Harnessing trade for development

Benefiting from market access opportunities

Developing countries cannot achieve sustainable growth and poverty reduction unless they integrate into the world economy. Trade reforms are necessary, but not enough to maximise the potential benefits of trade. Negotiations at the WTO Ministerial Conference in Hong Kong in December, 2005 should also focus on establishing an 'aid for trade' mechanism.

At the 2001 Doha conference, the World Trade Organization (WTO) members agreed to launch the Doha Development Agenda. This included multilateral negotiations to reduce trade-distorting policies and strengthen the WTO's relevance to development. Although removing trade barriers can be a powerful tool for poverty reduction, global gains from a Doha Round outcome will be unequally distributed and some poor countries may lose from global trade reforms. Complementary actions and international support are needed to enable poor countries to exploit market access opportunities and manage adjustment costs.

The negotiating agenda confronting developing countries in trade talks is complex (see box below for a summary of key issues in the Doha Round).

The challenge is to determine the areas of trade offering the highest gains, the adjustment costs involved in introducing reforms, and the complementary policies needed to benefit from them. This is made more complex because many developing countries are engaged in regional integration efforts and in bilateral negotiations with developed countries such as the European Union - African, Caribbean and Pacific (EU-ACP) Economic Partnership Agreement (EPA) negotiations, in parallel with the Doha negotiations.

The question therefore is - what can developed and developing countries do to generate the highest payoffs from trade agreements? This issue of id21 insights suggests that improving market access, which includes removing barriers that impede developing countries' ability to export goods and services should be the highest priority, complemented with expanded 'aid for trade'.

Negotiating the Doha Round

Agriculture is a key issue. As Peter Tulloch notes, barriers are particularly high for agricultural products in the Organisation for Economic Cooperation and Development (OECD) countries, justifying the emphasis on agriculture in the Doha negotiations. Developing countries also have higher average levels of protection for agriculture. Achieving greater disciplines on agricultural subsidies is important for negotiations and WTO disputes settlement. But as Marcelo Olarreaga argues, although subsidies distort trade and production, market access matters more for poorer countries because trade barriers have a larger effect on the world prices of their products. Abolishing export subsidies and disciplining the use of production subsidies is important. But without lowering border protection in high-income countries global profits from removing subsidies will be small.

The importance of improved market access is not limited to agriculture. Developing countries have much higher protection of manufacturing industries than OECD countries. Low-income developing countries, therefore, face the highest level of trade protection in other developing countries, rather than in developed countries.

Whether the Doha negotiations can substantially liberalise trade barriers is debatable. Progress has been limited and slow. This partly reflects resistance from groups who may lose from the reforms. Some groups in all countries will incur adjustment costs from bold trade reforms. The total gains from trade liberalisation will exceed total losses, especially over time. Thus the gainers could compensate the losers, while still improving their own welfare. But in practice such compensation often does not occur.

One source of potential loss for many developing countries is the erosion of preferential access to OECD markets. Trade preference programmes can benefit countries having the capacity to use them, as Chris Stevens discusses in his article. It is important to address concerns over preference erosion. Trade preferences are basically a form of aid. The Doha round offers an opportunity to shift to forms of support such as 'aid for trade' which are more direct and efficient and move away from preferential trade agreements which are discriminatory.

Beyond negotiations

Market access is a necessary but insufficient condition for harnessing trade for development. In many developing countries, domestic supply constraints are the main reason for the lack of trade growth and diversification. Without improvements in supply capacity and reduced transactions costs, trade opportunities cannot be fully exploited and the potential gains from trade will not be realised.

Research on the impact of global trade reforms on the poverty of producers in goods affected by trade barriers confirms the need for complementary measures. For example, Irene Brambilla's work on Zambia, where two-thirds of the population are poor, suggests that trade reforms in cotton will have a limited effect on household consumption and income. Even an ambitious Doha Round outcome can generate only small changes in price. Reforms in marketing and assistance to increase productivity can have much larger effects. For the Zambian economy, the role of trade reform is even smaller, as most of its exports are metal commodities which do not face trade barriers.

At the macroeconomic level as well, Susan Prowse argues that concerted efforts to expand 'aid for trade' - development assistance to strengthen trade capacity and reduce operating costs - can have high returns for increasing growth and reducing poverty. More aid for trade could help realise ambitious global trade reforms as it would assure poorer countries that they too would benefit. Aid could also develop the capacity of countries to identify trade and investment constraints. The share of aid for trade in total aid commitments has increased in recent years but represents only about four percent of total aid. Aid for trade cannot substitute for progress on market access or unilateral domestic reform. However, it can increase the benefits of trade opportunities for many poor countries by supporting their own reforms while helping to liberalise trade substantially.

To be effective, the 'aid for trade' effort has to address trade-related priorities determined by national governments. The priorities may not be the policy areas subject to WTO rules and requirements as some, such as the rules on intellectual property protection. As Miguel Lengyel points out, the Uruguay Round multilateral trade negotiations showed that WTO agreements may not benefit all members, when implementation costs outweigh the benefits.

Regional trade agreements both among developing countries and between developed and developing countries are other powerful instruments to harness trade for development. As with the WTO agreements, the challenge is to use them to address priority areas where the potential benefits for developing country participants are greatest. A major problem with regional agreements, as with trade preference programmes, is that they discriminate among developing countries. Focusing on the case of ACP countries, Dominique Njinkeu argues that there is a need for greater coherence between regional and multilateral efforts.

Exploiting and expanding trade opportunities

Global trade reform, in itself, is not enough to ensure positive outcomes for everyone. For developing countries to benefit from the reforms, several steps are needed:

• Governments have to set up mechanisms to be able to assist groups who may lose from trade reforms and be prepared to remove policy or infrastructure constraints for private investment and employment creation.
• Current preference-granting countries can offer other forms of support to compensate for the losses from preference erosion. Global losses from potential preference erosion will be less than the expected global net gains from bold trade reforms. Funds for compensation can be generated if the political will is mobilised.
• Larger gains from reforms are conditional on new employment opportunities, higher wages and a shift from subsistence agriculture. Complementary reforms and investments are needed to stimulate the desired supply response to new opportunities. Measures such as reducing transportation costs from remote areas, increasing farm productivity through extension services or improving the investment climate to support the creation of new employment opportunities are important.
• Governments need to assess what the costs and benefits of any WTO agreements are. This is complex and the solution probably involves a mix of differential treatment to developing countries to allow flexibility and aid to help implementation of WTO obligations.
• To realise the development promise of trade agreements, developed-developing country arrangements such as the EU's EPAs should address national priorities to achieve development objectives. This requires greater emphasis on using such agreements to pursue non-discriminatory market access liberalisation and complementary policies.

Bernard Hoekman
Development Research Group
The World Bank,
1818 H Street, NW
Washington DC
USA 20433
T +1 202 473 1185
F +1 202 522 1159
bhoekman@worldbank.org

See also

Strengthening the Global Trade Architecture for Economic Development: An Agenda for Action.
www.ycsg.yale.edu/focus/gta/GTA_policy_brief.doc

Views expressed on these pages are not necessarily those of DFID, IDS, id21 or other contributing institutions. Copyright remains with the original authors but (unless stated otherwise) any article may be copied or quoted without restriction, provided both source (id21, insights) and authors are properly acknowledged and informed. Copyright © 2004 id21. All rights reserved.