fMost developing countries in Latin America and Asia; excludesHong Kong, Korea and Singapore (non-GSP nations)./g Included 37 ACP and LDCS under Lomé Convention./h Included ACP 32 countries not under the group of LDCs./IIncluded 11 LDCs but not under ACP countries./jIncluded all industrial countries, Hong Kong, Korea, Singapore and14 transition countries./k 127 countries; excludes Albania, Bosnia, Estonia, Latvia, Lebanon,Lithuania, Macedonia, Moldova, Vietnam, Yugoslavia./lExcludes 3 LDCs: Comoros, Djibouti and Tuvalu. 3 others (CongoDR, Kiribati and Zambia) are included in the GSP group./m Included 18 Caribbean countries or territories under CCCT./n Excluded 8 developing countries: Albania, Aruba, Bosnia & Her,Macedonia, Mongolia, Oman, Saudi Arabia, Yugoslavia./o Excluded Myanmar.Source: Hoekman / Ng / Olarreaga (2001), 14.
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2. Tariff EscalationThe practice of tariff escalation biases exports towards unprocessedresource-based commodities, characterized by low value-added.This may cause difficulties to commodity-dependent developingcountries in their attempt to diversify their export base. The patternof protection creates particular hurdles for countries taking the firststeps up the technology ladder. According to the IMF and theWorld Bank protection is relatively low for primary products, butincreases sharply for low-technology, labor-intensive food processing and light industries, declines somewhat in the medium-technology range – such as automotive products – and is lowest at theupper end of the technology spectrum (see also Figure 4).71 In asnapshot of the post-Uruguay Round tariff levels by product and byprocessing stage in the Quad markets the UNCTAD study showsthe following picture: First, with few exceptions, post-UruguayRound tariffs escalate (that means increase between these categories) not only between raw and semi-finished but also betweensemi-finished and finished goods.72On average, the escalation in Canada and Japan and the EU ishigher between raw and finished, while in the United States thehighest average escalation is found between semi-finished and finished goods. Tariffs tend to escalate not only in agriculture but alsoin manufacturing. The average post-Uruguay Round tariff for allindustrial products ranges from 0.8 percent on raw materials to 4.8percent on the finished product, resulting in an average tariff levelof around 3 percent.A more detailed analysis of tariff escalation, distinguishing between markets of developing countries shows that tariff escalationis not just a feature of developed markets but is present in fact(sometimes even more prominently) in developing countries aswell.73 As in the case of Quad countries, in most cases escalation indeveloping countries is greatest between raw and finished products.However, as in the case of the United States, in Asian NICs, there isde-escalation between raw and semi-finished products, and thehighest escalation is found between semi-finished and finishedproducts. Of course the pattern of escalation is different in the717273
IMF / The World Bank (2002), 14.UNCTAD (2003), 27.Ibidem, 28.
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world regions analysed by the UNCTAD: Asian NICs, South Asia,North America, Sub-Saharan Africa, Oceania, North Africa andMiddle East, Latin America.74 In summary, the evidence shows thattariff escalation is a quite widespread phenomenon that affect bothagricultural and industrial products, and is present in markets ofboth developed and developing countries (for a compact representation, see Figure 6).30
Agricultural Products
Industrial Products
25
Tariff rate (%)
20
15
10
5
0Developing
High incomeFirst stage
Semi processed
Developing
High income
Fully processed
Figure 6: Tariff EscalationSource: European Commission (2002), 83
At the May 2001 3rd UN Conference on LDCs, all industrialised countries for the first time committed to the objective of dutyand quota free access for all exports originating in LDCs. Such anemulation of the unilateral EU ‘Everything But Arms’ (EBA) initiative (opening markets to all LDC exports, by allowing duty andquota free access) launched in early 2001 by other major industrialised nations, would contribute significantly to LDCs’ opportunities for trade based growth. The EU was the major destination for
74
Ibidem.
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LDCs’ exports even before the EBA initiative was adopted.75 In1998, the EU accounted for 56 percent of their total exports. Moreover, the EU already had very low tariffs for LDC imports. Exportsof the main products liberalised by EBA were, however, very low.Eliminating protection will certainly enhance trade in the productsconcerned. Studies by the UNCTAD and Ianchovichina et al. onthe impact of EBA have forecasted large increases in welfare as aresult – between US$ 400 and US$ 317 million depending on thestudy.76 However, even prior to the adoption of EBA, levels of protection against LDC exports were far higher in other Quad countriesthan in the EU (see Figure 7). Thus if all Quad members were toadopt similar measures, the welfare impact would be much higher(US$ 1.8 bn to US$ 2.5 bn).7760
50
% of LDC exports
40
30
20
10
0Canada
European UnionExports facing tariffs > 0%
Japan
United States
Exports facing tariffs > 5%
Figure 7: Pattern of Protection Facing LDC Exports (pre-EBA)Source: European Commission (2002), 75.
757677
Council Regulation (EC) No 416/2001 of February 2001.UNCTAD (2001); Ianchovichina et al. (2001).See European Commission (2002), 84.
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Table 4: Liberalization in Agriculture: The Role of Tariff Escalation Results of Model Simulations of a 50 % Worldwide Cut inTariffs on Processed Agricultural ProductsWelfare effectsAggregate trade dataPercentage Total value (‘97 Exports Terms of tradechangeUS$ mill.)Percentage change0.101994.90.5780.0370.040475.40.697-0.0590.047230.71.215-0.2430.0221,613.20.3400.0380.0181,415.70.4030.0800.098750.01.150-0.039
RegionsAsian NICsChinaSouth AsiaWestern EuropeNorth AmericaTransitioneconomiesSub-Saharan0.049153.0AfricaOceania0.232951.4North Africa0.2602,036.4and Middle EastLatin America0.0571,013.8Japan0.0582,127.0Rest of the World 0.096242.1Total12,003.4Source: UNCTAD (2003), 45 et seq.
1.324
-0.220
1.4251.706
1.003-0.408
1.0421.1961.843
0.042-0.2550.183
The effects of the elimination of tariff escalation in agriculturewere evaluated by the UNCTAD with the help of CGE modelsimulations.78 The model used in the simulations was the standardstatic GTAP5 model, with perfect competition in all sectors andconstant returns to scale.79 The database was GTAP5 (1997 data),modified by the UNCTAD to account for tariff preferences (relatedto GSP, no-reciprocal agreements as the Lomé-Cotonou agreement,and regional trade agreements) available from the UNCTADTRAINS database.80 The model was aggregated to cover 12 world
787980
UNCTAD (2003), 45 et seq.See Dimarana / McDougall (2002).UNCTAD-TRAINS (Trade Analysis and Information System) is acomprehensive computerized information system at the HS-basedtariff line level covering tariff, para-tariff measures as well as importflows by origin for more than 140 countries. See the UNCTADTRAINS website at http://r0.unctad.org/trains/. In country notes thishomepage also informs on trade control measures adopted by se-
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regions (3 of which comprise developing countries: South Asia,Sub-Saharan Africa, North Africa and Middle East) and 6 sectors(natural resources, manufactures, primary agriculture, processedagricultural products, textiles and apparel, services).81A 50 percent worldwide cut in tariffs on processed agriculturalproducts would result in increase world welfare by about 12 US$billion, roughly half those obtained from the liberalization of allagricultural sectors. The largest welfare gains are received in Oceania, North Africa and Middle East and in the Asian NICs (see Table 4). The elimination of tariff escalation in the agricultural sectorimproves export chances for developing regions such as SouthAsia, Sub-Saharan Africa as well as North Africa and Middle East(see Table 4).E. Contingent Protection1. Antidumping MeasuresAmong the trade remedies permitted under WTO rules, antidumping has become by far the most widely used, in both industrial anddeveloping countries. Since 1995 over 1,800 antidumping investigations have been initiated.82 While industrial countries (511 cases)have traditionally been the main users of such measures, developingcountries (1086 cases) have been more active in recent years, led byIndia, Argentina, Brazil, and South Africa. The transition countriesinitiated 248 cases since 1995. In the seven years to 2001, developing countries initiated almost two thirds of all investigations, wellin excess of their share in world trade. However, developing countries have also been the target of nearly 60 percent of investigations,mostly initiated by other developing countries.According to the IMF and the World Bank the recent steep risein antidumping investigations may put at risk the predictability andnon-discriminatory application of trade policies.83 Recent enforcement practices have raised serious concerns about the influence ofspecial interests on public policy, and may impose large costs onconsumers and downstream industries in importing countries.
818283
lected developing countries. HS is the harmonized system of tariffclassification.See UNCTAD (2003), 50 et seq.See IMF / The World Bank (2002) 15.Ibidem, 15 et seq.
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Moreover, the deterrent effect of an investigation typically reacheswell beyond the targeted exporter, and impedes incentives to passon efficiency gains.84 Additionally the frequency of antidumpingmeasures increases during, and may thus reinforce, economicdownturns.85 Small firms and countries face greater uncertainty asthey often lack the resources to challenge antidumping. The introduction of competition law principles and of public interest clauses,giving affected importers and users legal standing to argue againstprotection, could reduce the protectionist bias of antidumping.862. Standards and Non-tariff Barriers to TradeMany developing countries are concerned that they are ill-preparedto meet increasingly complex and burdensome standards and regulations. Such regulations play an important role in facilitating tradeby ensuring quality, safety and technical compatibility. However,there is often a risk that such regulations may be captured by special interests, particularly when regulatory processes are not transparent. And because the industrial countries are leaders in suchstandards, conditions might be imposed that are tighter than neededto achieve their objectives and hence just serve as a new kind ofprotectionist measure.Technical barriers have become a key concern regarding market access. Annual notifications of new technical barriers (includinghealth and safety standards, and product standards) to GATT/WTOincreased steadily from a dozen or two in the early 1980s to over400 in 1999. Low- and middle-income countries reported that overthe period from 1996-1999 more than 50 percent of their potentialexports of fresh and processed fish, meat, fruit and vegetables intothe EU were ‘prevented’ by their inability to comply with SPS(Sanitary and Phytosanitary Measures) requirements.87 SPS andother technical requirements have been viewed by developingcountry trade officials as a greater constraint on their ability to exploit their comparative advantages and hence to export than tariffsand quantitative restrictions.According to Henson et al. surveying government officials in65 low- and middle-income countries SPS requirements were con84858687
Finger (1993).Knetter / Prusa (2000).Hoekman / Mavroïdis (1996).See IMF / The World Bank (2002), 16.
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sidered the most significant impediment to exports to the EU.88Other technical requirements (e.g. labeling regulations or compositional standards) were also considered significant impediments totrade. Other factors of impediments are transport and other directexport costs, tariffs and only at the last palce quantitative restrictions.89 Overall, the developing countries have found it difficult toparticipate in designing standards in ways that better reflect theirconcerns and capabilities, and to challenge them where they wereimposed in a discriminatory manner. A number of agreements inthe Uruguay Round have addressed these concerns by strengtheninginternational rules governing product standards in order to minimize their abuse for protectionist purposes. Among others, these arethe Agreement on Technical Barriers to Trade (TBT, for trade inmanufactured products), and the Agreement on the Application ofSanitary and Phytosanitary Measures (SPS, relating to health andsafety for humans and animals). Nevertheless, SPS and TBT adversely affect LDCs exports.90F. Trade PreferencesMost developing countries have preferential access to industrialcountry markets for a wide range of products. This departure fromthe traditional non-discrimination principle of the GATT has beensanctioned under the GSP. In 2001, some 15 such schemes were ineffect, though country coverage and preference margins over applied MFN tariffs varied widely. In addition to GSP an importantrecent development has been the proliferation of bilateral and regional free trade agreements between industrial and developingcountries. Such agreements have to cover substantially all trade,unlike GSP schemes. However, the drawbacks related to rules oforigin apply to both measures.According to the IMF and the World Bank the benefits ofmany GSP schemes for their beneficiaries have been limited.91 Thereason is that preference margins are smaller for products that theimporting country deems to be sensitive – which are also among themost protected.92 Ozden and Reinhard found evidence that the8889909192
Henson et al. (2000).See also IMF / The World Bank (2002), 17.See Fontagné (2003), 5.IMF / The World Bank (2002), 18.Ibidem.
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availability of unreciprocated market access preferences has undermined the incentives of benefiting countries to engage in tradeliberalization, thus at times perpetuating anti-export biases in theirtrade regimes.93 The cost of monitoring of rules of origin to avoidtransshipment may have reduced the benefits expected from suchschemes. Rules of origin are akin to local content requirements(value added thresholds). Costs arise both from exporters seeking tobenefit from preferences by producing inputs from less efficientsources (trade diversion), and from the administration of, and accounting for ‘origin’.94 Brenton and Manchin have shown that as aresult of unattractive rules of origin, only one-third of imports thatwere eligible for preferential treatment did in fact enter the EUmarket with reduces duties.95 This problem is particularly acute fortextiles and clothing.Recently market access under GSP schemes has been enhancedon a regional basis, in particular for African countries. To date 36Sub-Saharan African countries have qualified in principle for preferential access under the United States’ AGOA (African Growthand Opportunity Act), adopted in 2000 (signed into law on May 18,2000).96 Margins of preference are substantial for textile and apparel products as well as for a range of other light manufactures andfood products. In order to benefit from this scheme, countries haveto meet, in addition to relatively tight rules of origin and standardGSP criteria, requirements relating to child labour and the protection of internationally recognized workers’ rights. The administrative requirement involved in documenting eligibility may explainwhy only 15 countries had availed themselves of benefits under thisscheme in the year 2002, with most of the benefits accruing to fourcountries – Gabon, Lesotho, Nigeria, and South Africa and withfuel accounting for 85 percent of AGOA imports.97 Mattoo et al.estimate that by 2008 the volume of African exports to the US market may rise by an additional 6-7 percent.98 Presently Sub-Saharan939495969798
Ozden / Reinhardt (2002)IMF / The World Bank (2002), 18 et seq. give examples in case ofNAFTA and the EU.Brenton / Manchin (2002)IMF and the World Bank (2002), 19.Ibidem; and USITC website at http://www.usitc.gov/.Mattoo et al. (2002).
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African exporters hold their US market share in textiles and clothing of 1.6 percent. In 2002 the AGOA imports increased by 10 percent to US$ 9 billion. Excluding petroleum imports, the AGOAimports were less than US$ 2.2 billion.99 However, effective preference margins will decline as quotas under the WTO Agreement onTextiles and Clothing are phased out.A number of industrialised countries have recently grantedcomprehensive tariff and quota free access to LDCs. The EU’sEBA initiative has extended such preferential access since cominginto effect in March 2001. It covers all products, except for sugar,bananas, and rice, which are to be liberalised more gradually.100Unlike the EU’s GSP scheme, benefits under the EBA are extendedon an indefinite basis, subject however, to broad safeguards. Similar schemes providing for virtually unqualified duty- and quota-freeaccess for LDCs have also been adopted by New Zealand, Norway,and Switzerland. Such broad-based tariff-free market access forLDCs can assist in diversifying their export structures.101 If suchschemes are adopted by all Quad markets, LDC exports to the Quadmight increase by US$ 2.5 billion, or about 11 percent, with relatively limited cost in terms of trade diversion.102Table 5: Market Access for LDCsDuty-Free imports into developed countries from developing countriesand LDCs. 1996-2001 (percent)199619971998199920002001Excluding armsDeveloping54.850.549.957.262.865.7countriesLDCs71.567.277.777.175.475.3Excluding arms and oilDeveloping56.851.549.958.165.166.0countriesLDCs81.175.575.073.670.569.1Source: WTO (2003), 126.
In spite of all these activities the performance of the LDCs ismixed. The share of the value of LDC exports, excluding arms, that99 See http://www.agoa.gov/resources/TRDPROFL03.pdf.100 See Breuss / Griller / Vranes (2003).101 Bachetta / Bora (2002).102 IMF / The World Bank (2002), 20.
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enters developed country markets duty-free has increase since 1996(from 71.5 to 75.3 percent). However, when the figure is furtheradjusted for oil there is a clear downward trend by around 12 percentage points (see Table 5). This downward trend reflects the shiftin LDC exports to products and export markets that are not dutyfree. In fact, the trade values show that there is basically no increasein the value of duty-free imports from LDCs while at the same timethere is a significant increase in the dutiable imports from LDCs.103In 2001, the average trade weighted tariff facing LDC agricultural exports into developed country markets was 3.2 percent. Theequivalent figures for textiles and clothing are 4.5 and 8.5, respectively.104LDCs account for less than one half of one percent of worldtrade. In the Doha Ministerial Declaration, Ministers committedthemselves to considering additional measures to progressivelyimprove market access for LDCs and to the objective of duty-freeand quota-free access for products originating in LCDs. Similargoals were also proclaimed in the context of the eighth MillenniumDevelopment Goal (MDG). The WTO noticed that in 2000, thedistribution of markets for LDC products remains heavily concentrated.105 Sixty-three percent of all exports go to the EU and theUnited States. In addition to the EU and US, the major developedcountry markets are Australia, Canada, Japan, Norway and Switzerland. Together the developed countries import 69 percent of totalLDC exports. Three of the top five markets are developing countries in East Asia, China, Republic of Korea and Thailand. Thesecountries account for 20 percent of total LDC exports. The remaining top 10 markets are: Canada, India, Japan, Singapore and Chinese Taipei. The market penetration of LDC exports is greatest inIndia and Thailand at 2.1 percent, followed by the EU at 1.4 percent. This in a way underlines the general trend of the last decade ofa steady increase of the South-South trade noticed by the WTO.106Accordingly, over the eleven-year period (1990-2001), South-Southtrade expanded twice as fast as world trade. The share of developing country exports to developing countries rose from 28 percent to103 WTO (2003), 126.104 Ibidem.105 Ibidem.106 Ibidem, 24 et seqq.
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37 percent of their total exports. In the same period, the importshare rose by 10 percentage points to over 41 percent. More thantwo-thirds of intra-developing country trade originates from and isdestined to developing Asia.107G. Regionalism versus Multilateralism1. Increasing Attractiveness of RTAsThe global trading system has seen a sharp increase in regionaltrade agreements (RTAs) over the past decade. A total of 259 RTAshad been notified to the GATT/WTO by the end of December2002,108 although only 176 RTAs are currently in force. An additional 70 RTAs are estimated to be operational although not yetnotified and about 70 are under negotiation. As of March 2003,only four WTO members – Hong Kong, China; Macao, China;Mongolia and Chinese Taipei – were not party to a regional tradeagreement. With the sole exception of Mongolia, these WTO members are all engaged in negotiations on preferential agreements.While the recent rapid growth of RTAs began in the 1990s, theseeds of this development were sown in the early 1980s. Part of theimpulse towards regionalism was driven then by the bleak prospectsfor progress on the multilateral agenda and the decision of theUnited States to explore the preferential approach to trade. TheUnited States signed its first free trade agreement (FTA) with Israelin the mid-1980s, followed by an FTA with Canada in 1988 and theNorth American Free Trade Agreement (NAFTA) in 1994. Thecurrent negotiations on free trade for the Americas (FTAA) spantwo continents and involve over 30 countries. More recently, alsoJapan and other Asian countries have departed from exclusive reliance on MFN-based trade.The WTO sees the major explanation for the expansion in thenumber of RTAs in the 1990s in the collapse of the COMECON(the preferential arrangement involving the old Soviet Union andEastern European countries) and the alignment of the Central andEastern European countries (CEEC) to the EU.109 Of the 123 newRTAs in force since 1990 (see Table 6), covering trade in goods,about a third were signed among transition economies (e.g.107 Ibidem, 25.108 Ibidem, 46 et seq.109 Ibidem, 46.
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CEFTA). Another third were agreements concluded as part of theeffort of the transition economies to integrate with the EU (e.g.Europe Agreements).Regional agreements among developing countries (SouthSouth RTAs) account for about 30-40 percent of all RTAs currentlyin force, including those not notified to the WTO. In Africa alone,there are about eighteen trading agreements. Partly, they establishcustoms unions or common markets. They tend to encompass alarge number of countries and have extended transition periods,often 20 or 30 years, which makes some recent RTAs more a declaration of intent than agreements affecting actual trade flows.The number of RTAs signed between developed and developing countries (North-South RTAs) has increased over the years. TheEU has played a major role in this respect through a series ofagreements with a number of countries including Turkey (customsunion since 1996), Mexico, South Africa and Chile. Euro-Mediterranean Association Agreements have also been concluded or arebeing negotiated between the EU and the countries of North Africaand the Middle East. These replace the earlier non-reciprocal RTAssigned in the 1970s. Moreover, the post-Lomé Cotonou agreementswill be negotiated between the EU and the ACP countries on thebasis of reciprocal preferential trade.Table 6: Notified RTAs in Goods by the Date of Entry into Forceand Type of Partners (as of January 2003)N-NN-SN-ES-SS-EE-ETotal1958-196420010031965-196900001011970-1974530200101975-197905010061980-198421010041985-198911020041990-19943312506291995-1999371041228642000-2002011454630Total163126211740151N (North) = developed countries, including Canada, the United States, EU(15), EFTA, Japan, Australia and New Zealand; E (East) = transitioncountries, including the former Soviet Union, Eastern and Central Europe,the Baltic States and the Balkans; S (South) = developing countries, including the remaining countries.Source: WTO (2003), 47.
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There are several economic and political considerations whycountries are interested in regionalism.110 Anyhow, the international trading system is increasingly characterized by a complexnetwork of preferential trade regimes, sitting side-by-side with theWTO multilateral trading system.111 There is a rise in cross-regional bilateral agreements, the growing involvement of countriesthat have traditionally remained outside regional arrangements, thedevelopment of inter-linked (overlapping) agreements, and considerable variations in the design and content of RTAs. One third ofthe FTAs currently under negotiations are among countries thatbelong to different geographical areas. All major countries are involved in cross-regional FTAs. The EU has concluded FTAs withMexico, Chile, South Africa and numerous other African and Middle Eastern countries and is in the process of negotiating regionalagreements with ACP countries under the framework of the Cotonou Agreement. The EU is also negotiating an agreement withMERCOSUR. EFTA has signed a FTA with Mexico and variousAfrican countries, and is negotiating FTAs with Canada, Chile andSouth Africa. The United States signed a FTA with Jordan, and isnegotiating with Australia, Chile, Egypt and Singapore. Countriesthat have traditionally remained outside regional agreements arenow negotiating and joining RTAs. The last major country to jointhe trend is Japan, which singed a FTA with Singapore in January2002.Table 7: Preferential Trade Share of Intra RTAs Trade inMerchandise Imports, 2002 and 2005 (as of January 2003)Western EuropeTransition economiesNorth America (incl. Mexico)AfricaMiddle EastLatin America (excl. Mexico)AsiaWorldSource: WTO (2003), 48.
200064.761.641.437.219.218.35.643.2
200567.061.651.643.638.163.616.251.2
110 See WTO (2003), 49 et seqq. for a discussion.111 See WTO (2003), 53 for an impressive world map of such a network.
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The significance of RTAs is demonstrated in the Tables 7 and8. Table 7 shows that 43 percent of world merchandise trade nowoccurs under the umbrella of preferential trade arrangements. Thisshare will increase as more RTAs are negotiated in the future. If allRTAs under negotiation at present are successfully concludedwithin the next three years, over 50 percent of world merchandisetrade will then occur among countries linked by preferential agreements.Table 8: Intra-regional Export Shares, 1970-2001 (Ratio of tradeamong members over total trade with members and non-members)1970 1980 1985 1990 1995 2000 2001 in forcesinceEurope and North AmericaCEFTA...……… 14.6 11.5 12.41993EU59.5 60.8 59.2 65.9 62.4 62.1 61.21957NAFTA36.0 33.6 43.9 41.4 46.2 55.7 54.81994