Trade preferences

Do they work and who gains?

'Preferences' have been a feature of the trading system since the 1960s. While some authors argue that preferences do not work, research shows they work in cases where they confer a significant competitive advantage on countries that are reasonably efficient sources of supply.

The main reason for controversy is that this combination of requirements is quite rare. Some trade regimes claiming to be preferential are not, whereas others making no such claim do confer a substantial advantage. And many of the highest profile 'preference beneficiaries' (such as the majority of sub-Saharan African (SSA) states) have failed the 'reasonably efficient supply' requirement.

Preferences are a relative matter: if country X pays a lower tariff than Y it may be called 'preferred', but it may not benefit from preferences if Z pays an even lower one (and is a substantial, efficient exporter as well). Nor is it effectively preferred if a requirement for obtaining the lower tariff is that it undertake manufacturing processes beyond its reach that make the output uncompetitive. Such 'small print' conditions are frequently found in trade preference programmes - especially those of the European Union (EU) which has the most complex set of discriminatory policies.

Two examples illustrate this range of issues. The first explains how some supposedly preferred states are unable to benefit whilst those that are not members of a preference scheme gain a lot. The Multifibre Arrangement (MFA) which restricted clothing exports by the most competitive suppliers to industrialised countries, until it expired at the end of 2004, conferred competitive advantages amongst other things, on two groups of states: some developing countries, mainly in Africa, under a range of tariff 'preference agreements' and East Asia's Newly Industrialising Countries (NICs), that had large historic quota rights to supply the high priced restricted markets, despite being completely excluded from tariff 'preference agreements'. But the rules of origin of the EU and, until 2000, the United States made it very difficult for most SSA states to benefit since they needed a competitive textile industry supplying inputs such as yarn and fabric, as well as a clothing industry in order to comply. If the gains went mainly to East Asia and North Africa, who bore the cost? Primarily countries like India and China which had small historic quotas and no preferences.

The second example is the EU's new Generalised System of Preferences (GSP) approved in June 2005 and effective immediately for 14 states and in January 2006 for the rest. On paper it appears both to simplify the EU's plethora of regimes and to liberalise substantially towards developing countries. What it may do in practice is to marginalise a group of about 14 countries in South and South East Asia and South America which will be treated less favourably than almost all others except nine OECD and NIC states. EU imports from developing countries may increase - but equally they could decrease. For almost every product some old discriminations will be removed but some new ones created.

All developing countries have had preferences under the GSP, but for most these have not been effective as stronger schemes existed for groups of more favoured countries, such as the least developed countries. What is the best way out of this complicated situation?

Discrimination between developing countries can be removed in two ways: by lowering tariffs on imports from the less favoured or by re-imposing them on those from the more favoured. Both these measures will cause adjustment problems for the countries that are currently more favoured, especially if they are not as efficient as the less favoured. But the first will also produce gains for the states that are currently less favoured; the latter will not favour anyone except OECD producers.

Unfortunately it is re-imposing tariffs on the more favoured that seems the most likely given the interest by EU producers to reduce competition from imports. The EU in particular has offered little in Doha on opening its market to agricultural exports from developing countries and in its domestic reforms (e.g. sugar) it is reducing the gains of favoured countries without increasing those of disfavoured ones.

Christopher Stevens
Institute of Development Studies
University of Sussex
Falmer
Brighton BN1 9RE
UK
T +44 (0)1273 878790
F +44 (0)1273 2621202
C.Stevens@ids.ac.uk

See also

Making preferences more effective, Institute for Development Studies Briefing Paper, University of Sussex, by Chris Stevens and Jane Kennan, 2004
www.ids.ac.uk/ids/global/pdfs/CSJKTradePreferences.pdf

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