. Does the EU Need the WTO at All?The significance of RTAs depends on its degree of integration.Most of the RTAs are simple free trade agreements or customs unions. Only the NAFTA goes a little bit beyond this status implyingbesides free movements of goods also partial free movement ofservices and of capital and labour. The highest form of integrationhowever, is reached in the EU. It not only consists of a customsunion and the four freedoms (Single Market concept) but is also anEconomic and Monetary Union (EMU) with a single currency(Euro). EU-25 together with the EU-EFTA free trade realtions willcomprise a potential of nearly three quarters of intra-EU-EFTAregional trade relative to total trade. Other RTAs (with the ACP,112 WTO (2000), 48.113 Ibidem, 55.
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with Mexico, South Africa, the Andean pact) make the EU a tradingsuperpower of its own. In addition, in contrast to most RTAs theEU does go much beyond the WTO commitments.114This provokes the question why the EU needs the WTO at all?Nearly three quarter of all merchandise trade is conducted with freetrade partners. Measured by this huge intra-trade share the EUcould easily forgo the multilateral commitments of the WTO. TheEU is, however, also a leading world trader. The EU holds a worldmarket share of around 19 percent (excluding intra-EU trade).Adding EFTA’s world market share of around three percentagepoints and that of the 10 new EU members of Central and EasternEurope of also around three percentage points this increases theworld market share of the enlarged EU-EFTA to 25 percent. Incomparison the United States hold a market share of 14 percent,Japan one of only nine percent and China nearly seven percent,followed by Canada with five percent. All other single countries arefar below a five percent world market share (measured with exportsfigures of the year 2002).115 If the EU would just rely on its bilateral and unilateral agreements with developing countries via GSPand the Lomé-Cotonou agreements with the ACP countries it wouldbe self sustainable. Intra-EU trade would cover industrial trade, EUACP trade would fulfil the function of supplying the necessary rawmaterial inputs. The only important trade partners in the industrialworld are the United States and to a lesser degree Japan.From an optimal tariff theory point of view a dominant playerin world trade (such as the EU) can improve welfare by imposingan optimal tariff rate which is usually very high (more than 100 percent), whereas the optimal tariff for small countries is zero (i.e. freetrade).116 This implies that the starting position for trade liberalization is quite different for large and small (and developing) countries. Larger countries and regions tend to lose from unilateral reductions in protection, which move them further away from theiroptimal level of protection. Only mutual or co-operative tariff reductions can benefit all countries. This highlights the importance ofthe WTO multilateral negotiations for a co-operative solution tobring together the different interests of large and small, rich andpoor countries, resulting in world-wide trade liberalization.114 See OECD (2002).115 See WTO (2003), 69.116 See Breuss (2003), 140 et seqq.
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Bagwell and Staiger in formulating an economic theory ofGATT/WTO reach the conclusion that GATT’s major principles,reciprocity and non-discrimination are thus simple rules that, whenused together can deliver an efficient outcome.117 Non-discrimination (the MFN clause) ensures that all international externalities arechannelled through world-price movements, and the principle ofreciprocity serves effectively to neutralize externalities of exactlythis nature (terms-of-trade effects).More interesting in answering the question whether the EUneeds the WTO, however, is the treatment of cases of bilateral imbalances. Maggi analyses such cases in the context of a three-country CGE model of trade with the presence of bilateral imbalances ofpower, where the ‘more powerful’ country (e.g. the EU) in a givenpair is the one that stands to lose less (or to gain more) from a tradewar (increasing tariffs). Hence, in case of trade liberalization a largeand powerful country would lose more (or gain less) than smallercountries.118 Seen from a world perspective of welfare maximization and the target of equality Maggi comes to the following conclusions: a) In the presence of bilateral imbalances of power (e.g.the EU versus small and developing countries), countries can sustain a higher symmetric welfare with multilateral enforcement (orpunishment strategy whereby any defection is followed by a permanent Nash reversion in multilateral relationships) than with bilateral enforcement. b) Under bilateral enforcement (punishment strategy whereby any defection is followed by a permanent Nash reversion in bilateral relationships) the weaker partner makes a larger‘concession’ than the stronger partner.119 The reverse is true undermultilateral enforcement. To overcome this inequality, internationaltransfers (e.g. development aid) could be used. According to Maggisuch a strategy is, however, an imperfect substitute for multilateralenforcement.120 c) Under absent power imbalances (if all countrieswould be of equal size and power), bilateral and multilateral enforcement are equally efficient. An important conclusion ofMaggi’s game-theoretic analysis is that international trade institutions like WTO are important in order to neutralise the imbalancesof power in world trade via rule-making procedures.117 Bagwell / Staiger (1999); see also Breuss (2003), 140 et seqq.118 Maggi (1999); see also Breuss (2003), 155 et seqq.119 Maggi (1999), 198.120 Ibidem, 200.
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The more power the EU accrues in world trade the more is itsattitude towards multilateral solutions of WTO no more than a figleaf to calm down its own sole or the critiques of globalization or ademonstration of its good governance.H. Developing Countries’ Market Access in AgricultureA key achievement of the Uruguay Round has been to extend multilateral discipline to domestic support in the farming sector, as wellas to export subsidies. Domestic support related measures havebeen classified according to the associated level of market distortions. The so-called ‘boxes’ characterise what is prohibited, allowed, or to be phased out. A slight reduction in the market distortion (domestic support granted to farmers) can be observed in the1990s. The ratio of producer support for the OECD was 31 percentin 2000-2002, compared to 36 percent in 1986-1988. The coefficient of nominal protection was 31 percent in 2002, compared to 57percent in 1986-1988.121Agriculture belongs to the built-in Agenda of the UruguayRound and hence also in the Doha Round. Rich countries can affordfarm support. Therefore the US$ 300 billion spent by the industrialised countries on farm support are often compared to the amountof their aid to development, which represents only a sixth of thissum.122 The Official Development Assistance (ODA) defined bythe OECD123 as the sum of grants and concessional loans (i.e. withgrant elements of at least 25 percent), undertaken by the officialsector and with the primary objective of promoting the economicdevelopment stayed at US$ 53 billion in the last decade (2002, US$58.3 billion).124 In contrast total long-term capital flows to developing countries increased from US$ 98 billion in 1990 to over US$295 billion in 2000.125 Nevertheless the share of ODA decreased121 See OECD (2003).122 See Fontagné (2003), 6.123 Chapter 3 of the OECD (2004) report describes the „MillenniumDevelopment Goals’ (MDG) defined at the UN Millennium Summit.The Millennium Declaration signed by 189 countries, including 147Heads of State, in September 2000 can be found on the UN websiteat http://ods-dds-ny.un.org/doc/UNDOC/GEN/N00/559/51/PDF/N0055951.pdf?OpenElement.124 See OECD (2004), 22.125 See European Commission (2002), 65.
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from 0.33 percent in 1990 to 0.23 percent of GDP in 2002126 andhence further away from the recommended aid target of 0.7 percent.In 2002 only five OECD members (Denmark, Luxembourg, Netherlands, Norway and Sweden) have reached the level of 0.7 percentGDP to be spent on ODA.1. Costs of Agricultural DistortionAccording to the comprehensive analyses of international organizations increased market access for agricultural products would workto directly address poverty reduction in developing countries.127While the rapid expansion of demand for unskilled labour in manufacturing and urban services in many developing countries hassharply reduced rural poverty, about three quarters of the world’spoor still live in rural areas, where agriculture is often the dominanteconomic activity. Agriculture accounts for about 27 percent ofGDP in developing countries, a similar share of exports and 50percent of employment. This dependency on agriculture is mostpronounced in LDCs and in Sub-Saharan Africa, where, in addition,production tends to be concentrated in only a small number ofcommodities.Agricultural distortions inflict large costs on the global economy, by some estimates exceeding those of protection in the industrial sector. Based on CGE model simulations with the GTAP5model the IMF and World Bank study finds that the global incomeloss from agricultural distortions worldwide may be well over US$128 billion (US$ 98 billion in industrial and US$ 30 billion in developing countries).128 Most of the cost results from market pricesupport measures, of which tariffs are the dominant form. Thelosses of export revenues (US$ 378 billion worldwide) are muchlarger, by a factor of three to four in the case of developing countries (US$ 256 billion in industrial and US$ 122 in developingcountries).Interestingly, both groups of countries suffer the most fromtheir own restrictive polices. For developing countries, these policies are responsible for about 71 percent of the total income loss,while for developed (industrial) countries, the share is as high as 95126 See OECD (2004), 62.127 IMF / The World Bank (2002), chapter III; UNCTAD (2003), chapter III; WTO (2003), chapter II.128 IMF / The World Bank (2002), 32.
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percent. Within the group of the industrial countries the major players in protecting its agricultural markets are the United States andthe European Union.129 For example, the United States granted US$3.6 billion subsidy to US cotton producers in 2001.1302. Removing Agricultural Subsidies alone is Negative forDeveloping CountriesWhile global liberalization of both tariffs and subsidies would benefit every region, the static effect of removing subsidies alone islikely to be negative for developing countries as a group and manyindividual countries.It is less clear whether the various objectives contemplated inthe DDA are mutually compatible.131 If market access is favourableto growth in the LDCs, then liberalizing imports in the North on amultilateral basis will erode the margin of preference conceded toLDCs and will reduce their access to these markets. If less distorting farm support in the North increases world prices of food products, LDCs that are net importers of food will be adversely affectedthrough negative terms-of-trade effects.132This can be demonstrated by the simulation outcomes of theUNCTAD study.133 The elimination of export subsidies in agriculture, without parallel changes in tariffs leads to modest worldwidewelfare losses. The distributional implications are the following(see Table 9): After the elimination of subsidies, all regions exceptEurope start increasing their agricultural value-added. However,since many countries still face high protection against their agriculture export, this shift might be counterproductive. Most regionsactually stand to lose from the elimination of subsidies, while thegains appear to be very concentrated in Western Europe – which (inparticular due to the CAP of the EU) is the area characterised by thehighest value of initial subsidies – and in regions that are net agri129 For a short description of the main features of the US Farm and Security and Rural Investment Act of 2002 and of the EU’s CommonAgricultural Policy (CAP) and its reform proposals, the 2002 midterm review of the CAP, see IMF / The World Bank (2002), 29 etseq.130 See Fontagné (2003), 6.131 Ibidem, 3.132 For similar results, see also Hoekman et al. (2002).133 UNCTAD (2003), 44 et seq.
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cultural exporters, such as Oceania and Latin America. WesternEurope (the EU) gains both from better resource allocation (theelimination of subsidies brings the specialization pattern of thisregion more into line with its natural comparative advantages) andfrom improved terms of trade. On the other hand the removal ofexport subsidies directly reduces the agricultural exports of WesternEurope, thus leading to a lower world supply for these goods and toimproved terms of trade for Europe, whose exports are sold now athigher prices on international markets. As for the terms-of-tradeeffects on the other regions, they depend on their agricultural exportpattern. Countries that are net agriculture and food exporters (e.g.North America, Oceania and Latin America) are likely to gain,while those that are not may lose (e.g. Asian NICs and North Africaand Sub-Saharan Africa) – which hits again primarily the developing countries.Table 9: Liberalization in Agriculture: Export Subsidy Removal.Results of Model Simulations of the Elimination of ExportSubsidies in Agriculture, without Parallel Changes in TariffsWelfare effectsAggregate trade dataPercentage Total value (‘97 Exports Terms of tradechangeUS$ mill.)Percentage change-0.008-73.90.008-0.007-0.015-178.80.006-0.013-0.000-1.90.1250.0820.0332.410.0-0.1240.065-0.001-88.0-0.0130.013-0.117-891.5-0.056-0.172-0.113-354.9-0.234-0.161
RegionsAsian NICsChinaSouth AsiaWestern EuropeNorth AmericaTransition econ.Sub-SaharanAfricaOceania0.024100.1North Africa and-0.283-2.209.7Middle EastLatin America0.00480.3Japan-0.013-484.9Rest of the World -0.063-158.7Total-1.851.7Source: UNCTAD (2003), 44 et seq.
0.107-0.148
0.119-0.296
0.056-0.047-0.225
0.035-0.061-0.189
3. Agricultural Liberalization Benefits all CountriesA comprehensive agricultural liberalization, which is both part ofthe built-in WTO agenda and one of the major pillars to the Doha
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agreement could be beneficial for both the developing and the developed world. Whereas an isolated elimination of export subsidiesmay have negative effects for the developing countries, tariff liberalization is beneficial for all countries, depending, however, on theexisting rates of protection in the particular commodities.Table 10: Agricultural Tariff Liberalization: Results of ModelSimulations of a Worldwide 50 % Cut in all Agricultural TariffsWelfare effectsAggregate trade dataPercentage Total value (‘97 Exports Terms of tradechangeUS$ mill.)Percentage change0.3423,363.60.888-0.0720.082964.01.199-0.0830.074361.21.954-0.3020.0211,562.10.4760.0060.0463,613.30.9140.2660.118900.81.474-0.045
RegionsAsian NICsChinaSouth AsiaWestern EuropeNorth AmericaTransitioneconomiesSub-Saharan0.072AfricaOceania0.419North Africa0.387and Middle EastLatin America0.073Japan0.116Rest of the World 0.110TotalSource: UNCTAD (2003), 43.
226.2
1.810
-0.210
1,719.83,033.8
2.2992.829
1.833-0.595
1,304.74,221.2277.121,547.9
1.7081.7632.248
0.056-0.3920.223
According to UNCTAD simulations, a worldwide reduction of50 percent in all agricultural tariffs brings about an aggregate welfare gain of US$ 21.5 billion (see Table 6).134 All the world regionsappear to gain, but gains differ widely both in absolute and in relative terms. The largest absolute gains are captured by Japan, NorthAmerica, the Asian NICs, North Africa and the Middle East andOceania. In percentage terms, those regions that appear to gainmost are Oceania, the Asian NICs and North Africa. The estimatedpercentage gain for Sub-Saharan Africa and Latin America arerelatively low. The aggregate trade data indicate that the value ofexports increases in all regions after liberalization. Lower worldwide protection in agriculture translates into increased worldwide134 Ibidem, 43.
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import demand and improved trade opportunities in all areas. Interestingly, the strongest increases are in the developing regions NorthAfrica and Middle East, Oceania and Sub-Saharan Africa. In Western Europe the export gains are modest (see Table 10).In addition to this static welfare gains a worldwide liberalization in agricultural trade would cause additional gains. On the onehand it would stabilize agricultural prices and lead to a downwardpressure on world prices for key commodities. Developing countries suffer the most from price instability as they have fewer resources available to smooth consumption and income flows. On theother hand agricultural liberalization is likely to have long-term,dynamic effects on world production and trade. These effects couldinclude increased farm investment and enhanced technologies andproductivity in response to better market opportunities. Accordingto the IMF and the World Bank for the developing countries to reapthe full benefits of liberalization, a framework of supportive policies is required – including the elimination of anti-agriculture biasesin pricing policies so that (higher) world prices are passed throughto the farm-gate – and essential infrastructure (transport, logistic,credit, extension services).135Hoekman and his collaborators in recognizing that a number ofdeveloping countries could lose from agricultural liberalization (inparticular from reducing domestic support measures) suggest thatagricultural reforms should be accompanied by compensationmechanism, which could include additional ‘aid for trade’.136I. Developing Countries’ Market Access in Textile and ClothesThe production of textiles and clothing is intensive in unskilledlabour and uses only simple technology. Therefore, a regional shiftin specialization (from the developed to the developing countries)took place since the sixties. In the mid-1960s, developing countriesaccounted for 15 percent of world textile exports and less than 25percent of world clothing exports. By the end of the 1990s, theseshares had reached 50 percent and 70 percent respectively.137 Although exports of textiles and clothing (T&C) account only for 5.5percentage points of total world exports (see Appendix, Table A1)their production is highly concentrated in the developing countries.135 IMF / The World Bank (2002), 33.136 Hoekman and Hoekman et al. (2002), 18.137 See IMF / The World Bank (2002), 36 et seq.
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This development has created a high dependency on these productsfor export earnings. In some developing countries textiles andclothing account for more than 80 percent of total merchandiseexports.138 In Pakistan (73 percent), Mauritius (64 percent), SriLanka (54 percent), Tunisia (43 percent), Turkey (38 percent) andMorocco (34 percent) these products account for more than onethird of their total exports. Then there is a group of countries withexport shares between 20 and 30 percent (India, 28; Romania, 24;China, 21 percent).Despite extensive quantitative restrictions discriminatingagainst developing countries and high tariffs in developed countries(the main export markets for most developing countries) there wasa remarkable growth in T&C exports. For nearly half a century,world trade in T&C has been subject to quantitative restrictionsunder derogation from GATT rules, beginning with Japan’s 1955voluntary export restraints on its export of cotton fabrics andclothing to the United States. These led to the multilateral ShortTerm Arrangement regarding International Trade in Cotton Textilesin 1961, the Long-Term Arrangement in 1962, and eventually theMultifibre Arrangement (MFA) in 1974.139 The MFA expandedquantitative restrictions beyond cotton products to wool and manmade fibre products and was extended several times until the Uruguay Round Agreement on Textiles and Clothing (ATC) took effectat the beginning of 1995. In the MFA’s last year of operation, sixparticipants (Austria, Canada, EU, Finland, Norway, and the UnitedStates) applied quotas under the Agreement.The salient feature of the MFA was bilateral quotas. The MFAcalled on importing countries to endeavour to grow quota volumesby at least 6 percent per year. In practice quota growth was lowerfor established suppliers, while small and new exporting countrieswere generally granted more generous quota growth. MFA quotasact like bilateral export restrictions. The export tax equivalents ofthese quotas vary substantially across countries. The most competitive exporting countries, such as China and India, face more stringent restrictions than the less competitive countries. The export taxequivalents of quotas for textiles varied from zero in Japan to 7.8percent in Canada (USA, 6.7 percent; EU, 4.5 percent). The tax138 Cambodia, Macao SAR and Bangladesh, see IMF / The World Bank,(2002), 38.139 See IMF / The World Bank (2002), 36.
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equivalents of quotas for clothing were higher (Japan zero; Canada,16.8 percent; USA 11 percent; EU 5.3 percent).140Under the ATC, quotas are to be phase out progressively overa 10-year period (ending in 2005). In the first stage (January 1,1995), WTO members were required to integrate products representing not less than 16 percent in volume terms of their 1990 imports of textiles and clothing products. In stage 2 (January 1998),not less than a further 17 percent had to be integrated, and in stage 3(January 2002), a further 18 percent. Finally, on January 1, 2005,all remaining products (amounting to a maximum 49 percent) are tobe automatically integrated. After integration, regular GATT safeguards apply.In spite of the time plan of the ATC, market access barriersstill remained. With the exception of Norway, whose T&C importshave been all freed from quotas, the major importers (the UnitedStates and the EU) eliminated only a small percentage of quotasoriginally in place during the first two stages (the USA from 750quotas only 13, the EU from 219 only 14). Therefore, the vast majority of restrictions is left to be abolished at the end of the implementation period.141In addition to the MFA quotas, T&C imports are subject to exceptionally high tariffs. During the Uruguay Round tariffs on T&Cwere cut less than those on other manufactures, and tariff peaks andescalation (tariffs on clothing are higher than those on textiles) remain common in this sector. In OECD import regimes, tariff peaksaffect 27 percent of total tariff lines on T&C. Tariffs in the UnitedStates for textiles are 11.2 percent (for clothing 13.3 percent; for allmanufactures 2.8 percent), in the EU 9.1, 11.9 and 3.6 percent respectively, in Japan 8.5, 12.5 and 1.4 percent respectively and inCanada 15.7, 21.2 and 3.9 respectively.142 However, tariffs on T&Care also very high in developing countries (16 percent).According to simulations with the GTAP model by the IMFand the World Bank, the cost of barriers to trade in T&C importsare a substantial burden on both developing and industrial countries. The combined income loss for developing countries quota andtariffs on industrial country imports amounts to US$ 24 billion, andthe export revenue loss to US$ 40 billion. Industrial countries suffer140 Ibidem, 39.141 See ibidem, 41 for more details.142 See ibidem, 39.
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around half the income loss but almost the same export shortfall asdeveloping countries, namely around US$ 40-46 billion. As intradeveloping country trade accounts for about half of their total exports of textiles and 20 percent of clothing exports, the cost of barriers (mainly import tariffs) are larger for developing countries(US$ 28 billion) than for industrial countries (US$ 3 billion). Thelosses of exports amount to US$ 42 billion for developing countriesand only for US$ 9 billion for industrial countries. Overall, the incomes loss due to MFA quotas and T&C tariffs for the worldamount to US$ 66 billion, and the losses of export revenues areUS$ 137 billion world-wide.143 The same model simulated indicates that as many as 27 million jobs are foregone in developingcountries due to the combined effect of quota and tariffs.144 Onaverage, each job saved in developed countries by tariffs and quotasis estimated to cost 35 jobs in developing countries, many of whichare in China and India. MFA quotas and