Is there a future for trade preferences?

Commonwealth developing countries have been granted trade preferences for a long time, especially the least developed countries. These preferences were usually well intentioned but rarely well implemented so there is room for debate on how beneficial they have been. Often, the terms on which they are given limits the ability of countries to utilise them. Even if preferences have supported exports suited to the existing production structure they have not encouraged, and may even discourage, export diversification. Nevertheless, the prospect of erosion of preferences is of concern. Should beneficiary countries seek to negotiate new preferences or to prepare for a life without preferences?

Although negotiations over the Doha Agenda in the World Trade Organization have stalled, the foreseeable multilateral trade environment is one of declining margins of trade preferences. For most countries the preference erosion they experience is unlikely to reduce exports but will make it more difficult to expand and diversify exports. Preferences will continue but will be worth less because they are available to more countries and apply to smaller tariff differentials.

Changes to the terms of preferential market access, such as rules of origin, can preserve some of the benefits but this should be viewed as a temporary reprieve. Beneficiary countries will need to identify new trade opportunities, availing of any preferences that remain available.

Many developing countries can avail of new preferential arrangements. Most African, Caribbean and Pacific (ACP) countries, especially in sub-Saharan Africa (SSA), can expect to derive some benefits from the Economic Partnership Agreement (EPA) with the EU. Reciprocity is at the core of EPAs; ACP countries offer tariff-free access to substantially all imports from the EU and receive enhanced terms of access to the EU in return. In negotiations, to date ACP countries have been somewhat diverted by concerns about opening up to the EU (which are likely to be exaggerated). It is vital that they focus future negotiations on securing favourable terms of access to the EU to encourage diversification in processed, value-added exports.

Least developed countries, especially in SSA, have recently been offered preferences by China and India. Although mineral exporters do not need preferential access to benefit from the growth in demand from China, India and other emerging economies, exporters of non-mineral commodities have gained little (almost 90 per cent of SSA exports to China and India are accounted for by eight exporters of resources). Economic relations with China and India are especially important for SSA countries through trade and investment. Although to date the significant export benefits have been limited to resource exporting countries, there are future opportunities for other developing countries. These opportunities will be squandered if viable domestic export producers are not supported.

Resource exporting countries face a challenge in trade relations with emerging markets such as China and India. They must avoid the ‘resource curse’ errors of the past by negotiating access to resources more transparently with all partners and putting in place systems to ensure that the revenue from resource exports and associated foreign investment is used effectively to promote local development. New economic partners provide new opportunities and foreign investment delivers the greatest benefits when it provides linkages to the local economy, such as through employment or demand for local supplies.

Grasping market opportunities should underpin the trade strategies of developing countries. Preferences can be part of these opportunities, but should not be looked towards as the major opportunity.

Views expressed here are those of the author and do not necessarily reflect those of the Commonwealth Secretariat or of Commonwealth member governments.

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