I.   Trade and Aid

II.  Market Access Barriers

III. Agricultural Support

IV. Trade-Related Technical Assistance

V. Trade In National Development And Poverty Reduction Strategies

VI. The Way Forward On Aid and Trade

References

Integration into global markets offers the potential for more rapid economic growth, the creation of better-paid jobs, and poverty reduction. While opening markets will not do the trick on its own, development success over past decades has generally been associated with outward orientation. However, many of the poorer developing countries have found it difficult to take full advantage of the opportunities of the global market. Supply response has been weak for a variety of structural reasons, including weak institutional capacity, but also because policies are often not supportive. Industrial countries have maintained market access barriers and agricultural policies that penalize typical developing country products.

A coherent approach to development and trade calls for trade policies that create market opportunities for developing countries, and for development policies that enable them to respond to these opportunities. The key components of such an approach are:

• Early, generous and predictable market access for the exports of developing countries, especially the poorest, within a framework of multilateral liberalization and combined with strong multilateral rules.
• Determined action to reform industrial country agricultural regimes, eliminating trade distortions that harm developing countries.
• Capacity-building assistance that improves the ability of developing countries to take advantage of new opportunities for trade.
• Sound and coherent trade and trade-related policies in developing countries themselves, which should be reflected within development plans and strategies for poverty reduction.

But average tariffs tell only part of the story. Tariff "peaks"1 within product groups, often exceeding 50 percent or, in agriculture, 100 percent, are concentrated in labor-intensive products of significant export interest to developing countries, and particularly Least Developed Countries (LDCs)². In the United States and Canada, tariff peaks are concentrated in textiles and clothing, in the EU and Japan in agriculture and food products. Tariff "escalation"—in which tariffs on processed goods exceed those on primary products—can substantially reduce the returns to developing country entrepreneurs of engaging in activities with higher value-added.³ This hampers the diversification of exports, limits the accumulation of skills and capital, and thus helps to perpetuate dependence on a small number of unprocessed goods whose world demand grows little and whose prices are volatile. The tariff structure of developing country importers differs little in this regard from that of the "Quad" (Canada, EU, Japan, and the United States). For instance, Russian tariffs on textile products are 8 percent at the initial processing stages, but 18 percent on finished clothing, for Mercosur the respective tariffs are 12 and 22 percent, and for South Africa 2 and 20 percent.

Tariff escalation on cocoa products The European Union applies a zero tariff on imports of cocoa beans (raw material), but cocoa paste (semi-processed) is subject to a 9.6 percent duty, and processed chocolate is taxed under a mixed set of tariffs that can add up to as high as 25 percent. Partly as a result, while 90 percent of the world's cocoa beans are grown in developing countries, only 44 percent of cocoa liquor is produced in these countries, and 29 percent of cocoa powder. As for the final product, chocolate, developing countries account for a mere 4 percent of global production. While tariffs facing the least developed countries have been eliminated under the EU's Everything But Arms initiative, they remain for large producers such as Ghana and Côte d'Ivoire. Dependent on the raw material rather than the finished product, such countries are left more exposed to price swings and other shocks. The world price of cocoa beans (London Cocoa Terminal) has oscillated widely, from US$1.72/lb on average in 1977, to US$0.50 in 1992, US$0.76 in 1998 and US$0.40 in 2000. Sources: International Cocoa Organization; Fund staff estimates from tariff schedules.

Non-tariff barriers

Non-tariff measures increase further the barriers faced by developing country exporters, and reduce the transparency of market access conditions. Under the Uruguay Round multilateral trade agreements quotas have been significantly curtailed and converted into their tariff equivalents. But a complex web of bilateral quotas continues to affect trade in textiles and clothing under a transition regime set to end in 2005.⁴ Industrial countries have exploited the considerable leeway they have under this regime by backloading liberalization, and it is estimated that, by 2004, the 11 principal developing country exporters will still face quota restrictions on over 80 percent of their exports of these products. This has given rise to concerns that political resistance to liberalization could increase in the final phases of the transition period.

Protection has shown a tendency to reappear under new guises when its traditional avenues are blocked by multilateral agreements. The escape valves of choice have been "trade remedies", and in particular antidumping measures.⁵ Almost half of the 499 antidumping investigations initiated by industrial countries in 1995-2000 targeted developing countries, with another quarter targeting transition economies.⁶ Antidumping measures have also become increasingly popular with developing countries themselves, with one-third of measures directed at other developing countries. Technical, sanitary and phytosanitary standards are increasingly complex, are generally developed with little involvement by developing countries, and have strained the capacity of developing countries to meet them. Furthermore, there are concerns about the scope for the discriminatory use of these measures. Together, non-tariff measures can add considerably to uncertainty over market access—a market that appears accessible at the time of an export-oriented investment can close if the activity proves "too" successful.

Safeguards on Shiitake mushrooms In the early 1990s, high prices of shiitake mushrooms in Japan encouraged Japanese firms to invest in China, introducing new cultivation techniques to raise the quality of Chinese mushrooms to Japanese standards. Chinese mushroom exports to Japan rose to US$120 million per year, gaining a market share of almost 40 percent. However, faced with this threat to its shiitake growers, in April 2001 Japan introduced temporary safeguard tariffs of 266 percent and other import curbs on imported shiitake mushrooms, restricting Chinese exports significantly. China retaliated with tariffs on Japanese cars, mobile phones and air conditioners. An understanding was reached in December 2001 under which Japan agreed not to extend the measures and the governments announced the creation of cooperative mechanisms aimed at ensuring "steady" bilateral trade in the affected farm products. Source: World Bank, Global Economic Prospects 2002; and www.chinadaily.com

Trade in services

Barriers to services trade remain substantial, both in industrial and developing countries. In general, industrial countries have undertaken more far-reaching commitments regarding access in their services sector than developing countries. Barriers in services trade vary in restrictiveness between sectors and modes of delivery, but are most restrictive for services that require the temporary cross-border movement of persons, an area of particular export interest to developing countries, and least in services such as telecoms and financial services in which the interests of industrial countries are strongest. At the same time, restrictive services regimes are partly responsible for inefficiencies in the trade-related infrastructure and correspondingly high transaction costs in developing countries.

Liberalization and inter-developing country effects

Most estimates of the potential gains from liberalizing access to industrial country markets point to significant benefits for developing countries. However, the benefits are likely to be spread unevenly—while developing countries would gain in the aggregate, this may not be true for each country and in every product category. In particular, a number of exporters, especially from poorer countries, enjoy de facto protection in third markets due to preference margins, and as a result of bilateral quotas under the Uruguay Round Agreement on Textiles and Clothing (ATC). As liberalization erodes these preferences, they may lose out to more competitive suppliers.

Perhaps the most significant development in this respect is China's recent accession to the WTO, which will allow it eventually to compete on equal terms with other developing countries.⁷ ATC quotas on textiles and clothing have been especially constraining for Chinese exporters; upon conversion of quotas into multilateral tariffs, they are expected to gain market share from other suppliers, including low-income countries. A reallocation of production could impose high adjustment costs, in view of the large share of textiles and clothing in the exports of many countries, and calls for early identification of problems and action to diversify exports and strengthen competitiveness. The backloading of effective liberalization under the ATC is unhelpful, as it turns what could have been a gradual adjustment process into a shock at the end of the transition period—for both importing and exporting countries.

Preference schemes

An argument often used to allay concerns regarding market access for developing country products is that there are preferential schemes that are especially designed to help these countries sell their products in industrial country markets. There is evidence, however, that the margins under many of these schemes are smaller than they at first appear; and "sensitive products," which tend to be of most interest to developing countries, are often not covered. Fairly comprehensive preferences for LDCs have been granted under the EU's Everything but Arms (EBA) initiative, which allows duty-free and quota-free access for virtually all products, and under similar schemes by New Zealand, Norway, and Switzerland.⁸ Another prominent scheme is the United States' African Growth and Opportunity Act, under which 35 African LDCs and non-LDCs can export freely to the U.S. market, with certain restrictions for apparel and other "sensitive" products.

Adoption by all Quad countries of schemes that provide unrestricted market access for LDCs can have significant benefits without imposing undue costs on other suppliers, given the very small share of LDCs in world trade (around 0.5 percent). There is, however, a danger of complacency, with LDC preferences—which carry only limited political cost for industrial countries—coming to be seen as a substitute for broader liberalization. In fact, such preferences risk creating vested interests, with rich-country protectionists coalescing with the poorest countries to maintain market barriers aimed at the "middle," perceived by both as a competitive threat. Preferences should therefore be set firmly within a context of rapid multilateral liberalization, while providing LDCs with enough time and assistance to adjust.

The agricultural sector in most OECD countries is heavily protected from international competition and receives substantial public sector support. Depending on their nature, subsidies can inflict significant damage on producers in other countries, as well as on domestic taxpayers and consumers. Despite reforms in recent years aimed at delinking subsidies from production, more than 70 percent of assistance to producers continues to be provided through market price supports and payments per unit of output, partly associated with export subsidies. Within industrial countries, this assistance is costly and regressive since much of the benefit accrues to large farms, and price supports hurt low-income consumers most, because they spend a larger share of household expenditure on food. In other countries, especially the poorer ones unable to compensate for losses through measures of their own, the over-production stimulated by these measures reduces prices and incomes from the affected products and subjects them to greater volatility.9

United States cotton subsidies and African producers World cotton prices have been on the decline since the mid-1990s. Since 1997, U.S. farmers have received "emergency assistance." Total support in 2001 is estimated to have been in the range of US$1.7-2.0 billion. Apart from enhanced support schemes that benefited a variety of sectors, cotton farmers were protected from imports by quotas, and received export support as well as price-based subsidies. These additional benefits have helped to shield cotton production decisions from relative price movements. Occasionally, cotton has had higher relative returns than substitute crops. As a result, while total area harvested in the world has been falling since 1995, in the United States it has followed a U-shaped pattern, increasing by around 10 percent between 1998 and 2001. In the 2001/02 season, U.S. cotton exports are expected to reach their highest level since 1926/27, or 35 percent of world trade, non-U.S. exports their lowest since 1984/85. This has contributed significantly to downward pressure on prices, hurting some of the world's poorest countries. For example, the loss of export receipts caused by the fall in world prices over the past two years is over 3 percent of GDP in Mali and Benin, and 1-2 percent of GDP in Burkina Faso, and Chad. For comparison, the value of annual HIPC initiative debt service relief to these countries has been in the range of 0.81 percent to 1.58 percent of GDP in 2001. Source: Cotton Advisory Committee; USDA Cotton and Wool Outlook 3/2002; Fund staff estimates of HIPC relief.

Levels of support and trends

Several indicators point to the extent of agricultural support in OECD countries. Total OECD support to agriculture, through border measures and budgetary transfers, amounted to US$327 billion or 1.3 percent of GDP in 2000.¹⁰ As a result, gross farm receipts were 52 percent higher than they would otherwise have been. There is, however, a wide distribution across countries and commodities. Support levels are very low in Australia and New Zealand, and far above the average in Iceland, Japan, Norway, Switzerland, and Korea. They are higher in the EU, with subsidies raising producer incomes by 62 percent on average in 2000, than in the United States (28 percent). Protection is greatest for rice, dairy products, coarse grains, wheat, and beef.

The Uruguay Round Agreement on Agriculture (URAA) extended multilateral disciplines to domestic agricultural support policies and direct export subsidies. It included commitments to reduce aggregate support measures for "amber box" policies—those deemed to have the largest effect on production and trade—by 20 percent over the 1995-2000 implementation period, compared with the base period of 1986-88. The URAA has contributed to a reduction in export subsidies but overall its benefits are judged to have been modest, because in most cases the ceilings of support under these commitments were well above actual levels, and because of the aggregate, nonproduct-specific nature of commitments—which allowed support of some products to increase substantially.

A recent trend, including under EU plans, is to link support payments to environmental goals and to stimulate rural development rather than farm production. Nevertheless, none of the plans proposes long-term reductions in support measures. The Japanese program has the goal of a higher food self-sufficiency level of 45 percent by 2010. In Canada and the United States, plans to delink production from support were undermined by emergency payments in response to falling prices that encouraged more, rather than less, production and further contributed to world market imbalances. Thus, U.S. soybean and cotton production rose despite (and partly causing) sharp falls in world prices.

Impact of liberalization—consumers versus producers

While developing country producers of the most protected crops lose incomes as a result of these policies, and GDP growth has suffered, consumers—often in urban centers—tend to benefit from lower prices. The most obvious case is food aid. For instance, in the 1980s, EU supplies of milk powder from surplus stocks assisted government school-milk and food support programs in Nicaragua, severely damaging domestic dairy farmers in the process. As a result, many net food importers among developing countries would suffer a net loss, in the short term, if industrial countries removed agricultural subsidies without lowering import restrictions to their markets.¹¹ However, if import restrictions such as tariffs were removed as well, estimates show that most developing countries would gain significantly, particularly in the longer run as new profitable production opportunities would promote productivity-enhancing investments.¹² These studies highlight the importance of a comprehensive approach to agricultural reform and of assistance to those adversely affected by reforms. But trade policies will rarely be the most appropriate instrument of assistance.

Many of the benefits of global trade and its liberalization depend on the ability of developing country producers to respond to new opportunities for production and trade. But their entrepreneurial drive is often hampered by weaknesses in the institutional and market infrastructure for trade, and the concerns of developing country producers are not always reflected in international agreements, e.g. on standards. This results in high and variable transaction costs, which increase uncertainty and act implicitly as a tax on trade that can exceed the cost of market access barriers. For example, formal and informal payments related to the administration of exports reduce farm-gate prices of rice for Cambodian farmers by around 15 percent.13 In general, the greatest gains can be achieved in tackling customs procedures and related corruption, liberalizing port services and the organization of transport markets, and in strengthening institutional capacity to meet technical and sanitary standards. However, in many of these areas, developing countries, especially the poorest, require technical assistance to design solutions and build implementation capacity.

The cost of customs and border procedures Numerous and complex customs procedures and requirements generate substantial costs. According to one source, the average customs clearance transaction in developing countries involves 40 documents and 200 data elements, some 30 of which are requested at least 30 times, and 60 to 70 percent of which must be re-keyed at least once. The costs of excessive control and inefficient customs clearance procedures, combined with the monopoly of service providers in the port or other key entry points, can exceed tariffs in many cases. Documentary red tape in customs has been estimated to increase the cost of imports substantially, by around 7-10 percent of the value of trade. For example, in the mid-1990s, customs clearance transactions in countries of the Middle East and North Africa often required 25 to 30 stages, and could take several weeks. Valuation procedures are a major uncertainty for importers, as customs generally expects under-invoicing. It is the practice in some countries of the Middle East and North Africa that customs officers question every invoice in order to charge penalties or collect "rewards" (for instance, in Jordan, the law rewards customs officials who detect invoice misreporting and charge penalties to importers). Source: Hoekman and Kostecki (2001); Staples (1998); and WTO (S/C/W/60).

The Doha Ministerial Declaration recognizes these special concerns and commits the international community to substantially stepping up trade-related technical assistance. These commitments must now be followed through with funding and results. One initiative, in which the IMF participates together with five other agencies,¹⁴ is the Integrated Framework (IF). The IF represents a coordinated approach to identifying and prioritizing trade-related assistance needs in LDCs as well as projects for donor funding, and to mainstreaming action on trade in national poverty reduction and development strategies. Diagnostic studies in three pilot countries have been completed (Cambodia, Madagascar and Mauritania), and work is underway to extend the scheme to other LDCs over the coming years.

1 Tariff peaks are defined as tariffs of 15 percent or higher.

² The United Nations have classified 49 developing countries as LDCs.

³ Among major manufactured products, tariff escalation is most prevalent in textiles and clothing, leather and leather products, rubber products, wood, pulp, paper, furniture and metals.

⁴ Developing countries themselves continue to make use of restrictive licensing of imports.

⁵ Under certain conditions, trade remedies such as safeguards and antidumping are consistent with WTO agreements.

⁶ However, exports of LDCs have been little affected.

⁷ China's accession terms provide other WTO members with strengthened safeguards against Chinese exports for a transition period.

⁸ Under the EU scheme, certain restrictions will be kept on banana imports until 2006, and on sugar and rice imports until 2009.

⁹ If industrial country production is insulated from world market conditions through support measures, the full burden of adjustments to changes in supply and demand falls on other producers, thus causing greater swings in prices.

¹⁰ Data in this section from OECD, Agricultural Policies in OECD Countries: Monitoring and Evaluation, 2001.

¹¹ This is the result of price increases for commodities of which developing countries are net importers, and possible decreases for those of which they are net exporters (as production patterns in industrial country farms change).

¹² The reason is essentially that import restrictions limit export opportunities for foreign suppliers without subsidizing their consumers.

¹³ Integrated Framework Diagnostic Trade Integration Study: Cambodia, 2001

¹⁴ These include ITC, UNCTAD, UNDP, the World Bank and the WTO. Creation of the IF precedes the Doha Declaration.