image: http://mattbrain.blogspot.com/2007/12/african-poverty-and-debt.html“We believe that those who live in the most extreme poverty deserve this country’s help…the strategy to defeat extreme poverty begins with trade.”
-US President George W. Bush
...in search of evidence of the utility of trade preference programs as measured by their usefulness to world's poorest economies
Prepared for Emily Alpert, Trade Policy Advisor, Oxfam America
By Justin Velez-Greenhalgh (2008)
U.S. Trade Preference Programs: How Well do they work?
(Written Testimony by Katrin Kuhlmann, Senior Vice President, Global Trade Program,
-US President George W. Bush
...in search of evidence of the utility of trade preference programs as measured by their usefulness to world's poorest economies
Prepared for Emily Alpert, Trade Policy Advisor, Oxfam America
By Justin Velez-Greenhalgh (2008)
U.S. Trade Preference Programs: How Well do they work?
(Written Testimony by Katrin Kuhlmann, Senior Vice President, Global Trade Program,
Women’s Edge Coalition – Before the U.S. Senate Finance Committee – May 16, 2007)
This testimony, given by the above referenced source, details the importance of maintaining and improving US trade preference programs. Kuhlmann’s point of view is that the Generalized System of Preferences (GSP) and the myriad of regional preference programs help to bolster the socioeconomic position of women, and to address development concerns in least developed countries (LDCs). She cites one study that found that countries benefitting from GSP preferences increased exports of products eligible for GSP treatment by 8% annually. She also cites other sources, claiming that the Caribbean Basin Economic Recovery Act (CBERA) has led to increased investment, income growth, and export diversification in Central America. Another regional program, the African Growth and Opportunity Act (AGOA), according to the testimony, is said to have generated 45,000 jobs in Swaziland, 26,000 in Lesotho, and 30,000 in Kenya. Additionally, Kuhlmann claims the jewelry industry in India has added 325,000 jobs since the extension of the GSP in 2001.
The testimony also cites the passage of trade bill (HR 6406) in December 2006 as an important step in the proliferation/continuation of trade preferences for poorer countries. Kuhlmann argues that another important component of making trade preferences as useful for beneficiary countries as possible is the continuation of competitive need limit (CNL) waivers. CNLs are used when exports rise above a certain dollar limit. The waivers allow countries to continue the duty free exportation of products even when the CNL has been surpassed.
Katrin Kuhlmann’s testimony addresses the need to make trade preference programs less restrictive in order to maximize economic opportunities for beneficiary countries. One important issue is coverage. Approximately half of the GSP-eligible countries have fewer than 33% of their exports covered. Another problem faced by poorer countries is that many of their economies are commodity (agricultural) and textile dependent. Clothing and agricultural items tend to be excluded from preference programs, or are subject to complex rules of origin.
Kuhlmann’s testimony leads to 4 major policy recommendations regarding US trade preference programs:
1. 100% duty-free market access for all sub-Saharan countries currently covered under AGOA
2. Special benefits that address unique African needs (AGOA plus) – essentially provide duty-free access for all products for sub-Saharan Africa, with an emphasis on infrastructure development and assistance
3. Consolidation of all US trade preference programs into 1 program with one 1 set of eligibility criteria and rules of use
4. Provisions for trade capacity building assistance – ie. Management training, telecommunications and financial services, and tools designed to help LDCs navigate complicated trade rules.
Quantifying the Value of U.S. Tariff Preferences for Developing Countries
World Bank Policy Research Paper 3977, August 2006 (this paper if a reflection of the work and research of the below referenced authors, and not necessarily a policy declaration on the part of the World Bank)
(Written by Judith M. Dean and John Wainio)
World Bank Policy Research Paper 3977, August 2006 (this paper if a reflection of the work and research of the below referenced authors, and not necessarily a policy declaration on the part of the World Bank)
(Written by Judith M. Dean and John Wainio)
This paper is a strong attempt to provide useful data in the debate over trade preference erosion and the extent to which reduction and/or elimination of preferences for developing countries has an economic/developmental impact. According to its abstract, the primary intent of the paper “is to improve our measures of the size, utilization and value of all US non-reciprocal trade preference programs…” Some facts mentioned in the paper are that US regional programs cover a significant amount of beneficiary countries’ exports, are highly utilized by beneficiaries, and have low tariff preference margins. The margin of preference is the difference between the preferential tariff and the Most Favored Nation Tariff (MFN tariff). Basically, where possible, LDCs use what advantages are available to them. “High utilization of preferences has occurred despite evidence that preference margins are generally low.” Limitations of preference programs like the GSP are tariff-rate quotas (TRQs) imposed on agricultural products (meaning duty-free access is not available on products once they exceed the quota), periodic expiration, loss of eligibility due to reaching the World Bank’s high income country category is reached, and competitive need limitations.
This paper, however objective, does note some obvious advantages of regional preference programs over the GSP, specifically the African Growth and Opportunity Act (AGOA). AGOA allows beneficiary countries duty-free access on a larger number of products than does the GSP, and exempts participating members from the competitive need limit. Also noted is the Caribbean Basin Trade Partnership Act (CBTPA), which is an extension of the Caribbean Basin Economic Recovery Act (CBERA), and allows preferential duty treatment on apparel and petroleum products. CBTPA also allows duty-free access for apparel imports assembled in CBERA countries from fabric made and cut in the United States. Yet another preferential program whose benefits exceed those of the GSP is the Andean Trade Preference Act (ATPA), which covers more products, does not have the GSP competitive need limitations, and does not have provisions that graduate participating countries out of eligibility. ATPA preferential treatment includes import –sensitive items such as petroleum, apparel, footwear, and tuna in foil packages.
Interestingly, in 2003, “the US imported about $19.6 billion of non-agricultural products from CBTPA countries, 50% of which was apparel. The conclusion? There is high utilization of regional preference programs. The GSP tends to be underutilized, mostly because the regional programs provide greater advantages to participating countries. Utilization, of course, is representative of the percentage of eligible imports entering the US under preference programs. “The regional preference programs are particularly important for countries in the Caribbean and Andean region, with almost 50 percent of US agricultural imports from CBERA countries and 40 percent from ATPA countries entering the US under these programs in 2003.”
Finally, the study finds that margins of preference (the extent to which preferential tariffs are below MFN tariffs), are not very large. 5.4% is the average preference margin across 101 countries, according to the report. “Few countries exported a product-mix which faced an average nominal tariff preference greater than the 6.4% average tariff across all products eligible for duty-free treatment.” This information might lead one to conclude that since regional preference programs tend to be more user-friendly than the GSP, it might be beneficial to rework some of the rules that apply to ATPA, AGOA, CBERA, etc. to increase preference margins offered to least developed countries, and thereby aid in their further development of economic infrastructures by helping to support export activity. Overall, the article finds that US preference erosion might not have a large impact on development, but that the economic impact on beneficiary countries could still be significant. Because the value of tariff preferences can comprise anywhere from 5 to 15% of a country’s total dutiable exports, there could be an argument that erosion reduces the competitive advantage of several smaller economies.
Erosion of trade preferences in the post-Hong Kong framework: from TRADE IS BETTER THAN AID to AID FOR TRADE
United Nations Conference on Trade and Development
A study carried out under the supervision of Habib Ouane, Director, Division for Africa, Least Developed Countries and Special Programmes (ALDC) and prepared by Stefano Inama, with inputs from Marcel Namfua, Interregional Adviser to ALDC, Craig Van Grastek, and Simon Evenett, University of Saint Gallen
United Nations, New York and Geneva, 2007
A study carried out under the supervision of Habib Ouane, Director, Division for Africa, Least Developed Countries and Special Programmes (ALDC) and prepared by Stefano Inama, with inputs from Marcel Namfua, Interregional Adviser to ALDC, Craig Van Grastek, and Simon Evenett, University of Saint Gallen
United Nations, New York and Geneva, 2007
This study attempts, as have other recent, similar studies, to address the issue of trade preference erosion, and elucidate the applicable impacts for both developed and least developed countries. The study also hones in on how preference erosion might cause export reduction on the part of LDCs that have successfully utilized favorable agreements with developed countries. Aid for Trade, as a relatively new initiative, is discussed as one possible method of compensating LDCs for losses incurred by preference erosion. The paper acknowledges that such erosion does have significant poverty implications for some countries, and can deeply affect household income, especially the monetary intake of those working in industries that benefit from special trade arrangements.
The study explains how preference erosions might be quantified. For example, if the Most Favored Nation (MFN) duty is 10%, and by special agreement an LDC is allowed entry of certain goods tariff free, then the preference margin is 10%. If that LDC rate remains at zero, but the MFN rate is lowered (liberalized) to 6%, then a preference erosion of 4% has occurred. Additionally, the paper argues that when different countries compete in the same product market, the importer has an incentive to favor the country receiving preference since imports originating there face duties that are less than the MFN rate. Erosion reduces the incentive to source from beneficiary LDCs in certain cases. Why does this incentive become reduced? The paper states that “field experience” teaches us that is the importer that pockets the tariff revenue forgone. Some developing country exporters, after having developed a working relationship with an importer, negotiate a share of that tariff revenue forgone.
The paper details many of the concerns addressed and developments of the World Trade Organization’s (WTO) Sixth Ministerial Conference, held in Hong Kong. It was there that the old paradigm, “trade is better than aid,” was, for all intents and purposes, reversed in favor of new thinking, “aid for trade.” According to the report, preference erosion, most especially for LDCs, is an issue that has been recognized both by the LDC duty-free, quota-free (DFQF) and Aid for Trade Initiatives. MFN trade liberalization and trade preference erosion are opposing concepts because a reduction in MFN rates comes at the expense of preference margins enjoyed by poorer economies. Some developing countries, evidently, are expressing concern because they feel an expansion of competitive opportunity afforded to LDCs will weaken their trading positions.
As an example of how trade preference erosion might be harmful to a poorer country, Lesotho is cited as an example where trading under AGOA has attracted “foreign direct investment (FDI) by some Asian companies in garment factories to develop supply capacity and exploit a substantial preferential margin.” Without the exploitation of such preferential treatment, a country like Lesotho could suffer developmentally in an era of preference erosion. It is, however, noted that in the majority of cases trade preferences alone do not attract FDI and create export diversification.
The study “has examined the issue of preference erosion on a tariff-line basis to identify the countries and product pairs most likely to be affected. It has suggested that although relatively small in absolute terms, the trade volumes affected by erosion may have a significant impact on small-scale industries and agricultural and fishery communities, with poverty implications.” To address the issue of preference erosion and market liberalizations, two main courses of action were identified in the paper:
1 Addressing preference erosion through the EIF and Aid for Trade Initiative – “The integrated Framework (IF) was launched in October 1997 at the WTO High Level Meeting on Integrated Initiatives for LDCs’ Trade Development, as a follow-up of the Plan of Action in favour of the least-developed countries (LDCs), adopted at the First WTO Ministerial Conference in Singapore in 1996. Its objective was to coordinate the existing trade-related capacity-building programmes of the following six international organizations: the IMF, ITC, UNCTAD, UNDP, the World Bank and WTO to assist LDC governments in integrating their trade-related policies into their national development strategies and thus to be more active in the multilateral trading system.”[1] Members voted to endorse an enhanced version of the IF at the Hong Kong Ministerial Conference in December 2005. In June 2006, the task force on the EIF submitted proposals on securing additional funding, strengthening in-country management capacities, and implementing/monitoring EIF processes. Of course, in terms of Aid for Trade, countries certainly need help addressing supply-side constraints (ie – natural disasters, insufficient production capacity, and outrageous costs of transportation) that prevent them from participating effectively in international markets, and to help them contend with the effects of trade liberalization.
2 Extending true market access and reform rules of origin – “WTO member should provide meaningful and comprehensive trade preferences to LDCs, as well as the reform of existing rules of origin. More advanced developing countries should also be part of this effort. The multilateral legal framework of trade preferences needs to be revisited to impart transparency and stability to trade preferences.”
As an example of how trade preference erosion might be harmful to a poorer country, Lesotho is cited as an example where trading under AGOA has attracted “foreign direct investment (FDI) by some Asian companies in garment factories to develop supply capacity and exploit a substantial preferential margin.” Without the exploitation of such preferential treatment, a country like Lesotho could suffer developmentally in an era of preference erosion. It is, however, noted that in the majority of cases trade preferences alone do not attract FDI and create export diversification.
The study “has examined the issue of preference erosion on a tariff-line basis to identify the countries and product pairs most likely to be affected. It has suggested that although relatively small in absolute terms, the trade volumes affected by erosion may have a significant impact on small-scale industries and agricultural and fishery communities, with poverty implications.” To address the issue of preference erosion and market liberalizations, two main courses of action were identified in the paper:
1 Addressing preference erosion through the EIF and Aid for Trade Initiative – “The integrated Framework (IF) was launched in October 1997 at the WTO High Level Meeting on Integrated Initiatives for LDCs’ Trade Development, as a follow-up of the Plan of Action in favour of the least-developed countries (LDCs), adopted at the First WTO Ministerial Conference in Singapore in 1996. Its objective was to coordinate the existing trade-related capacity-building programmes of the following six international organizations: the IMF, ITC, UNCTAD, UNDP, the World Bank and WTO to assist LDC governments in integrating their trade-related policies into their national development strategies and thus to be more active in the multilateral trading system.”[1] Members voted to endorse an enhanced version of the IF at the Hong Kong Ministerial Conference in December 2005. In June 2006, the task force on the EIF submitted proposals on securing additional funding, strengthening in-country management capacities, and implementing/monitoring EIF processes. Of course, in terms of Aid for Trade, countries certainly need help addressing supply-side constraints (ie – natural disasters, insufficient production capacity, and outrageous costs of transportation) that prevent them from participating effectively in international markets, and to help them contend with the effects of trade liberalization.
2 Extending true market access and reform rules of origin – “WTO member should provide meaningful and comprehensive trade preferences to LDCs, as well as the reform of existing rules of origin. More advanced developing countries should also be part of this effort. The multilateral legal framework of trade preferences needs to be revisited to impart transparency and stability to trade preferences.”
Nickel and Diming the Poor
U.S. Implementation of the LDC Initiative
By Viji Rangaswami
Carnegie Endowment for International Peace, Policy Outlook, Trade Equity & Development Project – July 2006
This article is critical of the apparent double standard involved when the US, one hand, expresses a greater desire for more open access for its farm and manufactured exports, while not, at the same time, doing more to open its markets to the word’s poorest countries. The article sets the parameters, based on UN guidelines, in terms of what qualifies a nation as a least developed country. First, it must have a very low per capita income (probably below 750.00 USD). Second, its human resources must be substandard in that its education system is weak or underdeveloped and the health of its people is not well provided for by some king of strong hospital/medical system. Thirdly, an LDC is economically vulnerable by virtue of its absence of export diversification, inability to contend with natural disasters, as well as a lack of modern services. According to the article, the 50 LDCs combined account for around just 1.1% of total United States imports.
One interesting prediction cited in the article is that, based on information from the International Food Policy Research Institute, the LDCs as well as 8 lower income countries (LICs) would see real income increase by 7.01 billion USD if all rich countries fully opened their markets to LDC exports as part of the Doha Round. Additionally, the 2001 Doha Ministerial Declaration is cited as evidence of the recognition that instability and lack of economic development in the poorest countries (especially as there is a link between instability and terror activity) must be addressed:
One interesting prediction cited in the article is that, based on information from the International Food Policy Research Institute, the LDCs as well as 8 lower income countries (LICs) would see real income increase by 7.01 billion USD if all rich countries fully opened their markets to LDC exports as part of the Doha Round. Additionally, the 2001 Doha Ministerial Declaration is cited as evidence of the recognition that instability and lack of economic development in the poorest countries (especially as there is a link between instability and terror activity) must be addressed:
“We recognize that the integration of LDCs into the multilateral trading system requires meaningful
market access, support for diversification of their production and export base, and trade-related
technical assistance and capacity building…We commit ourselves to the objective of duty-free, quota-
free market access for products origination in LDCs.”
Interestingly, the author of this article also claims that the US has erred by tying the completion of the Doha Round to its obligations under the poor country/LDC initiative. It’s felt that such linkage would shorten the period of time during which poor countries would enjoy preferential access. The reason is that when the Doha Round concludes, tariffs will be substantially reduced for all countries in the WTO. At that point, the margin of preference enjoyed by developing and least developed countries will also be reduced considerably. This period of time where LDCs are supposed to be afforded preferential access to developed countries markets is thought to be sufficient to improve their methods of competitiveness. Secondly, the author argues the lack of fairness involved when disagreements between highly powerful entities like the United States and the European Union cause stalls in Doha implementation and further complicate problems for LDCs.
Yet another avenue of interest explored in this article is the US claim that new preferences for poorer countries not already included in the system of preferences “will require careful evaluation of its impact on and relationship to current tariff preference programs, such as the African Growth and Opportunity Act (AGOA) and the Caribbean Basin Initiative (CBI).” To combat this though process, an IFPRI study is cited, which shows that sub-Saharan LDCs would still benefit if all LDCs received 100% duty-free, quota-free (DFQF) trade treatment. Malawi, for example, would be expected to increase exports by five times with full implementation of the LDC initiative.
As far as development is concerned, there is strong concern with regard to a loophole in the Hong Kong commitment. Evidently, the US has interpreted the commitment such that they may exclude up to 3% of potential exports from poor countries. That exclusion could amount to as much as 300 tariff lines, or practically all LDC exports. Again, accordingly to IFPRI, that’s about a 6 billion USD difference in real income gains between what could occur with 100% duty free treatment as opposed to 97% duty free treatment for LDCs.
Interestingly, the author of this article also claims that the US has erred by tying the completion of the Doha Round to its obligations under the poor country/LDC initiative. It’s felt that such linkage would shorten the period of time during which poor countries would enjoy preferential access. The reason is that when the Doha Round concludes, tariffs will be substantially reduced for all countries in the WTO. At that point, the margin of preference enjoyed by developing and least developed countries will also be reduced considerably. This period of time where LDCs are supposed to be afforded preferential access to developed countries markets is thought to be sufficient to improve their methods of competitiveness. Secondly, the author argues the lack of fairness involved when disagreements between highly powerful entities like the United States and the European Union cause stalls in Doha implementation and further complicate problems for LDCs.
Yet another avenue of interest explored in this article is the US claim that new preferences for poorer countries not already included in the system of preferences “will require careful evaluation of its impact on and relationship to current tariff preference programs, such as the African Growth and Opportunity Act (AGOA) and the Caribbean Basin Initiative (CBI).” To combat this though process, an IFPRI study is cited, which shows that sub-Saharan LDCs would still benefit if all LDCs received 100% duty-free, quota-free (DFQF) trade treatment. Malawi, for example, would be expected to increase exports by five times with full implementation of the LDC initiative.
As far as development is concerned, there is strong concern with regard to a loophole in the Hong Kong commitment. Evidently, the US has interpreted the commitment such that they may exclude up to 3% of potential exports from poor countries. That exclusion could amount to as much as 300 tariff lines, or practically all LDC exports. Again, accordingly to IFPRI, that’s about a 6 billion USD difference in real income gains between what could occur with 100% duty free treatment as opposed to 97% duty free treatment for LDCs.
Finally, the paper is concluded with 5 major recommendations:
1. Early Implementation – it is argued that a show of good-faith effort to implement the poor countries initiative could garner good will, and make other countries more willing to negotiate to our favor regarding other matters.
2. Allow 100% Access – the author maintains that the United States ought to provide complete duty-free, quota-free excess to all LDC exports. An exclusion of 3% of products (approximately 330 tariff lines) could drastically reduce potential economic benefits to those who need it most.
3. Allow 100% Access Plus for Sub-Saharan Africa – for one, as noted earlier, an IFPRI study concludes that improved market access for all LDCs does not come at the expense of sub-Saharan Africa. Furthermore, it is argued that disincentives under current trade preference programs are more problematic than previously thought. For example, limitation on the amount of sub-Saharan apparel that can be shipped into the US diminishes the incentive of outside businesses to invest in the productive capacity of African exports. Additionally, requiring that African producers utilize either US or African fabrics makes the situation difficult lower-priced and/or higher quality fabrics may be available from Asia. Non-tariff barriers, such as US sanitary and phytosanitary standards. It is suggested that USDA’s Animal and Plant Health Inspection Service (APHIS) be tasked with attacking the problems African farmers face in terms of acquiring approval for US markets.
4. Ensure Simple ROOs – the rule of origin as dictated by the existing US Generalized System of Preferences, which requires that products “be substantially transformed in a beneficiary country, and that at least 35 percent of the value of the product originate a beneficiary country, is one example of a good, straightforward, easy to meet rule of origin that facilitates trade.” More flexible cumulation rules are called for in the article – cumulation allows inputs from different countries whose eligibility falls under the same program to be counted in the value-added threshold. In terms of an African plus type initiative, it might be beneficial something like a 25% value added rule for sub-Saharan countries.
5. Expand the List to Include Other Low Income Countries – Kenya, Pakistan, Sri Lanka, and Papua New Guinea are just a few countries not classified as LDCs, but still plagued by epidemics like HIV/AIDS, natural disaster, and lack of export diversification.
[1] Agency for international trade information and cooperation – AITIC’s EIF page – http://www.acici.org/aitic/eif/Intro.htm
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