Duty-free, quota-free market access: What’s in it for African LDCs?
It has long been recognised that trade preferences can stimulate diversification into higher value-added export activities. Indeed, the structural transformation of developing economies was a key goal of the Generalized System of Preferences (GSP) when it was launched in 1971. There has been a constant call since then to improve upon the GSP and to provide more meaningful preferences to the least developed countries (LDCs). While a number of such schemes have subsequently been set up (see Table 1), the demand for improved preferences has not waned.
At the 2005 Ministerial Conference in Hong Kong, WTO members ultimately agreed that: "Developed-country members shall, and developing-country Members declaring themselves in a position to do so should, provide duty-free and quota-free market access on a lasting basis, for all products originating from all LDCs by 2008..." The zeal of this statement, however, was immediately tempered by an ‘escape clause': "Members facing difficulties at this time to provide market access...shall provide duty-free and quota-free market access for at least 97 percent of products originating from LDCs defined at the tariff line level..." while taking steps to progressively achieve 100 percent DFQF.
DFQF market access was a prominent item on the ‘LDC package' that was slated for an early harvest at the WTO Ministerial Conference in December 2011. However, no decision on the operationalisation of DFQF was taken then, and it seems unlikely to appear on the agenda of this year's meeting in Bali. With no progress on DFQF, the debate has focused on the potential gains under a 97 percent DFQF scheme versus full coverage and on related rules of origin. Available evidence shows that further trade gains for LDCs would be rather limited under a 97 percent DFQF scheme since the 3 percent of excluded tariff lines could potentially cover between 90 percent and 98 percent of all LDC exports. The very high share of trade reflects the fact that the 3 percent of excluded tariff lines tend to exclude the bulk of textile and clothing exports from LDCs like Bangladesh and Cambodia.
A positive outcome of the Hong Kong declaration is that some emerging economies have now joined the league of preference-giving countries. India's Duty-Free Trade Preference (DFTP) scheme, launched in 2008, is expected to provide duty-free access to 85 percent of its tariff lines when the scheme becomes operational in 2012. China started its duty-free scheme with 60 percent coverage in 2010 but with the objective of extending zero-tariff treatment to 97 percent of its tariff lines. Brazil announced that it would launch its DFQF scheme in 2011 - but is yet to follow up on that promise. Korea - not an ‘emerging economy' in the conventional sense - launched a DFQF scheme earlier in 2000 under a waiver but extended it to 95 percent of tariff lines in 2011.
While it is too early to fully assess the effects of these schemes, available evidence suggests that they have, so far, not been very successful in stimulating higher value-added exports from LDCs. For example, while Africa's LDCs accounted for 21.5 percent of Africa's exports to India, worth US$40 billion in 2011, excluding Angola, a major oil exporter, this share was a meagre 6.4 percent. Similarly, while 99 percent of all LDC imports into China in 2011 were under the duty-free scheme, China has imported little beyond oil, and a few other commodities, from African LDCs. It appears that the schemes' effectiveness is constrained by their very design - a criticism levelled against developed-country schemes in the past. India's DFTP scheme, for example, excludes a number of products of key export interest to African LDCs, such as fruit and vegetables, nuts, coffee, tea, maize and tobacco products, and provides limited concessions on several others (cut flowers, vegetable oils, and clothing).
Most developed countries have traditionally implemented DFQF schemes of various levels of ambition (Table 1). The US is implementing two regional duty-free schemes since 2000, including the African Growth and Opportunity Act (AGOA), which provides 40 designated African countries, of which 26 are LDCs, duty-free treatment on some 1,835 products. AGOA is set to expire in 2015.
However, whereas the DFQF schemes of Canada, Japan and the EU provide duty-free coverage to over 98 percent of tariff lines and feature few excluded products, the World Trade Organization estimates that, on the whole, US trade preference schemes admit on average only 82.4 percent of imports duty-free, with pervasive exclusions. However, this figure is misrepresentative since about 90 percent of all imports recorded under AGOA are in oil. Most Favored Nation duties on AGOA-excluded products average over 30 percent!
Not surprisingly, therefore, existing preference schemes have had mixed effects on African LDC exports, especially at the extensive margin. Within manufacturing, only apparel seems to have benefited from such schemes, specifically from AGOA, which proposes a single transformation rule for apparel and allows exporters to source inputs from third countries. Paradoxically, while textiles are generally recognised as a critical link in building a vertically integrated, higher value-added clothing industry, textile products are excluded under AGOA, as are leather products and footwear, a wide range of processed agricultural products, including dairy products, sugar, cocoa, and cotton. Stricter rules of origin in other schemes have also not been favorable to textiles. For example, the EU's double-transformation rule - which required apparel to undergo assembly plus at least one pre-assembly operation, such as weaving/knitting - has been perceived as technologically challenging by LDCs. This is, however, set to change after the EU significantly relaxed the GSP rules of origin in 2011.
Improving DFQF schemes
African LDCs could benefit from an ambitious program, especially one that offers more liberal access to the US market, according to recent research. For example, using a computable general equilibrium (CGE) model, Bouët et al in 2010 estimate that full implementation of a DFQF scheme by OECD countries would boost LDC exports by about US$2 billion (or 17 percent) without affecting preference-granting countries in any major way.
Another study by Sam Laird, 2012 - commissioned by the ICTSD - uses a partial equilibrium model to examine the impact of providing 100 percent duty-free treatment to LDCs' exports by a selected group of trade partners - including 4 major developed countries with long-standing trade preference schemes (Canada, EU, Japan and US), one with a fairly recent duty-free scheme (Korea), and two emerging economies (China and India). The results show that LDC exports would expand on average by 2.9 percent, with the biggest impacts coming from India (21.7 percent), Korea (12.9 percent) and USA (11.8 percent). Impacts on the rest of the world are negligible (Table 2).
The study shows that countries with close-to-full duty-free coverage, such as Canada and EU, will register very small increases in exports from LDCs. The estimated modest impact of extending the Chinese scheme (1.7 percent) seems to be linked to the fact that the bulk of China's imports (90 percent in 2011) from LDCs consist of raw materials and mineral fuels, which already attract little or no duty, while China is also competitive against LDC manufactures generally.
Country-wise, Haiti, Uganda, Cambodia, Bangladesh, Senegal and Nepal are among the biggest gainers. At the other extreme, Lesotho appears as the only country to lose in a rather significant way (Figure 1). Even so, its loss is a mere 1 percent of imports, or about US$5 million. The loss derives from the erosion of Lesotho's preference margin - mainly in the US - to the benefit of other competing LDCs, such as Bangladesh and Cambodia.
Lesotho's loss should not be a barrier to negotiations by LDCs for the implementation of a comprehensive DFQF scheme. This loss is small relative to the overall gains by LDCs and it may be easily compensated by improved special and differential treatment for LDCs and continued Aid for Trade flows to help Lesotho adjust to the new situation. Lesotho received US$194 million in Aid for Trade in 2010, and the amount has consistently increased since 2005.
Unfortunately, implementation of a DFQF scheme for LDCs is currently being held up in large part by the US's insistence that such a scheme be part of a Doha Round agreement. This position partly reflects the US's fear that opening up its markets in clothing could lead to increased competition from countries like Bangladesh and Cambodia. However, emerging research shows that such fear is unjustified. For example, Canadian imports from LDCs did not increase sharply after Canada launched its LDCT program in January 2003 and adopted flexible rules of origin for apparel. Moreover, CGE estimates suggest that the potential effects of the US providing full DFQF market access to LDCs will be a mere 0.5 percent fall in US apparel output. The resulting employment effects, although concentrated in traditional textiles-based states, will be, in aggregate terms, rather small, and dwarfed by global gains. It is time for US lawmakers to look beyond their defensive interests in textiles and show their real commitment to LDCs development, over two-thirds of which are African.
Vinaye Ancharaz is the senior development economist at ICTSD.
Sam Laird is an independent consultant and visiting Professor for TRAPCA, Tanzania.