Table of Contents

  • This publication explores trade preferences, their erosion and the ability of recipient countries to benefit from them. Trade preferences have constituted a long-standing and potentially powerful mechanism to assist developing countries to access industrialised country markets, offering recipient countries the prospect of a discernible trading advantage over competitors when exporting to preference-granting countries; in doing so, they open up opportunities for substantial export growth and associated improvement in recipient countries’ development prospects. In consequence, a range of developing countries currently enjoy preferential access to developed country markets for their exports under a variety of trade preference schemes, including the Generalised System of Prefer - ences, the African Growth and Opportunity Act; the European Union’s Everything But Arms arrangement and the Cotonou Agreement.

  • Increased access to industrial country markets through reduced trade barriers has been and remains a major objective of developing countries and has been included in the Doha Round of WTO negotiations. However, such trade liberalisation is likely to have an uneven impact across developing countries. While most countries recognise the bene - fits of reducing barriers to trade in general, preference-dependent countries are apprehensive regarding the (potential) impact of recent further tariff reductions by industrial countries – the loses and adjustment costs associated with preference erosion. One of the core issues is that most of the G-90 group of developing countries already enjoy preferential market access for at least some of their exports to developed countries under various preference schemes.

  • The aim of this chapter is to ‘set the scene’, and explain which preferential trade arrangements are considered, identify the amount and type of developing country trade covered by the relevant preference schemes and establish current preference margins and, by implication, the scope for preference erosion. Section 2.1 briefly reviews the preferential schemes offered by the EU and USA. The trade coverage of these schemes by country and product and associated margins of tariff preference are outlined in Sections 2.2 and 2.3. Section 2.4 summarises the conclusions that can be drawn from the chapter.

  • This chapter considers the evidence on the benefits of trade preferences and the implications of the erosion of preferential margins for developing countries and least developed countries. Appendix A3 provides further context and detail. After considering the relative importance of preferential trade schemes and the countries that are the major beneficiaries, evidence on the impact of preference erosion on specific countries and products is reviewed. The conclusion provides a summary of the literature and outlines some of the factors limiting the utilisation and effectiveness of preferences. Chapter 4 will address the major constraints that have prevented beneficiary countries from exploiting fully the preferential market access conditions offered under the schemes and the implied policy options.

  • The literature reviewed in the previous chapters has shown the relative significance of various preference schemes for developing and least developed countries. For most developing countries and many LDCs, preference margins are quite small, so preference rents are negligible and the implications of preference erosion are small. In this context preference rents can be interpreted as the (additional) export value derived by beneficiaries, which depends on their ability to take advantage of the margins. Typically, a number of countries are offered the same preferences (this is especially true for LDCs) and it is the more competitive producers who are best able to benefit. This is true whether the margins are large or small, although the size of the potential rent is greater if margins are large and/or if few countries receive the full preference margin. In most cases, margins are relatively small and available to many countries, so the likely losses from preference erosion are not great, overall or for individual countries.

  • This report has shown that only a relatively small number of developing and least developed countries are exposed to significant costs from preference erosion. The majority of these countries are either African (and can benefit from some ‘preference protection’ under arrangements for ACP countries and AGOA) or island economies in the Caribbean or Pacific (which can benefit from some ‘preference protection’ under ACP arrangements). An important distinction here is that whereas the ‘terms of access’ under AGOA are decided unilaterally by the USA, the terms of EU-ACP preferences will be determined in negotiations on the detail of economic partnership agreements. Conse - quently, as discussed below, the terms of preferences under EPAs are relevant to the trade policy negotiating strategies of ACP countries, in a way that AGOA is not. There are also a number of Asian countries, mostly LDCs such as Bangladesh, Cambodia, Myanmar and Nepal, that are exposed to potentially large costs of preference erosion; while they require a strategy for negotiations in the WTO relating to preferences, they are not party to EPA negotiations, but may face some specific preference erosion as a result of EPAs, to the extent that benefits of the EBA scheme are eroded.

  • While a large number of preference schemes are offered by developed and developing country trade partners, the main preference-giving countries for developing and least developed countries are the QUAD+: the EU, USA, Japan, Canada and Australia. The EU and USA are discussed in Chapter 2, and we begin here with some information on the others (see relevant chapters in Hoekman et al., 2009 for more detail). Japan offers GSP preferential tariff treatment to 141 developing countries, with LDCs being eligible for duty and quota free treatment on specified products. Canada imports most of its goods from the North American Free Trade Association (NAFTA) at significant margins of preference relative to MFN rates. Developing countries accounted for just under 20 per cent of its total imports in 2003, mostly under MFN, although about a quarter were subject to the General Preferential Tariff (GPT), which is generally less than half the MFN tariff. About three-quarters of preferential imports to Australia enter under developing country preferences, although since 2003 a more generous LDC preference scheme has been in place. The remainder of this appendix provides details and tables to supplement the discussion in Chapter 2.

  • The provision of trade preferences is embodied in preferential trade arrangements such as customs unions and free trade areas, typically those between developed and developing countries. Such PTAs tend to increase trade between members participating in the arrangement and may also affect trade with non-members. The PTAs can be reciprocal, where members reciprocate the treatment received in equal measure and form, or nonreciprocal, where some (typically lower-income) members are under no obligation to reciprocate the preferential treatment they receive from other members. A particular widespread non-reciprocal PTA is the generalised system of preferences, whereby developed countries (notably the QUAD) grant differential preferential tariffs to imports from developing, least developed and small and vulnerable countries. GSP preferences are granted unilaterally, without legal obligation on the part of the GSP-giving country, and as such may be withdrawn at any time. In cases where beneficiaries cannot be certain that the preferences will continue in the future, the potential benefits are less valuable, for example because there is less incentive for producers to invest in the produc - tion of goods that can benefit from such preferences.