Changes are necessary to make trade preferences more effective in fostering growth and export diversification of developing countries.
© Shutterstock/Hien Phung Thu | A manufacturing plant in Ho Chi Minh city, Viet Nam.
“Trade remains a key policy tool in the poorest economies to harness development”, said Assistant Secretary-General Junior Lodge of the Organisation of African, Caribbean and Pacific States during a recent event hosted by UN Trade and Development (UNCTAD).
The event showcased a new UNCTAD report calling for updating and expanding trade preference schemes to reflect the changes that transpired in the global trade landscape over the past six decades.
Looking at the different schemes available – 25 economies currently offer non-reciprocal trade preferences in the form of tariff reductions on merchandise exports from a pre-determined set of developing and least developed countries (LDCs).
While such measures contributed to export diversification in beneficiary countries, their effectiveness has waned over time.
The causes, the report notes, are attributable to the proliferation of free trade agreements, the decline of most–favoured nation tariffs, the rising number of non-tariff measures and the evolving factors driving international competitiveness such as technological advances, global value chains (GVCs) and services trade.
Consequently, only a small number of markets and sectors have been able to adequately benefit from trade preferences.
To keep fostering growth and diversification of developing countries’ exports, UN Trade and Development says it’s necessary to update trade preferences, strengthen global coordination, expand trade cooperation beyond tariffs and embracing a paradigm shift in market access cooperation.
Shortcomings to address
Current trade preferences have helped beneficiaries to expand their exports, especially in labour-intensive sectors.
However, the fall of most-favoured-nation and applied tariffs – paired with the evolutions of GVCs – have significantly shrunk the advantages provided by these schemes.
Focused only on tariffs – which no longer represent the largest source of trade cost – these schemes also struggle to leverage new sources of export diversification such as foreign direct investment, technology, skills and services.
While LDCs are still able to benefit from substantial tariff advantages, the impact on their competitiveness is threatened by benefits granted to other developing countries through preferential trade agreements.
Updating trade preferences
In fact, benefits from preferential schemes can increase by maximizing the utilization of existing preferences by LDCs.
This means reforming and facilitating rules of origin (RoO), improving transparency, greater benefits sharing among countries and addressing the needs of countries set to graduate from the LDC category.
In particular, modernizing RoO and enhancing stability and predictability of schemes are key to facilitating GVCs trade.
Additionally, small island developing states and landlocked developing countries warrant special attention. as many of them are structurally vulnerable but don’t benefit from alternative preferential market access.
Trade preferences can also adapt to support new industrial policy by incentivizing exports of high value-added environmental products – for example, processed critical energy transition minerals – from developing economies.
This will help secure supplies for preference-granting markets, while increasing local value addition in developing countries.
Scaling up intergovernmental coordination
Maximization benefits from trade preferences will require more dialogue and coordination between granting and beneficiary countries.
Such endeavour should aim at integrating bottom-up feedback from beneficiary countries, while supporting harmonization among granting countries.
“UN Trade and Development’s role in promoting international dialogue, through platforms like the late Special Committee on Preferences or a similar intergovernmental forum, can help align policies and share best practices,” said Luz María de la Mora Sánchez, director of international trade and commodities at UN Trade and Development.
New approaches to market access cooperation
UN Trade and Development highlights the need to go beyond tariff preferences – which have maxed out their potential to support development – to reach the goals set in the 1960s.
Doing so will require countries to enhance new market access cooperation beyond tariffs.
This can be done via regulatory cooperation on non-tariff measures or considering trade preferences for services.
Equally important is to foster foreign investments from donor to beneficiary countries by extending preferential access to sectors where foreign investment flows.
Other approaches recommended by the report include facilitating access to technology and combining trade preferences with development cooperation programmes to build supply capacities, facilitate trade and support trade finance.